The new generation of low-value practices

The new generation of low-value practices

Some practice owners are stunned when they learn that their practices have little or no value. Low profitability is the reason.
Nov 01, 2007

Dr. Karen E. Felsted, CPA, MS, CVPM
For years, veterinary practice owners assumed that when they wanted to sell their practices, buyers would be available to purchase them at a good price. Sure, a few practices had problems—they couldn't find buyers, or at least buyers who'd pay what owners thought the practice was worth. But these practices were easy to identify. They were smaller, with older facilities and outdated equipment, and they pulled in relatively little revenue. Fortunately, there weren't many of these troubled hospitals around.

Today things have changed. In the past few years, the number of practices with little or no value has been increasing. The valuation committee of the Association of Veterinary Practice Management Consultants and Advisors (AVPMCA), of which I'm a member, has even coined a term to describe these practices: "No-Lo Practice," short for no-value/low-value.

More and more practice owners are surprised when they receive no-value or low-value appraisals. Some of these practices are similar to the historically low-valued hospital: They tend to be small, mismanaged, and unable to keep up with client demand for better service, high-level medicine, and an attractive facility.

The bottom line
Other practices, however, surprise even the experts. On the surface they look great. They're in beautiful facilities with talented doctors and large support staffs, and they're providing good care with all the latest equipment. They offer comparatively high compensation and employee benefits, and in the owners' eyes, cash flow is strong.

So what's gone wrong? Why are these practices not worth what you'd think?

Peeking into profitability

Profitability is the top factor in determining a practice's value. Whether a hospital is housed in a gleaming 20,000-square-foot facility or a falling-down shack, if it's not profitable, it has little value beyond the tangible assets.

Because of this, profitability is one of the most important aspects of managing and, eventually, appraising a hospital. But it's not an easy number to determine. Standard financial or management reports don't show it—not taxable income from a tax return, not net income from a profit-and-loss statement. That doesn't mean those reports have been improperly prepared; it simply means they weren't designed to determine profitability. Most practice owners and managers aren't used to figuring out their own profitability. So, often, the first time they come face to face with the true value of their practice is when their appraiser talks to them about it.

The irony is that the arithmetic isn't hard: To find out a practice's profitability, you simply subtract the operating expenses from the operating revenue. The challenge is digging out some numbers you're probably not used to looking at in determining true operating revenue and expenses.

Operating revenue and expenses include items seen in day-to-day operations, such as fees for services and drugs and the cost of medical supplies. These items are listed at fair market value. For ease of comparison with other practices, profitability is stated as a percentage (the profit margin) and is calculated by dividing operating profits by gross revenue.