Until the mid-1990’s, it was common for veterinary practices to be valued according to their revenue. One often-cited approach was to value a clinic using a multiple of revenue, such as 75% or 100% of revenue. For example, a clinic with $1,200,000 of revenue valued at 100% of revenue would have sold for $1,200,000.
However, this valuation method has fallen out of favor and has not been used in some time. Why is that?
Imagine three clinics with identical revenues but different profitability:
• Clinic A has $1,000,000 of revenue and is generating a $50,000 loss
• Clinic B has $1,000,000 of revenue and is generating a $100,000 profit
• Clinic C has $1,000,000 of revenue and is generating a $250,000 profit
Would you pay the same amount for all three clinics? Probably not. A buyer –whether another veterinarian or a corporate group – ultimately needs to pay back his original investment. The clinic’s profits, not its revenue, enable that to happen.