How To Value a Veterinary Practice

Key takeaways

Veterinary practice valuation involves determining your practice’s financial worth by analyzing assets, earnings, and market trends. Accurate valuation helps you plan for growth, make informed decisions about your financial future, and attract buyers or partners, among other benefits. But many factors can affect valuation, ranging from profitability to operational efficiency, and knowing how to value a veterinary practice is important in accurately assessing your practice’s worth.

What is the value of your veterinary practice?

Do you know the value of your veterinary practice? Valuation is crucial for exit planning, growth strategy development, partnership formation, refinancing, and a range of other business processes.

Businesses use several different methods to assess valuation, each of which can produce a different final figure. You might worry about undervaluing or overvaluing your practice by using the wrong method or failing to account for certain value drivers.

This guide covers commonly recognized valuation frameworks, value drivers, and steps you take to prepare for the valuation process. It also includes improvement strategies and next steps you can follow to stay on the path to practice growth.

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What does “valuation” mean in the context of veterinary practices?

Veterinary practice valuation refers to the process of determining the financial worth of a veterinary clinic, based on its income, assets, liabilities, and prevailing market conditions.

Valuation is not the same as the sale price. While valuation is an estimate of your practice’s fair market value, the actual price you could sell it for depends on broader variables, including negotiations with the buyer.

Practice owners often determine valuation through several veterinary practice appraisal methods, not just one. Using a few methods and taking the average of all value figures could provide you with a more accurate valuation.

Why veterinary practice valuation matters for clinic owners

Even if you aren’t planning to sell your practice any time soon, assessing its value can offer several benefits that make it a worthwhile endeavor.

• Helps with strategic planning. Assessing value and all of the factors that impact valuation can help you understand your practice’s strengths and weaknesses better, informing your next steps forward.
• Improves positioning in negotiations. Partnerships, mergers and acquisitions, and veterinary practice sales also benefit from valuation. Knowing your practice’s value can give you leverage in negotiations.
• Increases accessibility to financing options. If you need to secure capital or borrow money for business ventures, knowing your practice’s valuation is often necessary as part of your lending application.
• Benchmark your practice. Knowing your practice value now can help you accurately compare it to peers or measure its growth over time.

Our Guide for Buying a Veterinary Clinic shares more about the importance of valuation in these transactions.

Valuation methodologies for veterinary practices

Businesses use several valuation methods to assess their approximate values. These are a few of the most common strategies you might use to value your veterinary practice.

Income (or “earnings”) approach

The income or earnings approach to veterinary practice valuation involves estimating the present value of expected future income or cash flows. This method focuses on your practice’s potential to generate money and uses techniques like the discounted cash flow (DCF) or capitalization of earnings method.

• The DCF method projects future cash flows over a specific period, then discounts them back to their current value. This method is often recommended when a practice’s cash flow is expected to change significantly.
• The capitalization of earnings method is simpler and better for businesses with stable, predictable earnings. It requires you to divide normal earnings by a capitalization rate.

In both methods, choosing the appropriate rate, whether discount or capitalization, is important to ensuring an accurate valuation. You also need to make adjustments for owner compensation, non-recurring items, and perks.

Determining your “true operating profit” is helpful in this approach. This figure is your practice’s actual profitability, calculated by adjusting net income for discretionary, non-cash, or non-recurring items. Veterinary practices often assess profit or earnings by calculating their EBITDA, or earnings before interest, taxes, depreciation, and amortization.

Market (comparable) approach

Because valuation and sale price are often significantly different figures for veterinary practices, it might be helpful to use the market approach if you are considering selling your practice. This involves using the actual sale prices of similar veterinary practices to benchmark your own practice.

This approach is sometimes easier said than done. Private sales data for veterinary practices is somewhat limited, and differences in geography and practice size can impact how comparable another practice’s sale price would be to your own. You need a solid understanding of your own financial health to make the appropriate adjustments for this method.

It may also be helpful to compare other transactions, such as acquisitions and mergers, when making decisions about your practice’s pricing strategy. While the market approach won’t provide you with a precise valuation, it can inform your practice decision-making.

Asset (net asset/cost) approach

Another way to value a veterinary practice involves assessing the value of all tangible and intangible assets, then subtracting liabilities. Tangible assets may include:

• Equipment
• Inventory
• Property
• Furniture
• Supplies

Intangible assets are often broader, encompassing:

• Goodwill, or your practice’s reputation and earning power
• Client lists and relationships
• Medical records
• Staff expertise
• Brand name

Goodwill and other intangible assets often make up a significant portion of a practice’s total valuation. Because these assets do not have a direct monetary value, the process of assessing them is often more abstract, and pinpointing a specific valuation figure can be challenging.

The asset approach often leaves veterinary practice owners with a floor or minimum valuation. This is especially useful for underperforming or capital-intensive practices that need to understand how their liabilities are impacting total valuation.

Hybrid/weighted approach

A hybrid or weighted approach to practice valuation involves combining several methods and finding the average valuation from them. For example, you might use both the income and market approach to arrive at a more balanced value. Most veterinary practice appraisers blend methods to reduce bias or limitations from a specific strategy.

Key value drivers and factors influencing veterinary practice value

Each of the above methods for how to value a veterinary practice considers different factors or value drivers. Understanding all of the details impacting your practice’s value can help you make strategic adjustments to boost profitability and revenue growth.

Financial performance and trends

High-value veterinary practices generally experience consistent revenue growth, stable profit margins, and healthy cash flow. Monitoring these veterinary practice metrics in your practice can help you predict changes to your valuation and assess your practice’s value compared to competitors.

Financial performance over multiple years is also a value driver. Having a multi-year track record of growth, not just one strong year, can improve your clinic’s valuation. Pairing this track record with high-quality financial reports that are transparent, clean, and audited can further improve the value of a veterinary practice.

Client base and retention/growth potential

If you were to sell your veterinary practice, having a sizable client base and strong retention could increase the sale price significantly. Predictable client demand and high retention reduce risk, offering better financial stability. The quality of client demographics also matters, with factors like household income and pet ownership trends impacting practice valuation.

Your practice can seek to improve valuation by focusing on new client acquisition. This may involve joining referral networks or strengthening your marketing strategy. Improving your practice’s reputation by seeking positive reviews from clients can also help.

Operational efficiency and scalability

Your practice’s operational efficiency impacts the number of staff you need and the number of patients you can see each day, which both directly affect revenue. You can assess your practice’s operational efficiency through metrics like:

• Per-staff productivity
• Utilization rates
• Throughput per exam room

Automating certain processes can improve efficiency and reduce practice overhead. Practice management software and digital tools help you streamline administrative tasks.

Meanwhile, your practice’s scalability also directly affects valuation. Consider whether your practice has replicable systems and in-place opportunities to expand.

Tangible and intangible assets, facilities, and equipment

We already know that tangible and intangible assets impact a practice’s valuation. Taking steps to increase the value of those assets can, in turn, raise your practice’s value as a whole.

Modern, well-maintained equipment is worth more than outdated machinery. When you upgrade diagnostic machines, imaging equipment, and laboratory processes, these changes can act as an investment to increase the value of your practice.

Your real estate also contributes to valuation, including whether you own or lease the facility, the value of the land, and any improvements you have made to the property. Consider how leaseholds, amortization, and depreciation schedules have affected your practice’s financial worth.

Brand, reputation, and market position

What is your practice’s community standing? What do your online reviews say about your reputation and trust levels? Your brand as a whole impacts your value to prospective buyers.

Consider how your practice compares to others in the veterinary market. Do you have any specialty services or niche offerings that set you apart? What is the local market like, and do you have any geographic advantages? Practices in underserved markets often have greater growth potential than those in oversaturated areas.

Risk factors and discount elements

When assessing your practice’s value, it’s important to consider potential risks and discount factors that cause the valuation to fluctuate. Such factors may include:

• Your practice’s dependence on one or a few vets or clients
• Pet health spending fluctuations and economic cycles
• Regulatory risks
• Exposure to liability concerns
• Deferred maintenance, which can lead to more expensive repairs

Preparing your vet practice for valuation

Now that you fully understand what impacts a veterinary practice’s valuation, you can start preparing your clinic for the valuation process. These steps can set your practice up for a smoother process and potentially lead to a higher final figure.

Clean and standardize financials

Start by reconciling the chart of accounts and ensuring consistent categorization for expenses and income. Adjust for owner compensation, perks, family member services, and non-practice income to ensure an accurate and comprehensive financial picture. Be sure to normalize non-recurring expenses, such as large repairs and one-off events, as well.

Audit assets and liabilities

Next, create a detailed inventory of your practice’s physical assets, including equipment, supplies, and real estate. You’ll also want to document intangible assets: intellectual property, client lists, contracts, etc.

Weigh these assets against liabilities, such as leases, deferred maintenance, and debt.

Document key operational metrics

Understanding your practice’s KPIs is important to understanding valuation. Compile key metrics, such as:

• Client retention
• New client growth
• Utilization rates

You’ll also want to gather standard operating procedure (SOP) documentation and system maps. This can help you demonstrate the scalability or replicability of your processes, which would be important in the event of a practice sale.

Market research and benchmarking

Once you have in-depth data about your practice’s operations and financial status, it’s time to perform market research for comparative purposes. Gather recent sold practice comparable data, both local and national, as well as sale price data. Research merger and acquisition trends in the veterinary industry, and analyze the demographic and pet population trends in your area.

Risk mitigation and enhancements

Mitigating risk in your practice can also improve your opportunity to be financially successful. Begin by addressing any operational or regulatory vulnerabilities that may put you at risk of revenue loss. Reduce dependency on key individuals, whose absence would greatly affect operations, and create plans for when these individuals leave or retire.

You can also mitigate risk by cleaning up leases, contracts, and vendor relationships.

Preparing supporting materials and narrative

While a valuation report focuses on factual data about your practice’s financials, it may help to create a valuation “story” that highlights strengths, growth potential, and risk mitigation efforts. Your practice’s value comes from much more than just profit and loss statements, and this story can help paint a fuller picture of how much your practice is actually worth.

Other supporting materials that may help include:

• Executive summary
• Practice highlights
• SWOT analysis

Strategies to increase your practice’s value (pre-valuation enhancements)

Taking steps to increase your veterinary practice valuation may be a good idea. Aside from potentially leaving you with a higher valuation figure, these strategies can promote a range of other benefits, including attracting more potential clients, improving your practice’s reputation, and building customer loyalty.

• Expand high-margin services or specialty care to bring in more high-value patients.
• Optimize pricing and service bundling.
• Improve client retention through wellness programs and subscription models.
• Document scalable processes and standardize staff training.
• Invest in modern technology and systems.
• Strengthen your brand or online presence.
• Consider facility or location improvements.
• Create strategic partnerships with referral networks and affiliated services.

Putting it all together: Sample valuation walkthrough

Imagine a small animal clinic makes approximately $1.2 million a year in revenue, with $150,000 in profit. After adjusting for owner pay, equipment, and one-time expenses, its adjusted earnings come to approximately $240,000.

Clinics like this often sell for anywhere from 4.5 to 5.5 times those earnings, or in this case, roughly $1.1 to $1.3 million. Factors that could further increase this number include:

• If the clinic owns its building and equipment
• The number of loyal clients
• Whether the facility has been modernized

Common pitfalls and mistakes to avoid

Veterinary practices often make a few common mistakes when determining valuation:

• Relying too heavily on “rule of thumb” multipliers, such as “1x revenue.”
• Using untidy or unadjusted financials
• Ignoring intangible value, such as client base and goodwill
• Failing to account for future capital needs or maintenance
• Undervaluing risk or discount rates
• Letting sentimental or emotional value overpower objective analysis

How to use this valuation once you have it

Your practice valuation can inform a range of processes and decisions. You can use this figure to:

• Guide pricing strategy or sale list price
• Gain leverage in negotiations and when structuring deal terms (seller financing, earn-outs, etc.)
• Present to lenders or investors for financing
• Drive internal improvement and benchmark progress

This figure will not remain stagnant, so be sure to reevaluate it periodically to monitor growth.

Next steps for valuation readiness

With so many methods and considerations for the valuation process, knowing where to start can be overwhelming. You may want to begin by consulting with a specialized veterinary valuation professional or consultant who can guide your next steps.

Your practice can start small by tracking adjusted earnings and key metrics, gathering financial documentation, and evaluating the different valuation methods that may apply to your practice, such as the income approach or asset-based approach.

Now that you know how to value a veterinary practice, you can begin using this value figure as both a tool and a measurement for your practice’s success. Weave is another valuable tool that supports veterinary practices. Request a demo to learn more about our patient engagement and practice automation features.

Frequently Asked Questions (FAQs)