 | VALUATIONS / PRACTICE APPRAISAL
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Methods for Valuing your Veterinary Practice
By Tom A. McFerson, CPA, ABV
Louis M. Gatto, CPA
The goal of a veterinary practice appraisal, or valuation,
is usually to determine what the fair market value of that
practice is. The formal definition of fair market
value, established by the American Society of Appraisers,
is “the amount at which property would change hands
between a willing seller and a willing buyer when neither
is acting under compulsion, and when both have reasonable
knowledge of the relevant facts.”
Veterinary practices are valued for various reasons: for
the sale of all, or part, of a practice to an outside party
or associate; for a partner or shareholder dispute; for a
marital dissolution; for estate tax planning purposes; or,
for just plain curiosity.
The most critical aspect in determining
the fair market value of a veterinary practice is choosing
the appropriate valuation method. A specific valuation
method might be more appropriate, given a certain
set of facts, then another. Below are the more popular valuation
methods currently being used:
Capitalized Excess Earnings Method: This
tends to be the most commonly used method of valuing a veterinary
practice. It is a combination of valuing the tangible assets
(drugs and supplies, equipment) and the intangible assets
(goodwill) of a practice. It is best used when there is some
consistent historical financial information to use.
One of the positives to this method is, as a popular valuation
method in our industry, most veterinarians are familiar with
it. The danger, however, is that it can be oversimplified.
Yes, it is formula based, but each step through the process
has many possibilities and variables.
Discounted Economic Income Method: While
the excess earnings method looks to the past for its value,
the discounted economic income method looks to the future.
The basic idea behind this method is to calculate the value
based on projected net cash flow for some future period, and
then to discount them to the present value based on the potential
risk involved.
One of the positives to this method is that it does take into
consideration a changing business. Historical data is not
appropriate if a practice’s gross is growing (or shrinking)
by thirty percent per year. One of the negatives is that you
are dealing with future projections and, depending on the
assumptions, these can vary widely.
Comparative Transaction Method: A value
is established by relying on information gathered from similar
transactions. Some appraisers prefer this method because a
value is determined based on the real world, i.e. actual veterinary
practices bought or sold in the marketplace. The challenge
of this method lies in finding veterinary practices that are
truly comparative to the one being valued. This is not always
an easy task.
Rule of Thumb: While not a formal “method”
of valuing a veterinary practice, it’s a simplistic
way of figuring a ballpark value for your veterinary practice.
The problem with relying on a rule of thumb is that it does
not recognize the differences between one practice and another.
There are too many factors involved to rely solely on rules
of thumb in arriving at a value.
We’ve discussed three of the more appropriate valuation
methods used in valuing your business. Make sure you understand
why you want an appraisal, and be comfortable with the method
the appraiser is going to utilize in valuing your business.
The method will have a dramatic affect on the value of your
business.
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Copyright © 1999-2003 Gatto McFerson
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