– Dave Gerber, DVM, Simmons & Associates Northwest
In reality there are many factors, both financial and other qualities that contribute to practice value. After all, the true value is simply what a willing buyer is willing to pay and those decisions are based on many, many things.
Unfortunately, we still see practitioners, and even accountants, who use some percentage of gross income to determine veterinary practice value. In truth, it is the profit after all expenses, NOT the gross income, that forms the basis of value.
Take, for example, a mixed practice that is grossing $700,000, $500,000 of which is derived from large animal over-the-counter-sales which typically have extremely low profit margins. A careful analysis reveals the actual cash flow is only $75,000. Now, compare that to a well-run small animal practice grossing $400,000, but with a cash flow of $150,000. Both of these scenarios are from “real life” situations. Which practice has the higher value? Clearly, the lower grossing, higher net practice.
Certainly practice profit is key in establishing a value and the most important component. Without enough net income to pay for all the bills, including the practice debt, and to provide the buyer with a reasonable salary, there is little or no value beyond the real estate, drugs, and equipment. But, there are many more factors that directly influence value, not all of them being financial.
For example, practice growth is important. Two practices with the same gross and net incomes will have different values if one is growing at 10% per year and the other is declining at 10% per year.
Transferability of the income to a new owner becomes most important in mobile practices because the loyalty is much more closely tied to the person than to the practice. Conversely, in a multi-DVM practice in a fixed location, a change of ownership has much less impact. Therefore, the goodwill of the latter has more value than of the former.
Some other important influencing factors are geographical location, facility appearance, competition, value of equipment and drugs, quality of remaining employees, and owner’s transition period.
The numbers are vital in establishing a value, but it would be mistake to ignore the above intrinsic and extrinsic factors that are intimately related to the total practice value.
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