Practice Appraisals: What Goes Into Formulating a Price?

An appraisal is necessary for anyone who is purchasing, selling or merging a practice. When you are considering putting your practice on the market, you will want to engage the services of a professional veterinary appraiser. Professional sales brokers typically have intimate knowledge of the marketplace, which is extremely helpful in establishing a value for your practice that accurately reflects the current market value. So, now you’ve got your professional appraiser; what goes into formulating a price? The combination of asset worth and goodwill determine the price for a veterinary practice.

1. Asset Worth

Tangible assets are the first area that an appraiser will examine. Tangible assets are concrete; you can touch them, or carry them. They include the building, equipment, tools, office and medical supplies, and inventory.

2. Goodwill

Goodwill is an intangible asset that reflects what the future earnings of the business will likely be. Business profits are realized when a business generates more cash flow than is required to pay the expenses. When the business is sold, depending on several factors, there is a greater likelihood that the practice will continue to net a profit. The goodwill value is obtained after a comprehensive review of past earnings and will include risk factors in its computations. Goodwill considers the fact that established practices generally have a known name and reputation. They often have an extensive client list and medical files available on their clients and patients.

3. Determining Value

There are three approaches used to determine practice value. A professional appraiser will decide on one of the following approaches, after thoroughly analyzing relevant factors.

• Asset Approach -The asset approach determines practice value based on the current market value of each asset that it owns. It is used rarely for veterinary practice valuation as its methods are incapable of establishing a value for goodwill.
• Market Approach - The market approach establishes practice value by comparing it to “like” businesses that have been sold. Typically, practice sale data is not publicly available, and for this reason, the market approach is usually a viable option for valuation.
• Income Approach - The income approach is the most common method used to arrive at a value for a veterinary practice. This approach is often used to appraise income generating properties, such as apartment buildings. Using these methods, a buyer of a veterinarian practice is considered to be making an investment, and future projected earnings of the business are considered returns on the investment. The income approach gives intangible assets value. Goodwill often makes up a huge portion of the value of a veterinary practice, and if it is not taken into consideration, practices have little value aside from hard assets.

A successful practice is built on tangible and intangible assets, but many underestimate the true contribution of goodwill to value. A veterinary sales broker understands that it’s taken you years to establish your practice. Goodwill may seem unquantifiable, but make sure that its value is included in your sale price.