Doyle Watson, DVM
Simmons Southeast –
It is no secret or surprise that many small, closely-held American business owners, including veterinarians, manage their business expenses and tax return net income (earnings) with the motive of tax minimization.
In the world of profit, taxes and veterinary practice value, “Earnings” is the balance remaining from gross revenues after all real, necessary, and recurring practice expenses have been met, including a fair market salary for the managing doctor (typically the owner). It is important to emphasize that this salary is that for being a managing doctor, not for being the owner. It is the real “profit” of the practice and the return on a hypothetical, out-of-pocket cash investment. In a well-managed moderate to high-grossing practice, earnings will range in the mid to high teens as a percentage of gross. It is the major source of practice value, often at four to six times earnings.
So let’s say, for example, that two practices, A and B, are identical in characteristics and quality in all respects except profit management. One earns (tax return net) 21%, the other only 7%. For simplicity, let’s say that both are determined by the appraiser to be worth 5.26 times earnings.
Gross Earnings Multiple
Practice A – $1.0M $210K (21%) 5.26 X
Practice B – $1.0M $ 70K (7%) 5.26 X
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