Improve Your Practice Value

Establish benchmarks, keep tabs on profitability and know the value of your practice.

It’s never too early to start evaluating the worth of your practice. The key is to develop metrics to track and improve your profitability now—and get you top dollar when it is time to sell. Follow these steps to get a handle on the value of your business:

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.

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.

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.

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.

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:

EBITDA:	$140,000
Cap rate:	÷ 0.18
Value:	$777,777

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.

For more info

• Talk to your CPA. Some metrics, such as the practice “breakeven point,” need to be calculated by an accountant.
• Visit VetPartners, a non-profit association of veterinary business specialists to download practice valuation resources.