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We define a single corporate Buyer's Valuation of a specific veterinary practice as follows:
This articles provides a simple 2-step framework for how a buyer determines a target veterinary practice's EBITDA. This Normalized EBITDA is a key input into the Buyer's Valuation.
Note that a single Buyer's Valuation is not the same as the "True" value of a practice. Also, the Buyer Valuation may be much higher than the purchase price offered. Sellers only see the buyer's offer price, which may differ from the Buyer Valuation. We discuss the reasons for this in several articles on this site.
This analysis is relevant to valuation in the context of a practice sale. *Veterinary Practice EBITDA stands for Earnings Before Interest Taxes, Depreciation and Amortization.
A buyer, particularly one with private equity backing, wants to estimate the current, stable, annual cash earnings power of your veterinary clinic in a corporate setting. This estimate is the Normalized EBITDA. Right away you should see that there is subjectivity in deriving this important metric.
It is a two-step process:
If a doctor joins a practice two months before the practice is sold, only a portion of that doctor’s annual production will be included in the last 12 months of EBITDA. Without a normalizing adjustment last twelve months EBITDA will under-state the annual earnings power of the practice. There are many other potential adjustments in this category
Detailed information. Not only financial statements but also explanations and reasons.
No potential buyer can determine a Normalized EBITDA, and subsequently the valuation of a veterinary practice without access to financial statements. Of course, these statements have no context if the buyer does not also have the ability to ask questions of the veterinary practice owner. If you have received an offer letter from a corporate, you should ask: what information did he use to get the valuation implied by the offer?
Unless the buyer has seen your financial statements and had a chance to discuss them with you, the offer is based on very little, and likely worth very little. Any valuation multiple suggested by the offer should be taken with a grain of salt.
Unless you go through the process or normalizing your EBITDA, you won’t know what the buyer is concluding with respect to his normalization process. If a buyer identifies a potential adjustment that increases your Normalized EBITDA, he may choose not to include it in his valuation, or “give you credit.”