Increasing the value of your veterinary practice takes a lot of time and effort. If the sale of your practice at the end of your career is an important aspect of your retirement planning, consistent veterinary practice valuations can make a huge difference in what your eventual sales price. Knowing the elements that create value, and knowing exactly what your market of buyers is looking for increases the chances that you will have a successful and profitable practice in the present and be financially secure in your future.
How do Veterinary Practice Valuations Increase Value?
It has often been said that knowledge is power. Knowing what to measure and how your practice is performing helps you make informed decisions that can increase your practice’s profitability and eventual sales price. Valuations are a management tool that can help you identify and prioritize areas for improvement in your practice.
The Two Components of Valuations: Profitability and Desirability
All high-value practices have high profit, BUT not all high-profit practices have a high value. To get maximum value, your practice must not only be profitable but also have additional desirable attributes.
Most people understand that profit is revenue minus expenses. So profit can be increased in only two ways: increasing revenue or decreasing expenses. Most practices that are struggling with profitability have worked to cut costs as much as possible, but oftentimes not much attention is given to increasing revenues.
Practice owners are constantly hearing about increasing fees, and that DOES need to be done regularly in small increments. Just as important as a pricing structure is the dollars a practice is forfeiting through “giveaways” and excessive “discounting.” Because costs are generally fixed, each dollar not captured in revenue is a dollar lost in profit.
Remember that every dollar of revenue that makes it to the “bottom line” as profit benefits you in two ways. First, you get the dollar itself and, more importantly, you get an added three-to-six dollars in practice value!
Even if two practices have the same profit, they rarely have identical values. This is a result of additional qualities that make one practice more desirable than another. Some of these can be “tweaked” to increase desirability and some cannot.
Long-term, loyal, and skilled employees add value, as does a reasonable transition period by the selling doctor. A small, “high-touch boutique” practice has more loyal clientele than a high volume, “low cost” practice. A practice in a permanent location, as opposed to a mobile practice, will have more transferable goodwill because the clients are more likely to remain with a fixed-location practice, creating more value.
Changing aspects of your practice like location and staff longevity are likely not possible. However, there are some key aspects of desirability that can be altered that will increase the value of your practice. Here are some examples.
New Facility or Major Remodel
Moving to a new facility or undertaking a major remodel of your existing facility can be a large capital expense. While no one looks forward to spending money on capital expenditures, it is sometimes a necessity for a growing practice. It takes at least five years (and often closer to 10 years) to see a valuable return on this type of major investment.
If expanding or remodeling is not an option, a lot can be done to improve a facility with a good cleanup crew and a bucket of paint. The bottom line is that the appearance of your facility has a meaningful impact on its perceived value.
Adding New Equipment
When a buyer is considering purchasing your practice, he or she is looking at more than the revenue your practice generates. Your buyer will also be looking carefully at your equipment to determine if your equipment will support sustained business and future growth. Not all new equipment is a wise investment. The first question before making an equipment purchase should be, “Will this equipment not only pay for itself but will it increase profit?” If the answer is not a strong “yes,” then the equipment is probably nothing more than a high-priced toy. Useful, income-generating equipment will provide a tax deduction and contribute to the bottom line.
A well-trained staff is the single most valuable asset in any practice. Not only will a good staff make money, but it can also be a huge selling point to a potential buyer. The reverse is also true; a poor-performing staff can easily kill even the most solid of deals.
Bookkeeping may not be as exciting as practicing medicine, but it is nonetheless very important to a practice’s value proposition. While a CPA can tackle the nuts and bolts of record-keeping, you as a practice owner must keep a close eye on your financial ledgers. Your CPA should provide you with financial statements that you can understand and which clearly track your revenues and expenses. Financial statements aren’t just about the bottom line. By carefully studying how dollars are being spent as well as which activities are most profitable, a practice owner can use financial statements as a valuable management tool.
Timely Fee Increases
Raising prices on unsuspecting customers can prove harmful to your practice. However, this does not change the fact that proper fees must be maintained and should properly reflect the quality of the care your practice provides. Communicating these necessary changes with your clients is certainly good practice for customer happiness. Fee increases generally lead to at least some revenue growth and ensure that the next owner of the practice won’t have to greatly increase fees as a first order of business.
Is a Formal Veterinary Practice Valuation Important?
Valuation reports and feasibility analyses provide critical data needed to properly assess a practice’s potential purchase opportunity. Negotiating a price without ensuring it is grounded in the financial realities of the practice is risky and potentially very costly.
Simmons has a variety of free resources available to help assist practice owners in increasing the value of their businesses. From our Guide to KPIs to our Exit Strategy Checklist, these resources can get you started on your exiting planning. That being said, when it comes to understanding your practice’s current and potential value there is no replacement for a professional veterinary practice valuation or appraisal!
Proper planning of your exit can pay big dividends when the practice sells. Even very small, inexpensive actions today can have huge impacts on your practice’s value tomorrow. Stay passionate about veterinary medicine, stay focused on the goal of selling your practice for maximum value, and continue to strive for growth and high profits. After you sell, you will have plenty of time to look back on a very successful career and exit strategy.