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
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.
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.
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.