The various attributes of a veterinary clinic, such as location, the affluence of clientele, and the quality of medicine practiced, may all be outstanding and provide support for value considerations in veterinary practices. However, such characteristics do not provide insights into the profitability of the practice.
In a chapter from What It's Worth: Veterinary Practice Value, which we’ve excerpted here, Byron Farquer, veterinarian and appraiser, and David McCormick, appraiser, discuss six profit indicators and benchmarks in veterinary practices including compensation, tangibles, EBITDA, and more.
1. Annual Revenues
Most practices generate around $300,000 to $600,000 of revenue per full-time equivalent veterinarian. The wide range exists because of geographical differences, species differences, and work rates. A small-animal-practice veterinarian in rural New Mexico, for example, may not be able to break the $450,000-to-$500,000 gross per doctor because the average transaction fee is lower than in the larger urban areas. Another small-animal veterinarian in northern New Jersey may produce over $1 million through team utilization and higher levels of medicine.
2. Discretionary Cash Flow
The owner’s discretionary cash flow can range from 24% to 41% of gross revenues (or more). The cash flow can vary by practice type. Mixed-animal practices (those that treat both livestock and pets) often have lower cash-flow levels because they tend to retail a lot of products. They also maintain two pharmacies, since not all drugs can be used on all types of animals, which adds to overhead costs and reduced efficiency. A surgical specialty practice can have extremely high cash flow because it is not dealing with other types of overhead and as a specialty is commonly able to command a premium for its services.
Target earnings before interest, tax, depreciation and amortization (EBITDA) is typically 14% to 17%, but the average is 11% to 12% for small-animal practices. Farquer and McCormick consider a practice of any type to be financially healthy if it is 14% to 18% EBITDA. Based on data from their colleagues as well as their own internal analysis, the average practice of any type in North America is 10% to 12%. There is a broad range in part because some high-grossing practices have very little value beyond their tangible assets due to low profitability and their correspondingly low intangible asset value. The higher profit level for the specialty surgical practices tends to be strong, as it is for many well-managed practices.
4. Expensive Tangibles
In recent years, veterinary facilities have become equipped like miniuniversities—full of sophisticated equipment. Today, it is common to find a small-animal hospital with in-house blood diagnostic machines paired with ultrasound, surgical lasers, therapy lasers, digital imaging, and endoscopy along with expensive patient monitoring machines. On the East Coast, even the smaller one-doctor practices have a digital X-ray and a Class 4 therapy laser. According to Farquer, veterinarians like lots of equipment and many clients are willing to spend what it takes to save their pets.
5. Vets are not money-/compensation-driven
Some veterinarians are well compensated, but, by and large, veterinarians (and their teams) aren’t in it for the money. Don’t be surprised to find extreme variability in the profitability of practices. Generating a profit is not a driving force within this industry, as problematic as that is. This often results in practices that are revenue rich and profit/value poor, and this appears to be an increasing trend.
Small-animal veterinarians are typically compensated at 20% to 22% of production or a salary amount that has a similar relationship to their production. To this, benefits such as health insurance, continuing education, retirement, licensing, etc., are frequently added. Large-animal veterinarians, if paid on a percentage of production, are generally compensated in the 25%-to-30% range. Specialists or people working in more demanding environments—for example, the emergency veterinarian who works at night or on weekends—may also be in the higher range.
Veterinary practices are unique from other businesses and can be challenging to value. The characteristics alone do not provide insights into the enterprise’s profitability. With many practice owners retiring or selling and some disputing a business issue in court, both business valuation professionals and practice owners need to stay current on the value drivers and valuation techniques employed to derive a value for these businesses.
To learn more about valuing veterinary practices, be sure to check out BVR’s special report, What It's Worth: Veterinary Practice Value. Preview the table of contents and download a free excerpt of the report.