By: Joe Stephenson, MA – Simmons Northeast –
“As a veterinary business appraiser and broker I see droves of young veterinarians reared on cutting edge technology, hungry for practices thoroughly equipped with blinking lights and high resolution screens.”
Technology is changing the face of veterinary medicine. From digital radiography to advanced surgical tools, the latest equipment can elevate patient care, improve efficiency, and strengthen the overall business of a practice. But while new gadgets may shine in the treatment room, they don’t always shine on the balance sheet.
Too often, veterinarians invest in expensive technology at the wrong time — right after buying a practice, or just before retirement — and end up reducing, not increasing, their practice’s value. The truth is simple: medical technology is only as valuable as the profit it produces. Without a clear plan and enough time for a return on investment, that shiny new purchase may drag your practice into No-Lo territory.
In this article, we’ll explore how to approach technology as an investment, why timing matters, and how to calculate whether your next big purchase will strengthen or weaken your financial future.
Why Medical Technology Must Be Treated Like an Investment
The demand for more cutting edge medical technology is a reality of the veterinary business. With the technology comes increased average expenses, but the cost of falling too far behind might be greater than the cost of updating equipment. The key is to think about buying equipment as an investment. You need to have the capital to make the investment, you have to have a concrete plan and you need enough time to see a return on that investment.
Timing Is Everything
Let’s start with the capital and time to return. This means that you shouldn’t invest in pricey equipment right after you buy a practice and you shouldn’t invest in pricey equipment just before you retire. Early on after buying a practice, your debt payments will take up a large part of your earnings.
You shouldn’t invest in equipment just before retirement for a number of reasons:
• When selling your practice, your equipment only has value in as much as it’s producing earnings.
• A practice sells free and clear of debt. That means the buyer doesn’t take on your loans, you pay them out of the closing proceeds.
• Every dollar you add to your earnings is worth up to $6 in practice value.
If you just sunk a major share of your earnings into equipment and you haven’t had enough time to see a return on your investment, that equipment might drag your practice down into No-Lo depths. The ideal time to invest in equipment is after you’ve had time to understand the flow of your business and at least five years before you want to retire.
Know What You Need
Even if you’re in the right career position to invest in equipment, you still need to step back and make sure it not only improves your quality of medicine but is also a sound business decision. In order to gain perspective and slightly reduce the risk of making a bad decision, I suggest owners perform a full feasibility analysis to see if the equipment is really worth it.
A feasibility analysis is a tool to gain perspective on a potential investment or business decision. Here I just want to give you some information on roughing out a potential return on investment (ROI), a major part of your feasibility analysis.
Assess Your Veterinary Practice’s Health
Before rushing into investing in new equipment, you should at least know about the health of your practice and whether or not you are even in a position to invest. When was the last time you had a management-based appraisal (MBA) done?
A skilled valuator can point out profit centers and weaknesses in your practice. If you’ve kept up with the suggested MBA every three to five years, you can refer back to that analysis to help you understand the current health of your practice. If not, it’s time to get one done to see if you’re even in a position to invest. Lagging technology could be the least of your problems.
Once you fully understand your practice’s health, you’ll be in a great position to make a plan to ensure that you actually see a return on that equipment investment.
Estimate Equipment Cost
If you are in a position to invest, start by estimating the equipment’s actual cost. For example, take a $50,000 piece of equipment bought with a loan. These low-interest rates won’t last, so to be conservative, consider a 5-year loan with an 8.5% interest rate, which results in $11,550 in interest through the life of the loan.
In this example, I’m assuming the equipment will depreciate over 5 years. The equipment may retain some residual value and continued use, but the rapid rate of technology growth is rendering a shorter useful life. You can depreciate the equipment either in the first year or through its estimated useful life. The tax savings from depreciation will be about 35%, bringing the cost down to $32,500. Adding the interest from the $50,000 loan brings your actual cost to $44,050.
Step 1: Actual cost after adjustments
Loan:
- Monthly payment = $1,026
- Total paid over 60 months = $1,026 × 60 = $61,550
- Interest = $61,550 – $50,000 = $11,550
The tax savings from depreciation (35%):
- $50,000 × 35% = $17,500
Also, consider additional costs you might incur. Do you need renovations, or to pay installation fees? You may need to hire new staff and you will need to train your existing staff and possibly yourself.
After researching, assume you have to invest an estimated $1,000 in installation and training. You might also consider the offered service plan for some equipment. Some practice owners never need to use their plans, but we’ve also seen brand-new digital x-rays fall apart in the first year. A $2,000 annual service plan isn’t bad compared to a new $50,000 piece of equipment.
Other costs (installation, training, service plan):
- $1,200 + $2,000 = $3,000
Including the installation costs, the training, the service plan, and the interest, less the tax savings, your initial investment is $47,050. With an estimate of the actual cost, you can start building an ROI calculation.
Net initial:
- $50,000+$11,550−$17,500+$3,000=$47,050
Build an ROI Estimate
To get to your ROI start with your annual cost. Annual cost is actual cost divided by the useful life of the equipment. Over five years, that’s $9,410.
Step 2: Calculate the ROI
Annualized fixed cost:
- $47,050 ÷ 5 = $9,410
Add service plan:
- $9,410 + $2,000 = $11,410
Average annual expense = $11,410
Usage Goal
Once you have the annual cost, you need to set a usage goal. If it’s a brand new piece of equipment, try to estimate how much you think you will need to use it to see a return. If it’s just an upgrade of existing equipment, such as going to your first digital x-ray, don’t expect to achieve a huge initial usage jump. Set a reasonable goal over a number of years, e.g. 200.
Fixed Cost Per Use
Fixed cost per use is just your annual cost divided by your number of uses: 9,410/200=47.05 . In addition to the fixed cost, the equipment will have some variable costs. These are personnel costs and materials costs. We assumed some minor materials costs of $2 and $20 personnel costs. This puts the total cost per use at $69.05.
Step 3: Cost per Use
Fixed cost per use:
- $9,410 ÷ 200 = $47.05
Total cost per use:
- $47.05 + $22.00= $69.05
Set Potential Price Per Use
Using the estimate of the cost per use, apply a markup to set a potential price per use. You should start with a 50-100% markup. Remember, this equipment has to pay for itself, pay you a return, account for variables you didn’t consider, and pay for the utilities and amount of space it takes up in your building.
We started with a 50% markup, which puts the price at $104.
Step 4: Price per use (50% markup)
- $69.05 × 1.5 = $103.57
Calculate Yearly Revenue
To get your revenue for each year, multiply your price minus your variable costs by your estimated usage for that year, e.g. in year one: (103.57-22)*75=6,118.
Step 5: Usage ramp & revenue
- Year 1; 75 uses: 81.57 × 75 = $6,118
- Year 2;125 uses: 81.57 × 150 = $12,236
- Year 3; 175 uses: 81.57 × 175 = $14,275
- Year 4; 200 uses: 81.57 × 220 = $17,946
- Revenue = (6,118+12,236+14,275+17,946)
- Revenue = $50,575
Step 6: Average annual revenue
- Average annual revenue = $50,575 ÷ 4
- Average annual revenue = $12,644
Arrive at Your ROI
With an estimated gain and cost, you can estimate your ROI (gain-cost/cost). Take your average annual revenue and subtract it from your average annual expense. This gives you your average annual gain (12,644 – 11,410 = 1,234). Divide that number by the average annual cost for your ROI estimate (1,234/11,410 = 10.82%).
Step 7: Return on Investment
Average annual gain:
- $12,644 − $11,410 = $1,234
ROI:
- $1,234 ÷ $11,410 = 0.1082 = 10.82%
Result: ≈ 10.8% ROI
10.8 % is a great ROI. Before moving forward, though, you should perform a sensitivity analysis. Change one variable at a time in the calculation and see how that changes the ROI. Changing the number of uses or the percentage markup could drastically change the outcome.
As you can see, only changing the markup to 25 percent results in a considerable loss.
Let Technology Build Value, Not Erode It
Technology can strengthen your practice — but only if you treat it as an investment. The right timing and planning ensure it adds profit and long-term value instead of draining your resources.
At Simmons Veterinary Practice Appraisals, we help veterinarians understand and protect the true value of their practices. Contact us today to connect with an advisor who can guide you toward smarter decisions and a stronger financial future.
