The competition for small animal veterinary practices is fierce, and you want to ensure your practice is highly desirable to prospective buyers. This will help attract qualified buyers who will provide an excellent standard of care for your clients and patients, but also can help attain a higher purchase price.
What do buyers look for?
Gross income is too often used by practice owners when asked about practice value. But gross income can be a deceptive measure of a practice’s worth. Profit, or the net income received after all expenses, is a more accurate measure of a practice value.
For example, a practice with $1M in gross income and $800k in expenses may be less valuable than a practice with $750k in gross income and $500k in expenses.
Another important figure is cash flow, which is gross income less expenses before the owner is compensated. In the above example, the first practice has a cash flow of 20% ($200k profit/$1M gross income) whereas the second practice has a cash flow of 33% ($250k profit/$750k gross income). The higher the cash flow, the better.
Practices with high gross incomes and high cash flow tend to have the highest values, and practices with low gross income and low cash flow have the lowest values. Many practices in the middle may only fetch moderate values and many times these values are significantly lower than what the practice owner believes their practice is worth.
Type of practice
This article focuses on small animal practices, as mixed and large animal practices account for only about 10% of all veterinary practice sales. The percentage of new graduates who desire to work in rural settings has continued to decline as more and more veterinarians seek regular hours and higher pay. This coupled with crippling student loan debt has weakened the pool of prospective buyers for mixed and large animal practices.
In business, there’s a popular quote “If you’re not growing, you’re dying”. And prospective buyers of a veterinary practice like to see growth. Growth can take many forms, from growth in revenue, staff, clients, or locations.
Two of the more popular growth metrics prospective buyers like to see is growth in net income (gross income less expenses) and growth in client base (more new clients gained than clients lost).
Growth in net income is often achieved by attaining higher gross income (as your expenses may not fluctuate too much), but be careful. If you are looking to sell and have recently hired a new associate, your net income may take a hit in the short-term as your expenses increase but gross income has not yet followed, even though the long-term investment and outlook in hiring an associate may be worthwhile.
Buyers like to see growth in all areas, any decline can signal a red flag. Working hard to maintain high gross income, high cash flow, and growth in the client base can provide reassurance to buyers that they are purchasing a valuable practice.
Having the most modern facilities or building upgrades are not required to be able to sell a practice, but having clean facilities with high functionality will certainly appeal more to a prospective buyer than something that needs a lot of work. Buyers need to envision themselves spending the next 10 years here, and a neglected building will most certainly turn off many. Regular and preventative maintenance can go a long way in preserving the value of the practices facilities.
State of the art equipment is also not necessary, but equipment which will allow the buyer to practice high-end, modern medicine should be considered. If a buyer immediately notices a lot of working capital will need to go toward the purchase of new equipment, this may impact the sales price offered.
Probably the single most important factor in deciding which practice to buy is the location. Just as when purchasing a home, people have a desire to live and work where they want. Buyers may be more willing to purchase a bad practice in a great location rather than a great practice in a less desirable location. More common this is becoming suburban areas that offer plenty of amenities and great schools.
Where the building is located within the geographic area can also play a significant role. People are living busier lives than ever before, and many times clients are willing to prioritize convenience over quality of care. Having ample parking, an accessible driveway, and good signage are all important factors for prospective buyers. Hard to find practices will require greater marketing efforts on behalf of the buyer.
Closely related to location, the client base will say a lot about the future of the practice. Clients that make regular appointments, pay in full and on time, and heed the advice of professionals make the work that much easier for both the owner and the staff. Obviously every practice will have their fair share of problem clients, but a great client base can increase the value of your practice.
Staff and processes
Another very important consideration for prospective buyers is the operations of the practice. Are the staff happy, well-paid, and treated fairly? How much turnover has the practice experienced recently? Richard Branson, founder of Virgin Atlantic, has a great quote to summarize. “Clients do not come first. Employees come first. If you take care of your employees, they will take care of the clients.” Whether you are looking to sell your practice today or 20 years from now, take care of your staff.
How the office is run and how streamlined the processes are have a positive impact on not only the staff, but the clients as well. A well-defined process establishes client and staff expectations and reduces the amount of errors. I highly recommend ‘The E-Myth Veterinarian’, a book written by Michael Gerber and Peter Weinstein, DVM, MBA. The book goes through why having processes and systems in place helps reduce errors and uncertainty and greatly improves the customer experience, thus increasing the potential value of your veterinary practice.
Accurate and well-maintained records, from both accounting records and client data are desired by potential buyers. This helps reduce possible surprises along the way and also helps the incoming owners understand who is their client base, which can assist with client retention and acquisition.
If your internal client records and accounting procedures are not well documented, it would be beneficial to clean this up and establish these best practices before selling.
No practice is perfect, and every practice will have characteristics which make them more or less appealing to prospective buyers. The goal is to understand what makes a practice most attractive and work toward moving your practice in this direction. Some things, like location, you may not be able to change, but recognize the areas where you can improve and disregard the areas where you have no control.
Andrew Langdon is a CERTIFIED FINANCIAL PLANNER™ and the founder of VetWorth, a fiduciary fee-only financial planning firm dedicated to serving the unique needs of veterinarians and their families.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Andrew Langdon, and all rights are reserved. Read the full Disclaimer.