If you own a small animal veterinary practice, consider buying one or plan to open a new clinic, here are some interesting industry statistics.
Classified under the SIC 0742 code, there are over 37,000 vet practices in the US alone. The industry as a whole generates some $12.2B in annual revenues and employs more than 264,000 people. The average vet clinic is quite small – generating around $300,000 in annual sales with 7 professional and support staff.
Key value drivers for a veterinary practice
While each vet practice is unique, a number of common factors contribute to the practice value. Here is the short list:
- Practice size. Multi-doctor vet practices tend to be more valuable than a single practitioner clinic.
- Location. Practices located in urban areas usually command higher valuations.
- Specialty area. Small animal veterinary clinics are generally more marketable than large animal practices. As a result, small animal vet practice valuations are typically higher.
- Asset base. Most vet practices sales are asset sales. A clinic with significant furniture, fixtures and equipment assets is likely to command a higher valuation.
- Market position. Well-established clinics can create considerable business goodwill. These practices tend to be above average in client profitability and client retention. As a result, their valuations are usually above the industry norm.
Business valuation methods for veterinary practices
As with many other professional service firms, you can value a veterinary practice using a number of methods under the standard asset, income and market valuation approaches.
Successful vet practices are frequent acquisition targets. If you need to determine the market value of your clinic, comparison to recent selling prices of similar practices is a good choice.
You can calculate your business value based on the practice’s financial performance and the valuation multiples derived from comparable practice sales. These multiples are ratios that relate the actual practice selling prices to its revenues, profits, cash flows, assets or owners’ equity.
Here are the valuation multiples commonly used in valuing veterinary practices:
- Practice sale price to annual net sales or gross revenues.
- Sale Price to EBITDA and EBIT.
- Price to net income.
- Price to seller’s discretionary earnings (SDE).
Example – valuing a private veterinary practice using valuation multiples.
Let’s consider a typical vet clinic with the following financials:
- Practice annual net sales: $300,000.
- EBITDA: $56,000.
- Net income: $33,000.
- Seller’s discretionary earnings: $110,000.
We pick a set of reasonable valuation multiples and estimate the practice value as shown in this table:
|Multiple||Multiple value||Practice value|
|Price to net sales||0.7||$210,000|
|Value to EBITDA||5.2||$291,200|
|Price to net income||6.2||$204,600|
|Value to SDE||2.5||$275,000|
|Average Practice Value||$245,200|
By convention, these practice value estimates include most business tangible assets and goodwill. The value of real estate, cash, and receivables is not included – a common arrangement in an asset sale of a professional practice.
Other business valuation methods you can use
Even if you need an informal business valuation check for your practice, it is always a good idea to use several valuation methods. No one method is better than the other. The combination gives you a solid coverage and much more reliable estimate of practice worth than a single calculation.
If you plan to share your practice appraisal with other business people, tax authorities or legal experts, a multi-method practice valuation is a must.
For valuing a small owner-operator managed veterinary clinic, consider using the venerable Multiple of Discretionary Earnings method. This income-based valuation technique lets you calculate your practice value based on its earnings and a number of key financial and operational performance factors.
If you are negotiating with professional investors or lenders, the Discounted Cash Flow method should be among your choices. This formal business valuation technique is the common way to determine the value of a professional practice based on its earnings outlook and risk assessment.