Valuing an Incorporated Veterinary Practice for Sale.
There are several reasons why you would look to have your practice valued, but before we start, it is important to understand what makes up the value of a practice.
- The basics of the value can be seen in the Balance sheet of your yearly accounts.
- Fixed Assets: Non-current assets could include property, equipment, and intangible assets like goodwill.
- Current Assets: Cash, accounts receivable, and stock.
- Current liabilities, Bank loans (long and short term), trade creditors, and tax and social security.
- Equity: This represents the owner's interest in the practice, e.g. Share capital. It includes capital contributed by the owners
- Net Assets: Retained Earnings .
The Balance Sheet
These elements provide a snapshot of the veterinary practice's financial health at a given time.
Within this, the most significant values are property (If included) and Goodwill. At the present time, most practices do not include property, as the directors/owners may well own it and rent it back to the business, leaving the Goodwill as the largest asset
The following gives an example of the funds available to a seller and the changes taking place
If the practice were sold as per the balance sheet on the day of sale, the sale would produce £196,000 for the share capital. This would leave funds in the business, meaning the buyer is paying money for money (i.e. leaving the cash assets in the practice). The seller will unlikely want to leave the cash and the loan in practice, so the money will be withdrawn, and the loan will be paid back (£618K) before completion.
The seller would then obtain £362k plus £618k, giving £980K
The practice's goodwill was revalued based on a maintainable profit of, say, £300k on sales of £1,800,000, and the purchaser then paid £1,800,000 for the goodwill after the revaluation. 100% of the shares were sold for £1,942,000 The seller would now come out with £2,922,000/p> • The new balance sheet would be updated for the sale day, producing some additional changes. • It is evident that goodwill is the driving factor, so you need to get an indication of its value before proceeding; this allows you to decide whether the potential sales figures will allow you to live the life you want post-sale.
If it is not, you should look at steps that can be taken to put you in that position at some time in the future and prepare the business over that period to up its value.
If you want to undertake a valuation for a reason other than sale, the base numbers will stay the same, but the Goodwill value will almost certainly be less. When taking in a veterinary investor, accommodation between the parties will be required to come to a fair agreed value.
There are different methods of producing a value, but the Gold Standard for practice valuations utilises a multiplier of the Maintainable profit. In this way, we produce figures showing profitability by deducting the costs and overheads the new owner would not incur and adding back the costs the purchaser would have to incur. By allowing for some additional factors, a final Maintainable profit is produced. A multiplier can be used on the MP to calculate a goodwill value. You can utilise a range of multipliers to give you an estimated range of values.
Throughout my career as a veterinary broker, we have utilised Maintainable profit as the yardstick. Corporations and most other financial bodies accept this, and it offers a justifiable way of producing fair market value.
