Veterinarians who are planning the sale of their practice often ask, "What is my client list worth?" When it comes to practice
value, the short answer is nothing.
A big portion of practice value is tied to the earnings the practice generates for the owner after all normal operating expenses
have been paid. While it's true that without clients there would be no earnings, the only true value of a client is the earnings.
You may be saying to yourself, "Sounds like a circular argument to me." So, let's explore the long answer to the question.
Two common methods of valuing veterinary practices – single period capitalization and excess earnings – both entail capitalizing
an earnings stream that is representative of the normal operations of the practice (see figure 1). This earnings stream determines the goodwill (intangible asset) value of the practice.
Figure 1 – Calculating earnings
The capitalization rate reflects the return the investor wants to achieve based on the risk associated with owning the practice.
The valuator must consider multiple factors when determining the appropriate rate – general market risk, veterinary industry
risk, and risk associated with the ownership of the specific practice being valued (see figure 2).
Figure 2 – Risk factors considered by a valuator
An investor wants to know what kind of return to expect on his or her investment. "What's the likelihood I'll recoup my investment
and how many years will it take?" A capitalization rate of 25 percent means the investor is expecting to recoup the investment
within 4 years (100/25 = 4, where 100 = investment and 25 = rate of return).
A client list in and of itself doesn't guarantee that those clients will remain with the practice – and generate earnings
- after a sale. Typically an investor only wants to pay for what can reasonably be assured he or she will receive.
Dr. Darren Williams, owner of Mayde Creek Animal Health Center in Katy, TX says, "A client list has no intrinsic value. We
have no exclusive contracts with our clients. They are not ours to keep and are free to seek veterinary care from any provider
they choose. Therefore, a list of their names is simply a record of those individuals who have used our services in the past,
not a guarantee that they'll continue to use our services."
Lorraine List, CPA, CVA, owner of Summit Veterinary Advisors in Littleton, CO agrees that a client list has no more value
than the paper it's printed on. "The value of the list depends on whether those clients, and the earnings they represent,
can actually be transferred to the purchaser. It's important to remember that no one actually "owns" clients – they always
have choices on where they can get veterinary care for their animals. That's why the steps in an ownership transition are
so critical," List states.
I was curious if corporate consolidators attached value to the client list when they purchase a practice, so I spoke with
Dr. Stan Creighton and Mr. Greg Hartmann, MBA of National Veterinary Associates (NVA). "We don't attach a value to the client
list per se," says Creighton. "The value of a client is primarily the earnings generated in the practice."
Hartmann added, "To a certain extent NVA ignores the number of active clients when we buy a practice. We do subjectively
assess the number of new clients to determine the stability of the client base and the potential for us to minimize the client
attrition rate over a period of time."