How much is your practice worth?

Whether the practice is up for sale, listed as an asset for retirement planning, or the practice owner just wants to know how much the practice is worth, the Practice Value Estimate provides the answer. The Practice Value Estimate tells you how much your practice is worth from a cash-flow perspective.

According to Ross Dawson (practice evaluator, Vethelp Consulting, personal communication, 2011) who works with veterinarians across Canada, many practice owners think their practice is worth 1 year’s gross revenue or at the very least, 60% of gross revenue. Unfortunately, it is rare for a practice to sell for 1 year’s gross revenue and many practices aren’t even worth 60% of the practice’s annual revenue.

The results of the 2010 CVMA Practice Owners Survey (1) shows the average companion animal practice in Canada is worth 46% of gross revenue and the average mixed and large animal hospital is worth 55% (Table 1). Both are a far cry from 1 year’s revenue.

Table 1.

Average worth of practices by province

	Companion animal practices	Mixed and large animal practices
Canada	46%	55%
NF	20%
PEI	67%	65%
NB	56%
NS	35%	59%
QC	42%	59%
ON	53%	58%
MB	50%	40%
SK	25%	48%
AB	40%	40%
BC	39%	68%

The CVMA Practice Value Estimate provides an estimate of veterinary practice value based on income. This method of estimation is based on the assumption that, like any other investment, the price a purchaser is willing to pay for a veterinary practice is determined by the size of the anticipated financial return. The magnitude of the return, the potential for growth, and the risk of return all drive the value of a veterinary practice. The term “estimate” is used because the Practice Value Estimate focuses only on the magnitude of return — the value of the future income available to the practice owner.

Calculating the Practice Value Estimate involves a few numbers from the Practice Owners Economic Survey and the practice financial statement. The algorithm works like this: Take the gross revenue and subtract all non-veterinary expenses such as drugs and supplies, rent, non-DVM wages and benefits, utilities, continuing education, and all other expenses related to running the veterinary hospital. What you are left with is the money available to pay veterinarians. From this figure, subtract associate wages and benefits leaving the income available to the practice owners. The last expense to take out is the practice owner’s fair market wage. Depending on the province and the going provincial rate for locum veterinarians, the replacement cost for the practice owner can range from $50 to $64 per hour depending on the type of practice and the province. After taking away the owner’s fair market wage you are left with profit. The profit is multiplied by a factor of 4 to get the Practice Value Estimate.

Why 4? Four is used as a multiplier in the Practice Value Estimate because the assumption is that under average conditions, a potential buyer would want to pay off the practice in 4 years. The Practice Value Estimate tells a potential buyer how much they would have to buy the practice for so they could generate the same revenue, pay all the same bills, pay the same staff and veterinarians, pay the practice owner a fair market wage comparable to locums in their province, and still have money left to pay back the bank. Assuming the bank sees an average amount of risk and wants the practice paid off in 4 years, the buyer has just enough to make the payments. Buying the practice for less would mean the buyer has to spend her/his own personal money to pay off the practice.

The Practice Value Estimate is designed to provide an estimate. A more accurate practice value can only be determined by a qualified practice appraiser. For purposes of third party financing, a valuation report completed by a qualified appraiser will be required. Some limitations of the CVMA Practice Value Estimate follow.

1. Information and assumptions used in adjusting the financial statement

Each economic survey and financial statement is scrutinized by researchers but assets, inventory, and even staff can be overlooked if the survey is incomplete. These limitations may result in an estimate of value that is different than that determined if the research and process were more thorough (a complete valuation performed by a qualified veterinary practice appraiser).

2. Assumption of an average level of risk for a hypothetical purchaser

Several practice attributes could materially influence the risk associated with a practice purchase and in turn influence the value. The CVMA Practice Value Estimate assumes average risk for location, demographics, staff longevity, client loyalty, and revenue growth. If a practice is located in a less desirable location (such as, rural Canada) then the value will go down. If staff veterinarians do not have contracts then their long-term viability is questionable and this raises the risk associated with one or more veterinarians leaving the practice. This will also bring down the value of the practice.

Considering the price of the Practice Value Estimate is free for veterinarians who fill out the Practice Owners Economic Survey, the advantages outweigh the disadvantages. One big advantage of knowing how much your practice is worth is that growth can be measured year over year. Comparing the value from year to year provides feedback on the direction of the practice. If the value of the practice is going up every year, then the owner knows the decisions he/she made over the course of the year were the right ones. If the value is going down compared to last year, then something inside or outside the practice is affecting the financial success.

In the past year, practices across the country have been hit with outside forces affecting the revenue and ultimately the net income and profit in their practice. Because the value of a practice is 4 times the profit, a drop of $1.00 of profit means a $4.00 drop in the value of the practice. Before the recession, the average companion animal practice was worth an estimated 58% of gross revenue. Last year it was worth 46%; a 12% drop in value stemming from a 3% drop in profit. Mixed and large animal hospitals are seeing improvements but the country is divided. Mixed and large animal practices in western Canada that focus on beef production are struggling, while those that focus on dairy production are doing better.

The biggest reason for the drop in the Practice Value Estimate is fewer clients coming into the practice. A decrease in the number of clients reduces revenue, and with expenses locked in for the year in many practices, net incomes are sinking. There is less money available to veterinarians so after veterinary incomes and replacement wages are accounted for, there is less profit. This affects the value of the practice.

Increasing a Practice Value Estimate is possible and this can be approached from many sides. To get revenue up in the short run, increasing fees to keep up with provincial inflation is a good place to start. This year is seeing higher than normal inflation in many provinces so fee increases are needed more than ever to simply keep up. In the long run, improved communication with clients will help increase client traffic and increase revenue. Start calling past due clients immediately after their missed appointment and give them an opportunity to rebook without penalty. The payoff is distant but pre-booking clients for their next appointment before they leave the last one helps cement the appointment in both your calendar and that of the client.

On the expenses side, short-term cost management such as putting off projects and repairs until better times can save thousands in many hospitals. For long-term expense management, an annual review of all expenses along with a monthly budget can drive down expenses and help increase profit. Remember, for every dollar saved, the value of the practices goes up 4 dollars.