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Buying A Veterinary Practice

What is a Low-Profit Practice, and Why is it an Issue?

Aug 4, 2017 10:55:48 AM

shutterstock_294725510.jpgIn recent years, a wave of low profit and no profit veterinary clinics have been making their way onto the market, leaving practice owners feeling lost and confused. The old convention stated that the value of the practice was based on previous years' revenue alone, leading many owners to believe that their high grossing practices were worth far more than today's market can support. That's where the problem comes in.

Today's Valuation Methods

The first thing that practice owners need to understand is that valuation methods have evolved in the veterinary industry. Instead of relying on reported revenue alone, today's appraisers are looking at several different factors to evaluate how much your practice is really worth. This includes not just the revenue, but also the value of your real estate, tangible assets, and profits. In a low-profit practice it is obvious that the last part of this equation has gone awry.

How Did We Get Here?

You may be wondering how somebody with a high revenue practice could allow themselves to fall into the low-profit practice category. The answer is simple: management style. Many low-profit practices are owned by sole proprietors who don't see a need to maximize practice profits. They are earning a comfortable salary for themselves, and they invest in the practice and the staff with whatever is left over. The effect is that you could have a $1.5 million revenue but only $20,000 in profit for the year. To any potential buyer, that looks like a very risky situation. In truth, there may be more than enough money to go around within the business, but the owner has not prioritized profit so the money is swallowed up by what appear to be operating expenses.

Solving the Problem

In terms of the veterinary market itself, this trend has led to erroneous valuations of practices that look like they should be worth far more than they are. The real down side comes in for the owner who planned to sell their practice and retire, but suddenly realizes that revenue alone won't get them the price they feel they deserve. This has stopped more than one sale in its tracks and forced would-be retirees to continue working for 3-5 more years as they build up a profit stream. If an owner decides to go through with the sale despite the shockingly low valuation of their practice, it's likely that the new owner of the low-profit practice will immediately begin cutting benefits to staff or services offered to customers to keep the practice above water and stabilize the profits which can lead the practice into dangerous waters.

The best solution to this problem is to begin planning your sale early. Cut back on new investments in equipment and extra expenditures for staff over the course of several years. Prioritize profits to boost your valuation leading up to the sale and avoid falling into the low-profit practice group.

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