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Preserving practice value through economic turmoil (Proceedings)

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Nov 01, 2009

The valuation of a veterinary practice reveals a telling story about the practice and its owners and staff. It is evidence of the practice's ability to pay bills, retain staff and clients, and invest in the future. It is also management's report card and a forewarning of the owners' future financial security.

Practice valuations are mandatory when planning for financial security, buying or selling a complete interest or a partial interest in a practice, writing buy/sell agreements, estate planning, bank financing, mergers, divorce, or for litigation for damages (for example, condemnation, breech of contract, lost profits, etc.).

With so much riding on the outcome, it's alarming to see how many owners have never had their practice valued. If these owners had a similar investment in, for example, AT&T or Microsoft, they would be checking the value of their investment every day! It's time to face the facts – a practice's value is not equal to one year's revenue; and, a practice's existence is, in itself, no assurance of value. So, let's look at how veterinary practices are valued in today's market and what you can do to control the final outcome.

Determining value

There are several methods used to value a veterinary practice, including excess earnings, discounted future returns, and capitalization of earnings. A qualified valuator will use his/her professional opinion and experience to determine the most appropriate method for your practice situation. This manuscript outlines the excess earnings method where the principal components of value are net assets and goodwill.

Net assets

Net assets include working capital assets such as cash, accounts receivable, and drugs, hospital, and retail supplies. Values for these assets are usually first obtained from the practice's Statement of Financial Position prepared on the accrual basis. Then, each asset is adjusted from its stated book value to its appraised fair market value. For example, accounts receivable are adjusted to reflect only the value of the collectible accounts. Working capital assets are reduced by working capital debt such as accounts payable, payroll taxes payable, sales tax payable, and retirement contributions payable.

Net assets also include the practice's tangible assets such as office supplies, office furniture, and medical and office equipment. The practice land and building is included only if the practice owns these assets. Tangible assets are valued at current market value, the price a buyer would pay given each item's age and condition. Market value can be determined in one of three ways:
     • An independent appraisal by a qualified appraiser familiar with veterinary equipment.
     • An agreement between the buyer and seller.
     • A financial formula that considers original purchase price, age and replacement cost.

If real estate is to be valued, obtain an independent appraisal from a qualified appraiser experienced in valuing special use facilities. After all assets have been valued, all purchase debts such as notes, leases, and mortgages payable are listed and subtracted from the asset total to arrive at net asset value.