28 Jun Understanding veterinary practice valuations
Veterinary practice owners understand the use of a valuation for buying and selling a practice but may be unaware that a valuation can also be an important tool in strategic planning. A valuation report not only indicates to owners what their practice is worth but can also highlight areas in need of improvement by comparing a practice’s operations and spending habits to industry averages. Improvements in these areas may translate to greater cash flow in the short term and higher value when it comes time to sell.
When to get a veterinary practice valuation
Preparing to sell your practice
It is advisable to have a valuation done three to five years before you plan to sell your practice. A valuation sets a baseline for your practice value and illuminates areas that need attention. With an accurate valuation, advanced planning, and the advice of an experienced Simmons advisor, you can make adjustments over time that boost your practice’s total value before putting it on the market.
Practice management and planning
Another use for practice appraisals is for practice management and various strategic planning programs. Because an appraisal assesses the risks and profitability of the practice, it is an integral component of several management-related programs such as exit strategy planning, monitoring the efficiency of long-range planning programs, and measuring the veterinary practice’s ability to create value. We recommend having a valuation performed every three to five years for management and planning purposes.
Practice ownership changes
The practice appraisal is a detailed process that establishes a practice value at a specific point in time. The practice appraisal is an important and highly informative initial step for any type of transfer of ownership, such as practice sale transactions, associate buy-ins, and merging practices.
Other situations
There are other non-asset transferring reasons which require a practice appraisal such as tax court disputes and legal procedures.
How we value veterinary practices
Many factors combine to determine a practice’s value. While numbers largely determine the sale price, there are many other factors that ultimately affect the value and price including practice profitability, net cash flow, practice growth, transferability of income to a new owner, geographic location, facility appearance, community goodwill, and value of tangible assets.
As part of the valuation process, we determine net cash flow using tax returns and consider adjustments for owner compensation and perks, capital improvements, one-time expenses, and those unrelated to daily practice operation. Next, we determine the practice’s value by applying appropriate income methods of valuation to the earnings.
Before reaching our final opinion of value, we also consider the following “sanity tests”:
- Does the practice’s price fit our company’s extensive market data and experience?
- Does the price provide an appropriate personal income for the new owner?
- Does the price allow for a reasonable return on the buyer’s investment?
- Are the price and terms such that the buyer will be able to obtain commercial financing?
Contact Kate Owens, DVM, MBA, CVA at [email protected] or (303) 729-0870 to get started on your veterinary practice appraisal.
This is a paid sponsored content article from Simmons and Associates – Intermountain.