How do we value practices?
As the first and oldest veterinary practice brokerage, Simmons uses progressive practice valuation methods to determine the accurate value of today’s practices. We don’t follow the method of a percentage of gross income because it doesn’t give a true representation of the practice’s past and future earnings performance. Instead, we use a more precise income-based approach that determines value by capitalizing earnings.
Many factors are considered when determining a practice’s value. Simmons will examine practice profitability, net cash flow, practice growth, transferability of income to a new owner, client loyalty, geographic location, facility appearance, goodwill, value of tangible assets, quality of employees, and the exiting owner’s transition timeline. While numbers largely determine the sale price, Simmons considers many other factors that will ultimately affect the value and price.
As part of our practice valuation process, we determine net cash flow using tax returns and considering 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.
What affects pricing?
Before reaching our final opinion of value, we consider the following “sanity tests
• Does the practice’s price fit our company’s extensive market data and experience based on three decades of practice sales statistics?
• 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?
As you can see, practice valuation requires insight into our profession, financial expertise, and business know-how. Old rules of thumb, such as practice value equals one times gross, should be retired for more sophisticated and accurate methodology. Simmons uses standards embraced by the appraisal community and contributes to practice valuation methods.