Navigating the veterinary practice valuation process
If you are considering selling your veterinary practice, you’ve probably wondered what it might be worth.
You may have heard that valuations are just a simple formula:
EBITDA x Multiple = Purchase price
There’s a bit more to it than that . . . Let’s explore the reality behind how practice value is derived.
What is “EBITDA”?
If you’re not familiar with the term, it stands for Earnings Before Interest Taxes Depreciation and Amortization—and it’s used to determine the operating cash flow of your practice.
Your “adjusted EBITDA” calculation should be a sustainable figure that includes normal operating costs and reflects your current payroll for the practice. Work with your potential buyer to adjust the figure to remove any renovations, new hires, or other expenses that are outside of typical margins. To ensure accuracy and remove bias, a responsible buyer will utilize a third-party accounting firm to validate their calculations.
To increase your EBITDA, you will want to take steps to expand your margins, which can include:
- Adjusting pricing for your services
- Expanding your service mix (adding dental, for example)
- Increasing your revenue by adding clinic hours or staff
- Reducing your COGS (Cost of Goods Sold)
How to determine a multiple
Buyers look at two key variables to determine a multiple:
- What makes this a good long-term investment?
- What are the risks involved?
Risks can include a facility that is in disrepair, a rural location where it is harder to attract clients and talent, and recruiting challenges—like specialty/emergency hospitals, solo practitioners, or even very high producers who would be difficult to replace. These risk factors, among others, could push your multiple down.
Conversely, a hospital that demonstrates consistent growth, low turnover, and responsible management practices will generally yield a higher multiple.
Economic factors can drive down your EBITDA and your purchase multiple:
- EBITDA – Inflation leads to client price sensitivity and a decrease in disposable income. Your staff may also ask for raises to combat higher costs of living.
- Multiple – Rising interest rates increase the cost of borrowing, which reduces investor return on a purchased practice.
The Amerivet difference
One of the main advantages of partnership is the ability to retain ownership in your hospital. We call that a joint venture (JV), where you decide how much ownership you would like to keep while bringing on Amerivet as a growth partner.
This model has several advantages, most importantly preserving the culture of your hospital. We don’t “take over” like some of the others, which makes it easier on your staff. The other benefit is that your retained ownership continues to grow and eventually receives the same multiple as our entire platform!
With our model, your practice growth is rewarded. Why would you give away your financial upside to someone else? We can’t think of a reason either!
We also offer the option for TopCo equity in our parent company. If we sound like the partner you’re looking for, please reach out for an introduction so we can get to know you better!
Learn more at AmeriVet.com.