Veterinary Practice Valuation Basics for Sale Preparation

September 12, 2020

Basics for Veterinary Practice Sale Preparation

Who should I engage to complete my valuation and what will I get?

A veterinary practice owner might wonder How Much is my Veterinary Practice Worth in a variety of circumstances.  Oftentimes the question is posed as a prelude to a transition or sale.  A veterinary practice valuation can provide useful insights to veterinary practice owners who are preparing for a practice sale.  

What is included in a practice valuation?

A veterinary practice valuation completed to prepare for a transition should estimate what your practice is worth in the market today, what drives that valuation, and how you can increase your value.  Having a 3rd party, expert perspective on these questions will help you prepare to sell your practice.  

One goal you may have when you sell your practice is to maximize your after-tax proceeds (whether in cash, or in stock).  If you plan to exit within the year, your ability to make investments that increase the value of your practice are limited.  If you plan to sell in a few years, you can do many things to increase the value of your practice, provided you know what will make your practice more valuable.

The particulars of the analysis contained in a valuation will vary from vendor to vendor but all will have a few common elements. 

The analysis will convert your “as reported” income statement into a “normalized” income statement.  The goal of normalizing your financial statements is to present an annualized estimate of recurring, stable, cash profit (EBITDA - earnings before Interest, Taxes Depreciation and Amortization - is a commonly used estimate of cash profit).  Once determined, this metric can be used with a market multiple, or projected forward to determine the valuation.

For an owner preparing for a near-term sale, the process of “normalizing” your income statement should be of particular focus.  Every buyer will conduct their own normalization process to determine the cash profit he is purchasing with your practice.  For maximum usefulness, the normalization adjustments included in your practice valuation should closely match the normalization adjustments a potential buyer would make.  That means each adjustment must be supported by the particular details of your practice.  Simply assuming your practice incurs an expense at an industry standard level will not do.  

The analysis may also show you where you have achieved financial results that are better than, or lag peers, as well as determine and prepare an accurate times series of key performance indicators that potential buyers will use to diligence the business.  Standardizing your metrics and comparing them to industry peers may identify areas where you can improve your performance in the near-term. It may also identify areas where you need to clean up your reporting or data collection.  

What I believe a valuation will not do, is tell a practice owner how much she should ask for her practice when she does sell.  As I’ve written elsewhere, if you want to achieve the best outcome in a sale you must let the market “discover” the price of your practice.  Telling a buyer an ask price preempts the need for price discovery.  

Many different types of vendors in veterinary services offer practice valuation services, including accountants, practice brokers and practice consolidators.  If you are preparing for a practice transition, who should you hire? What you learn from your practice valuation will be highly dependent on the vendor you choose

Practice Brokers

A Practice Broker’s main business is to help individual owners buy, or sell practices.  They typically offer free, or significantly discounted valuations.  The relationship the broker builds with the owner by doing a valuation can better position the broker to sell the practice. The service is discounted because the fee a broker earns by selling one practice can pay for the cost of dozens of valuations.  

The valuation a broker performs may also form the basis for establishing a “list price” for a practice that is transitioning.  Brokers are typically paid a fee as a percentage of sale proceeds (up to 10% in veterinary services).  All things being equal, this fee structure incentivizes brokers to reach a deal quickly.  This incentive will impact the valuation work done by a broker, particularly, if the valuation forms the basis of the practice List Price.  

Practice List Price

The List Price (and the valuation work done to determine that List Price) will reflect that incentive which may be in conflict with what you seek to accomplish.  In my opinion, you should not commission a practice broker to do a valuation, unless you have decided to sell your practice using that broker, and commissioned a second opinion from an independent party which you can use to make sure the Broker’s List Practice is high enough.   

  • Key Advantages:  Price, some knowledge of the current market 
  • Potential Pitfalls:  Lack of independence
  • Use Cases:  You have decided to transition, you have selected the broker for the transition, you have completed a 2nd opinion valuation to “check” the list price.

 

Practice Consolidators

Practice consolidators offer free valuations as well.  For a consolidator, offering “free” valuations is a great way to learn more about your practice.  Any information you provide to a consolidator will help the consolidator evaluate whether he wants to own your practice.  

Offering “free” valuations makes sense for the consolidator though I always wonder why veterinarians, especially those preparing for a transition, would allow it.  Giving one party preferential access to your practice information today will inhibit your ability to drive competition among buyers when / if  you decide to sell your practice in the future.     

I used to work on wall street.  Some of the leading private equity firms were my clients. I rarely saw a private equity firm share detailed information on a portfolio company with a potential buyer outside of a sale process.  Private equity firms know that controlling the flow of information - who gets what and when - is a key tool for driving competition in a sale process.  If an individual buyer has more information than another, the process can unravel resulting in a poor outcome for the seller. 

I recommend that no veterinarian preparing for a transition should share detailed information with a consolidator.  Sharing your financials with a consolidator is only appropriate when you are conducting an auction for your practice.  And even then, it must be done with great care.

  • Advantages:  Price
  • Disadvantages:  Sharing information with a competitor before conducting a sale process
  • Use Case: None

 Accountants

Accountants offer valuations as part of recurring accounting services, or on a stand-alone basis at a wide variety of prices. 

Accountants are independent.  They do not buy practices, nor collect fees earned for selling practices.  This independence frees them to approach valuation objectively.  However, accountants lack access to the transaction data contained in the market. 

Accountants do not have access to the deal files that brokers or consolidators maintain so a valuation from an accountant is unlikely to reflect the price you could get from a consolidator in today’s market.  In some circumstances, such as evaluating a tax claim, or facilitating a buy-out between insiders, the current market can be ignored with limited financial consequence.  However, the current market is a crucial input where determining valuation for a near-term transition. 

Also, accountants have limited experience interacting with corporate buyers so their understanding of what kind of normalization adjustments are appropriate is not tested in the market.  This means that the normalized cash profit an accountant calculates may be significantly lower, or higher than what a corporate buyer would accept in a sale process.  

  • Advantages: Objectivity
  • Disadvantages: Price (time and $ cost) limited feedback from today’s market


Conclusion

A valuation can help you prepare for near or medium term practice sale.  Who you choose to complete your valuation will have an impact on the quality of the valuation you receive.  You should never use a valuation to form an ask, or list price for your practice.


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