Practices values fall

Practice values for companion animal practices fell in 2011. This is not surprising since the results of the last economic survey showed most provinces had stagnating revenues, declining numbers of clients, and increasing expenses. A declining practice value was merely the culmination of all these factors (Table 1).

Table 1.

Practice value as a percent of gross revenue

	2011	2010	Change
NB/	50%	55%	−5%
NS/	26%	35%	−9%
QC	36%	42%	−6%
ON/	51%	53%	−2%
MB/	37%	33%	4%
SK/	40%	37%	3%
AB/	31%	40%	−9%
BC/	46%	39%	7%

NB — New Brunswick, NS — Nova Scotia, QC — Quebec, ON — Ontario, MB — Manitoba, SK — Saskatchewan, AB — Alberta, BC — British Columbia.

The Practice Value Estimate is based on information from the practice financial statement and Practice Owners Economic Survey to give an estimate of the veterinary practices worth based on cash flow. A simplified explanation for the practice value estimate is profit × a multiplier. Profit is calculated by subtracting all non-DVM expenses from gross revenues and then subtracting associate wages and a replacement wage for the practice owner — whatever is left over is profit. The calculation is identical for each province, except for a replacement wage for the owner, which is based on the current associate wage in the province for that year.

The multiplier is just as important as profit. According to Ross Dawson, a valuator from VetHelp Consulting, the multiplier can range from 3 to 5 and generally sits around 4 for most practices. The purpose of the multiplier is to put a value on the future profit from the veterinary practice. Assume a practice owner wants to sell his/her practice. The practice has gross revenues of $500 000 and the owner earns $170 000 net income per year. If the owner is prepared to earn $70 000 as a replacement wage (the wage that an experienced associate or locum would earn) then the practice has $100 000 profit at the end of each year. If a potential buyer would expect to use the profit to pay off a loan to buy the practice over 4 y (under the assumption of average risk), the value of the practice is 4 y × the profit each year ($400 000). In this example, the multiplier is 4.

The result of the practice value estimate 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 size 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 only focuses on the size of return — the value of the future income available to the practice owner. It estimates that the risk of maintaining that return will be constant and consistent for all practices. The Practice Value Estimate includes equipment but does not include real estate or inventory.

The Practice Value Estimate is calculated (and limited by) the financial statement and information provided to make necessary adjustments to the financial statement. Adjustments are made to financial statements to account for income splitting, personal use of auto, ownership of building and property, and other personal deductions from practice that would cloud the financial results.

The Practice Value Estimate assumes an average level of risk. Several practice characteristics such as location, client demographics, facility and equipment quality could influence the risk associated with a practice purchase and, in turn, influence the value. These and other factors that affect the risk of the investment are not explored. The Practice Value Estimate is designed to give 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 is required.

For 2011, most practice owners were presented with a practice value estimate that was lower than the previous year. Past articles have explained lower profit resulting from decreasing clients, stagnating revenues, and increasing expenses. The root cause of the decline was primarily the dismal economic performance, which was arguably outside the control of veterinarians. Profit, however, is just one side of the equation for the practice value estimate. Protecting the value of the multiplier by minimizing the risk to potential purchase can help prop up the value of the practice. By controlling the elements under direct control of the practice owner, the value of the multiplier can be maintained and increased.

Key elements that affect the multiplier, which may be controlled by the practice owner, include consistent staffing, current technology, and an appealing facility.

Consistent staffing increases the value of the multiplier because new purchasers need experienced staff to help them understand the workings of the practice and, more importantly, show clients that there are consistent elements in the transition period.

Current technology applies to management software and equipment. If new purchases and training are needed then the risk associated with maintaining the current income is increased, which can affect the value of the practice.

Probably the best way to maintain the value of the practice is to keep the facility modern, clean, professional, and appealing. Keeping up on the landscaping and cleaning the windows will not directly translate into more clients but consistent maintenance sends a message to potential buyers that you care about your hospital, thus minimizing the fear a purchaser may have of buying a facility that has problems.

The best way to find out how to protect the value of your practice is with an appraisal from a qualified practice appraiser. They can show you what factors affecting the multiplier are working in your favor, and what needs to be improved.