Veterinary practices are generally valued by applying an Earnings Multiple to the profits (usually the EBITDA) of the business.
For example, an Earnings Multiple of 8x applied to EBITDA of £500k would lead to a value of £4m for the business. Most valuations of this nature are made on a cash free, debt free basis.
To explore this in more detail, we should walk through each of the individual elements.
Whilst many may think that the EBITDA of a business is fixed, it is far from it for the purposes of business valuation. The EBITDA used to structure a valuation should be the “Underlying EBITDA” – i.e. the true underlying profitability of the business to the acquirer.
Rather than simply presenting the EBITDA from the latest statutory accounts, looking at trading performance over the last twelve months or run-rate period (often the last six months annualised) can be highly beneficial
Exceptional costs or costs which will not continue post completion of a transaction should then be “added back” to increase the EBITDA figure.
Earnings Multiple Drivers
Earnings Multiples within the UK veterinary sector have fluctuated significantly in recent years. Having peaked in 2021, multiples have decreased subsequently, largely as a result of the CMA's intervention in the sector. As a crude guide, multiples for strong single practices or small groups are generally in the region of 8-12x EBITDA in early 2023.
There are a number of key factors which will drive the size of the Earnings Multiple applied to profits. A high level summary is as follows:
Most corporate acquirers are primarily focused on small animal practices rather than large animal/farm. As such, small animal practices are generally valued higher and receive interest from a broader pool of acquirers.
Referral centres and specialist secondary care providers are highly sought after by acquirers due to their scarcity and attract a premium as a result.
Desirability of location is another key indicator of value. Affluent, family focused and populous areas are deemed more valuable.
Put simply, the larger the practice (both financially and in terms of vet numbers), the greater the value. Single vet practices are higher risk for acquirers and larger practices therefore reduce this risk through diversification.
Strong EBITDA margins are an indicator that a vet practice is performing well and has its cost base under control.
Buyers will ideally see opportunities for growth in the practice, whether through increasing physical space and employing more vets, or by diversifying the services offered.
Where the selling shareholders remain key to the day to day operations of the practice, this is likely to limit the valuation as the deal would be deemed higher risk for the acquirer. The consideration structure is also likely to include a larger deferred element in order to ensure that the sellers continue to deliver strong performance in the 2-3 year period post completion.
Cash Free, Debt Free Offers
When selling the shares of your company, the vast majority of offers are made on the basis of being "cash free, debt free".
In simple terms, this means that any cash in the business is retained by the seller and that all loans are repaid by the seller upon completion. Transactions should also include an
adjustment to "normalise" working capital. This prevents the buyer from having to inject funds into the business if there is insufficient working capital to run the business after completion.
This adjustment is usually calculated by comparing the working capital at completion against the average working capital over the recent past.
Taking the earlier example of a business valued at £4m, it's important to note that this is the "Enterprise Value" (i.e. the headline valuation) and not the "Equity Value" (i.e. the amount actually payable to the sellers). This £4m will be increased for cash on the balance sheet, reduced for the repayment of any loans, and adjusted for any surplus or deficit in working capital. The net result is the amount actually payable to the sellers.
How Can Eclipse Corporate Finance Help?
Eclipse Corporate Finance is a specialist mergers & acquisitions advisory firm focused exclusively on the UK healthcare sector.
Having advised one of the major UK veterinary corporates on significant acquisition processes, we have an in depth knowledge of the elements required to deliver a successful transaction in the sector.
If you are considering selling your practice, we would be happy to produce a complimentary valuation report for your business. As a team of chartered accountants, we take a granular view on valuation, analysing the ways in which performance can be presented to achieve the optimum price.
Please get in touch by emailing email@example.com for an initial conversation.
Further details on how we can support you in selling your practice can be found by following the link below.