Negotiating the sale of a veterinary business can involve numerous financial considerations. One of the key issues that owners need to understand when selling a veterinary practice is EBITDA: earnings before interest, taxes, depreciation, and amortization. A selling practice owner should know how experts determine EBITDA, how it affects valuations, and what other factors influence the final sale price of the business. This knowledge can help them negotiate a better deal and gain more value for the work they put in growing their business.
What Is EBITDA and How Is It Calculated for a Vet Practice?
EBITDA stands for “earnings before interest, taxes, depreciation, and amortization.” In accounting and finance, EBITDA can help accurately measure a business’s performance and profitability by excluding non-operating expenses from financial data. EBITDA allows professionals to compare the financial performance of two businesses without the influence of local tax laws or a company’s specific debt financing decisions.
A veterinary practice can calculate its EBITDA in two ways. The practice can take its net income and add back its interest, taxes, depreciation, and amortization expenses. Alternatively, it can take its operating income (also called EBIT) and add depreciation and amortization from its financial statements.
How to Determine Valuation Multiples
When selling a veterinary practice, parties may negotiate a purchase price by applying a valuation multiple to the practice’s EBITDA. However, determining the valuation multiple often becomes a key aspect of the sale negotiation. For veterinary practices, parties may focus on various aspects of the business’s finances and operations, including:
- The practice’s revenue mix (e.g., exams, surgery, laboratory, pharmacy, etc.)
- Practice growth rates
- Client retention rates
- Geographic factors, such as total client base and number of local competitors
Current Market Ranges for Independent vs. Specialty Practices
The valuation of a veterinary practice can also depend on the types of services it offers. Smaller, independent practices may not have as high a valuation as a larger, multi-office practice that covers a wider geographic area or has a more robust client base. Specialty practices, including those that perform invasive surgical procedures by board certified surgeons, can also command higher valuations because they provide more profitable services or services with a higher share of cash clients versus insurance reimbursement.
How Add-Backs and Adjustments Affect Valuation
Add-backs and adjustments during EBITDA calculations to normalize cashflows can significantly affect veterinary practice valuations. When practices sell for a multiple of their EBITDA, every additional dollar added to the EBITDA can increase the sale price by that multiple. An adjustment of a few thousand dollars can affect a practice valuation by tens of thousands of dollars, depending on the multiple.
Why the Multiple Offered Isn’t What You Walk Away With
Unfortunately, the base sale price, determined by applying the valuation multiple to EBITDA, does not necessarily reflect the amount a selling practice owner will walk away with after the transaction closes. The sale of a veterinary practice can involve various transaction costs, including legal and accounting fees and broker commissions. A sale agreement can also adjust the final price through a working capital adjustment if the practice ends up having less cash at closing.
How to Position Your Practice to Improve EBITDA Before Going to Market
A practice owner can maximize their EBITDA before entering sale negotiations by following best practices, such as:
- Cleaning up financial records and thoroughly documenting add-backs and adjustments
- Evaluating overhead and expenses to minimize waste
- Optimizing revenue by focusing on high-margin services and accounts receivable collections
Role of a Veterinary-Specific Valuator vs. a General Business Broker
When undertaking the M&A process for a veterinary practice, owners should understand the importance of retaining a business valuation expert experienced in veterinary practices rather than a general business broker. A valuation expert who regularly works with veterinary practices will have a more in-depth understanding of the unique aspects of a vet office’s financials.
Contact Our Firm for Legal Guidance in Selling Your Practice
The complexities involved in selling a veterinary practice make it critical to have knowledgeable counsel throughout the sale process. Contact Mahan Law today for an initial consultation with a veterinary lawyer to learn about the importance of EBITDA when selling a practice and for experienced guidance to help secure a fair price for your business.