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Valuations for Buyer & Sellers

Why are Practices Valued?

While the most common reason to value a professional practice is to plan for a sale,

practice valuation engagements are performed for a variety of reasons, including the following:

purchase/sale
partner buy-in or buy-out
financing
mergers & acquisitions
martial dissolution
tax purposes
eminent domain actions
litigation
stockholder disputes
bankruptcy
etc.

What's the difference between a Valuation and Appraisal?

For the most part, the terms valuation and appraisal are used interchangeably for determining the value of a business or practice. In recent years the term 'valuation' has become the more accepted term. However, use of either term is acceptable. The term 'evaluation' is however an incorrect use of the term, and is often confused with the correct term of 'valuation.' A trained professional would never use the term 'evaluation', but rather either valuation or appraisal.

What do Practices Sell For?

There is no single magical formula to valuing any business, especially a veterinary practice. Though many people still want a rule-of-thumb; so here is a rule-of-thumb:

Most practices will sell for between 65% to 85% of annual gross collections.

The problem with a rule-of-thumb is, "How do you know if your practice is the norm or the exception?" A rule-of-thumb may or may not apply to you. We see practices sell for ±2 standard deviations of the practice average sale practice. This means that practices will often sell for 30% to 60% above or below the average sales price. Will your practice sell for above or below or at the average? We sometimes see practices sell below or above even this wide range of 2 std. dev. Below is a graph showing the widely ranging distribution of veterinary practice selling prices:

Why is the Price Range so Wide?

There are dozens of factors that influence practice value. A key factor influencing value is practice type (e.g., small, mixed, large, ER). Beyond practice type, numerous factors influence value. Some sample factors are shown below:

Practice Size. Are you a solo practice or a 6 doctor practice? Are you grossing $400K or $4MM?

Profitability. A practice netting 30% of gross will sell for less than a practice netting 43% of gross. How do you compare with your peers?

Location. Practices in rural or particularly high cost of living areas may sell for less.

Facility. Practices located in larger, modern facilities sell for more than practices in cramped, run-down facilities.

Equipment. Practices with lots of expensive, modern equipment tend to sell for more than those with little or old equipment.

Hours Worked. Are you working 20 hours/week or 90 hours/week to generate $XXXX income?

Staff. Do you have a well-trained staff with good tenure, or poorly trained staff with turnover every 3 months?

Financial History. Is your practice income increasing or decreasing? Is the growth rate sustainable in the long run?

Personal Goodwill. How much of the business is tied to the doctor's individual reputation or personality? Can a new buyer duplicate?

Sale Terms. Will it be a stock sale or an asset sale? What is included or excluded from the sale?

Financing. What type of financing is available? Commercial loan? Seller carry? How much down payment? What are interest rates?

Associate DVM Non-competes. Do you have signed non-competes with your associate DVMs? Or can they open up across the street?

Competition. Did a competitor just open down the street? Are you the only game in town?

The Vet Broker considers over 40 different factors when valuing your practice.

Who does valuations?

There are several categories of people that perform valuations:

business appraisers
accountants (CPAs)
business brokers
college professors
commercial real estate appraisers
investment bankers

Each category has its advantages and disadvantages. Although, the better appraisers tend to be educated in business valuation and have an understanding of the various issues involved in valuing a business (e.g., brokerage/sales, finance, accounting).

Why not just have my CPA do it?

Accountants often do not have significant experience or training in performing valuations. The vast majority of CPA's nationwide have little or no training or expertise in business valuation. While they are very familiar with financial statements, many are uncomfortable making the forecasts that are crucial to valuation. Further, their experience tends to be in tax value, which is usually quite different than Fair Market Value or Fair Value. They usually do not understand or have real world sales experience in market value; and often do not consider value to a real world buyer or how current practice acquisition loan requirements affect how much a buyer will pay.

How about a general business broker?

General business brokers most often use generic rules of thumb to list and sell businesses. However, rules of thumb can be dangerous as they do not take into consideration the specifics of a particular business. Also, many business brokers lack the financial expertise necessary to properly analyze a company's financial statements. Finally, most general business brokers are not familiar with professional healthcare practices and have difficulty assessing variations unique to a given practice. Most business brokers will just tell you that a practice will sell for X times net or gross--this usually will give you a dramatically wrong answer to practice value.

How about those Valuation Software Programs?

Low-end software-driven products should be approached with caution. In general, valuation programs are designed to give quick, and not necessarily accurate answers. Further, by design, they deny the user the expertise of a qualified appraiser's many years of valuation wisdom. While valuation software tools can be an effective time saver in the hands of a trained professional, their use is problematic when used by individuals or untrained part-time appraisers who do not understand the appraisal process or the tool itself. The old axiom of 'Garbage In - Garbage Out' often describes the result. You may find it interesting to know that most certified business appraisers rarely use purchased valuation software as the crucial element in valuation is the experienced interpretation of information.

Valuation Organizations

There are four organizations in the United States that certify business appraisers are:

Institute of Business Appraisers, Inc. (IBA)
American Society of Appraisers (ASA)
National Association of Certified Valuation Analysts (NACVA)
American Institute of Certified Public Accountants (AICPA)

The below table compares/contrasts the certification credentials from each of these organizations. For better quality appraisals, one finds that appraisers holding the more difficult to obtain certifications (i.e., Certified Business Appraiser (CBA) from the Institute of Business Appraisers or the Accredited Senior Appraiser (ASA) in business valuation from the American Society of Appraisers) generally do high quality work and are well regarded in court.

A Comparison of Business Valuation Certifications
Requirement	IBA CBA	ASA ASA/AM	NACVA CVA	AICPA ABV
Education	College/Equivalent	College/Equivalent	College/Equivalent	College/Equivalent
Continuing Professional Education	Yes, 24 Credits every two years or equivalent	Yes, 100 Credits every five years	Must maintain CPA credential. Other classes in business valuation are required to maintain designation.	60 Credits and involvement in 5 reports every 3 years
Report Review Requirement	Yes, 2 Reports rigorously reviewed by leading Business Appraisers	Yes, 2 Reports rigorously reviewed by leading Business Appraisers	None other than portion of qualifying exam.	None
Experience	Minimum of two assignments--two peer reviewed reports	5 Years for ASA; 2 years for AM	No Minimum	Involved in 10 Business Valuations
Qualifying Exam	Proctored, Closed Book	Proctored, Closed Book. Also must pass an Ethics Exam. A USPAP exam must be passed every five years	Take-Home, Open Book until 1999; Proctored, Closed Book starting in 1999. Exam includes a report writing portion.	Proctored, Closed Book
Organization has Professional Standards	Yes, for over ten years	Yes, for over ten years	Yes, since 1995	Under Consideration

Our People

Several TVB Brokers and VPSG affiliates are members of, and/or accredited by professional valuation organizations such as the Institute of Business Appraisers (IBA), American Society of Appraisers (ASA), National Association of Certified Valuation Analysts (NACVA). Additionally, our experience in practice sales/brokerage gives us a rare perspective as to true practice fair market values. All of our brokers have access to our internal network of sales and valuation expertise.

Types of Valuation Reports

THe Vet Broker offers a variety of valuation reports and formats. For information on standard services for Buyers & Sellers follow the appropriate link below:

In addition, we can provide valuations for different needs. Contact us to discuss your need today.

For Real Estate Appraisers

We offer veterinary clinic/hospital appraisal guidelines for cost of construction and income approach in special purpose real estate appraisals. Click Here.