VPSG has sold hundreds of practices.

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Practice Pricing Considerations

There is a tendency for participants in the veterinary practice sales market to attempt to use rules of thumb to assess value and sale price relative to a practice’s revenues. As I and many others have written, there is no rule of thumb relative to revenues that is reliable for determining the sale price of a veterinary practice. The reasons for this are varied, but key issues are related to wide variations in profitability and the influence of resale or retail activity or other low profit endeavors within veterinary practices. The later is especially true for large animal and mixed animal practices where resale activity or “dispensing” is routinely practiced.

Sales data on past veterinary practice sales also has limitations, but it can be used as a crude indicator for some practices. The price paid for a veterinary practice relative to its revenues can be shown by sales data to be significantly correlated when small animal practices are considered. Based on data from actual sales of small animal practices sold by the Veterinary Practice Sales Group (VPSG), the average sales price to gross revenue ratio is (and has been for many years) between approximately 70%-75%. It has also been shown that larger small animal practices (grossing $750K or more) often get a premium or have higher sales price to gross ratios, when cash flow justifies a higher price. Statistics also tell us that about 2/3 of all small animal practices sell for a price that is one standard deviation either side of the mean. One standard deviation in the population of the practices sold by the VPSG is about 20%. Therefore, approximately 2/3 of all small animal practices generally sell for somewhere between 50% and 95% of revenues. Now, this is a pretty wide range and approximately one third of small animal practices sell outside of this range. Also, sales data obviously does not include all veterinary practices that potentially are offered for sale, those that do not sell, and/or practices that the VPSG broker was not willing to take on as a candidate for selling. This data is thus a select population of veterinary practices and as such, it could make it somewhat illogical to consider it as appropriate for making broad generalities or for usage as a “rule of thumb” about all veterinary practices that could be presented for sale. Sales data (price to revenues) is therefore, not necessarily, a good indicator of what a practice should sell for based solely upon its revenues, but it is helpful to some degree and gives some sense of reference of what is happening in the marketplace for specific types of veterinary practices.

In the author’s opinion, the best indicator of what a practice should sell for is based on profit or historical cash flows while factoring in growth. Ultimately, acquisition debt on the practice and real estate must be retired to give a “reasonable” salary after debt for the new owner. Cash flow from the practice will be used to satisfy those requirements. Debt service based on a seller’s price for practice and real estate can be easily calculated, if the seller’s price is known. What is a “reasonable” salary? That can vary from individual to individual, but the components generally considered are as follows: average wage as a non-owner for professional services performed, management compensation for running a practice, and perhaps, risk of investment or return on investment. Growth or potential? The seller often has difficulty in justifying significant premiums based on potential or anticipated growth unto itself, but past growth may be an indicator. When professional appraisers approach a valuation engagement, they are required to “predict future earnings”, which should account for growth. It becomes an educated guess, but positive, negative or neutral …growth and some justification for growth should be given.

So what’s the point? Potential buyers should look closely to historical cash flows and assess their own ability to reproduce those cash flows while accounting for debt service and reasonable salary when considering price. They should also consider the prospects for growth. Many (and some say most) practices grow significantly immediately after acquisition and banks that follow the practices after closings usually see this as a result of new enthusiasm in the practice and a strong sense of debt aversion characteristic of veterinarians. New owners often work harder and make improvements to the practices that result in increases in revenues or profit or both. Every potential buyer should consider these issues in evaluating a practice for purchase and do a business plan with projected revenues and cash flows for at least 3 years after acquisition. This can help assess potential salaries and make a forecast for practice success. We encourage all potential buyers to use an accountant to assist in them this process and be realistic in your approach. Every practice placed on the market should also have a price opinion or business valuation. It facilitates completion of the sale when done properly and most potential buyers will not buy unless they can see how debt can be retired and what salary potential may be present.