What Makes Up a Practice Valuation?

The assessment of the value of your hospital.

When assessing the value and potential of your hospital, there are many items to consider. A comprehensive valuation of your practice will take into account both financial and nonfinancial information relating to your current performance and future potential. Prospective buyers will typically evaluate many factors including, but not limited, to:

  1. Revenue
  2. EBITDA
  3. Location and Market Competition
  4. Doctor and support staff stability

Within each of these larger topics, there are many ___ to address. Keep reading for a breakdown of each of these four topics. We will discuss the most important questions to ask and issues to consider when analyzing your practice and its value.

Revenues

When your practice is being valued, both your historical financial performance and future potential will be assessed. Considering the following questions will help you understand your potential for revenue growth.

  • How have year-over-year revenues grown? Hospitals experiencing a consistent revenue growth rate demonstrate the ability to not only retain but grow their client-base, keep pricing of products within market rates, and offer new lines of products and services.
  • Are there untapped areas of the market or services not currently offered that you could add? The ability to expand into untapped areas or add new services is a promising sign of potential revenue growth that could increase the value of your hospital.
  • What is the square footage of your hospital and how many exam rooms does it have? Evaluating the size and layout of your physical space, including any opportunities or limitations, is important when considering your tangible capacity for revenue growth.

EBITDA

Prospective buyers will look at EBITDA to evaluate your hospital’s profitability and expected cash flow generation for a year. EBITDA can be calculated using the following formula:

Net Income + Interest Expense + Income Taxes + Depreciation Expense + Amortization Expense = EBITDA

At your hospital, it is important to consider whether any personal and/or non-recurring expenses should be removed from the above calculation. Where expenses of this nature exist, it is appropriate to call them out for evaluation. See examples below:

  • One-time equipment purchases or the replacement of a large item related to real estate would be considered non-recurring expenses.
  • Personal cell phone expenses are generally considered personal expenses and would not continue if selling your practice.

When evaluating financial statements to calculate your practice’s EBITDA, be aware of industry standards. The following table demonstrates the average breakdown of spending for veterinary hospitals on an annual basis, measured in percentage of revenues.

Cost of Goods Sold 23% of revenues
Facility and Equipment Related Expense 10% of revenues
Labor & Fringe Related Expenses 40% of revenues
Administrative Expense 4% of revenues
Fee Income & Collection Expense 1.6% of revenues

Location and Market Competition

Understanding the location of your hospital and its nearby competition are both important factors in a practice valuation. Consider the following questions about location and competition:

  • What is the population of the city or town in which your hospital is located? Areas that are growing and/or have large established populations have promising room for revenue growth. Hospitals with high visibility that are located in busy areas have greater potential than those in low visibility, remote areas.
  • How many competitors are located within a 5 mile radius of your practice? How does your hospital’s online reputation compare to nearby competitors on sites such as Facebook, Google, and Yelp? Additionally, how does your curb appeal compare against competitors?

Doctor and Support Staff Stability

The stability of the doctors and support staff of your hospital are important to consider when evaluating the future of your practice. Both veterinarians and surrounding support staff alike have a strong impact on the reputation and success of any practice.

  • Veterinarians build loyal client bases, and with the combination of tenure and sound medicine comes continued success and strong doctor production. Furthermore, replacing veterinarians is difficult in a highly competitive market with a shortage of professional staff. Doctors who plan to stick around save expenses of identifying and recruiting incoming doctors.
  • The same goes for the stability of your support staff. It can be costly to recruit, hire, and train new staff members. Tenured staff build relationships with those who visit the hospital and are equally important in a hospital’s reputation as the doctors are.

Before you get ready to sell, it is important to consider how all of these factors will impact your purchase price. Revenue and EBITDA are only part of a larger picture that will be considered by those valuing your practice. A comprehensive understanding of the value of your practice will consider both financial and nonfinancial information. By answering and understanding the quantitative and qualitative questions and issues above, you will be knowledgeable about the value of your practice and prepared for the selling process.