6 ways to establish benchmarks, keep tabs on profitability and know the value of your practice.
Even if you don’t plan to sell your practice for decades, you can’t start monitoring its worth too early. Establishing and tracking profitability benchmarks will improve your bottom line now—and get you top dollar when it’s time to sell.
1. Review finances monthly. Prospective buyers will consider the age and condition of your facility, your lease, employment agreements and other factors. But profitability is the key metric in evaluating the value of a practice. Look for efficiencies in revenue and expense streams and complete and review practice financial statements monthly. The payoff: An American Veterinary Medical Association-Pfizer study found that 62% of practice owners don’t use financial concepts to manage their practices, and those that do earn two-thirds more than those who do not.
2. Track key performance indicators. Use veterinary software to track KPIs such as sales by category, number of invoices, average invoice and new clients. Then benchmark your results to industry standards and your own prior years’ history.
3. Use detailed accounting methods. Today, an estimated 80% of veterinary practices track finances on a cash basis versus accrual basis, typically because it’s often the path of least resistance from a tax perspective. But accrual accounting provides more comprehensive insights. Monitor the health of your practice, including assets, liability and equity. And take advantage of the American Animal Hospital Association’s chart of accounts.
4. Calculate your ROI. What is your return on investment? Keep in mind that a change in ROI is a good indicator of a change in the value of your practice. To calculate, start with your practice net income and adjust for:
- Normalized veterinary pay (18% to 22%)
- Management pay (1% to 4% of gross revenue)
- Fair market value rent (10% of fair market value of property on a triple net basis)
An ROI of 18% is the gold standard. Under 13% is considered below average.
5. Prepare for a practice valuation. When the time comes to invest in a valuation, it will hinge on two elements: calculation of cash flow (EBITDA) and capitalization (“cap”) rate. The cap rate is the expected return rate to make an investment. Demographics, age and condition of your facility, practice stability and revenue/earnings growth potential will all factor into the cap rate. The more risk, the lower the cap rate. Profitability equates to value because your EBITDA will be divided by the cap rate. One example of how that might look:
|Cap rate:||÷ .18|
6. Invest in the right report. Practice valuations come in different forms, ranging from a market analysis report to a summary report/detailed report. When you ask for a report, know what you want. And you may need one sooner than you think—valuations are needed for estate planning, divorce settlements and other financial reasons, not just a retirement sale.
Check out PSIvet’s tech solutions, such as Pulse Dashboard, to monitor 16 KPIs in real time. For information, contact your Practice Consultant.
0-13%: Below average
16%-18%: Above average
|Practice gross revenue:||$1,000,000|