{"id":7105,"date":"2020-02-01T00:00:16","date_gmt":"2020-02-01T08:00:16","guid":{"rendered":"https:\/\/todaysveterinarybusiness.com\/?p=7105"},"modified":"2022-06-15T17:45:15","modified_gmt":"2022-06-15T17:45:15","slug":"veterinary-practice-value","status":"publish","type":"post","link":"https:\/\/navc.sitepreview.app\/todaysveterinarybusiness.com\/veterinary-practice-value\/","title":{"rendered":"You Bring Value to a Practice"},"content":{"rendered":"

One of our primary responsibilities as a practice manager is to sustainably maximize shareholder value (profit). Whether you have full access to the accounting and play a role in major financial decisions or have limited governance over categories like human resources, inventory or marketing, your actions can shape profit and ultimately the practice\u2019s value.<\/p>\n

When I participated in a formal practice valuation, I found great satisfaction watching the fruits of my revenue and budgetary efforts validated and multiplied into tangible practice worth. So many abstract concepts \u2014 culture, client satisfaction, goodwill, reputation \u2014 contribute to a practice\u2019s true success. But for a number cruncher like me, a practice\u2019s finances are the motivating concrete component we use to help keep score. When an owner\u2019s retirement plan hinges on practice value, the score matters.<\/p>\n

Rules of the Game<\/h3>\n

Calculating true practice value is a complex task best left to a certified valuation analyst. Our report included various valuation methods, including the income approach and debt-service model. Ultimately, our fair market value was best calculated using the market approach, a multiple of adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). I admit I do not fully understand all of it, but the process clearly showed the vital need when preparing for a valuation to manage the practice with EBITDA in mind.<\/p>\n

Managerial Accounting<\/h3>\n

While determining EBITDA seems relatively straightforward, even in the most cleanly accounted veterinary practices, calculating true profit for the sake of valuation takes some adjustments. The practice\u2019s financial accounting provided to an accountant determines tax liabilities and creates important third-party business documents. The bulk of management, however, is better served through internally focused managerial accounting where metrics for budgeting, cash flow, accounts receivable and inventory efficiency can be accurately derived.<\/p>\n

Managerial accounting also can be used to normalize or adjust EBITDA to find a true and comparable profit useful for forecasting and estimating value. I accomplish this with a simple Excel spreadsheet that permitted me to review several years of color-coded, notated accounting side by side and at a glance. My worksheet includes budgets as a percentage of revenue, actual over\/under figures, and explanations of anomalies such as one-time, sped-up or delayed payments in any given fiscal year. When reviewing midyear, I can prorate annual expenses and take care to notice where the closing date falls within the payroll cycle, allowing us to most accurately predict year-end profitability.<\/p>\n

When adjusting a financial income statement for managerial accounting, many line items can come into play, including rent, owner compensation, family-member employment, donations and personal expenses. Money Matters columnist Leslie Mamalis explained the pitfalls and considerations of these categories in her article \u201cUsing EBITDA Can Be Tricky.\u201d (Read it at http:\/\/bit.ly\/35gKSE5<\/a>.) Having a strong understanding of which expenses are normal, which are necessary parts of the business, and which are discretionary or made to capitalize on taxation strategies helps to better determine what the practice\u2019s adjusted EBITDA is and what changes need to be made to improve it.<\/p>\n

What\u2019s the Multiplier?<\/h3>\n

Once you have worked through finding the EBITDA, similar to what a professional would use for valuation, the next step is determining the multiplier applicable to your hospital. Veterinary Practice Partners<\/a> (VPP) publishes a free guide that breaks down and explains the factors used when assigning a multiple, from 5 to 8, to value individual small animal general practices. These factors include:<\/p>\n