Veterinary practice valuation basics

EBITDA and what it leaves out

Mamalis defines EBITDA as net income with interest, income taxes, depreciation and amortization added back. She notes that some buyers, "particularly national or regional consolidators," price practices as a multiple of it [1]. She argues the measure works best for publicly traded companies with audited financial statements prepared under GAAP (generally accepted accounting principles, a standardized accounting method). She also notes that most small businesses do not use GAAP [1].

Her chief objection concerns equipment. She writes that adding back depreciation is reasonable because purchases vary widely from year to year, and that U.S. tax law has allowed first-year write-offs of as much as $250,000 [1]. EBITDA, however, does not subtract anything for ongoing equipment replacement. She states that veterinary profitability calculations instead include "an annual equipment acquisition allowance that varies somewhat based on practice type" [1].

Watson of Simmons uses "earnings" in a narrower sense: what remains after all true and reasonable operating expenses, including a fair market salary for the managing doctor, usually the owner [3]. On that view, an owner-veterinarian draws income from two streams: pay as a doctor and a return on investment. A third stream comes as landlord if the owner also holds the real estate [3]. Watson writes that it is these earnings that "almost entirely create the intangible asset 'goodwill' value of a practice" [3].

Normalization adjustments

Normalization, sometimes called adjusting EBITDA, removes spending choices that a different owner would not make. Mamalis describes the "substitution principle." Under it, an appraiser replaces actual owner salary and benefits with what an associate or manager would be paid for the same work [1]. She explains that this raises profitability when the owner overpays herself and lowers it when the owner underpays [1].

The adjustment categories named across the sources are:

• Owner compensation and benefits, substituted with associate and manager pay at comparable production [1].
• Family members on payroll, adjusted to what an unrelated person would earn [1].
• Facility rent when the owner also owns the building, which Mamalis says may sit above or below fair market rent for tax reasons [1].
• Discretionary or personal spending such as resort CE, charitable giving, personal vehicles and event tickets [1].
• One-time, accelerated or delayed payments, which Suiter flags in her own multi-year worksheet [4].

On rent, Watson puts a reasonable fair market return on real estate at about 7 to 10% of the property's value, depending on local conditions. He describes this under a triple net lease treated as if practice and building had different owners [3]. He adds that excessive rent starts to erode earnings once real estate value approaches or exceeds practice revenue [3].

Suiter participated in a formal practice valuation. She reports that the report included the income approach and a debt-service model, but that fair market value was best calculated with the market approach, "a multiple of adjusted EBITDA" [4]. She notes that a formal valuation reviews the past three complete tax years [4].

Multiples and capitalization rates

A multiple and a capitalization rate express the same thing. Watson gives the cap rate as the reciprocal of the multiple [3]. On that basis, 4 to 6 times corresponds to cap rates of 25% to 18% [2], and 4.5 times corresponds to 22% [3]. Watson writes that lower risk warrants a lower rate of return, meaning a higher multiple and a higher value [2].

Source and year	Context	Multiple stated
Watson, Simmons, 2023 [2]	Historical norm, general small animal practice	4 to 6 times EBITDA (cap rates 25% to 18%)
Simmons, undated [3]	Common appraisal and sale range	4.3 to 5.6 times earnings
Watson, Simmons, 2023 [2]	Corporate buyers, premium high-grossing practices	About 8 to 18 times EBITDA (cap rates 12% to 6%)
VPP guide, per Suiter, 2020 [4]	Small animal general practice	5 to 8 times
Sparrow, Castner and Wood, 2020 [5]	Case study, traditional vs. consolidator	5 times vs. 10 times EBITDA
Leech, 2023 [6]	Consolidator market after 2022	Peak near 18, reverting to 8 to 13 times

Watson traces the 5-times convention to the Veterinary Economic formula introduced in the late 1970s [2]. He also argues that the historical sale statistics are partly circular, since appraisers and brokers structured prices around those multiples and then recorded them [2]. He calls for appraisers to accept higher multiples. He cites SBA data putting the loan default rate at less than half of 1%, along with relaxed commercial lending policies [2]. Watson writes as a veterinary practice appraiser and broker, so this argument for higher values comes from a party involved in practice sales [2].

How earnings drive the price

Watson's worked example uses two practices each grossing $1.5 million, both appraised at a 22% cap rate, or 4.5 times earnings [3]. Practice A earns 21%, or $315,000, which yields a value of about 95% of gross. Practice B earns 9%, or $135,000, which yields $608,000, or 41% of gross [3]. He attributes low earnings mainly to unmanaged expenses, naming staff and associate pay, cost of goods sold and rent as common problem areas [3]. He suggests support staff costs should typically run from the high teens to mid-20s as a percentage of gross, with cost of goods in about the same range. He describes paying associates on production as one way to address associate compensation [3].

The Veterinary Practice Partners factors summarized by Suiter point in the same direction [4]:

Higher multiple	Lower multiple
Income above $2.5 million	Revenue below $1.4 million
Revenue growth above 6%	Growth under 2%
Associates are key income drivers	Selling veterinarian is the primary producer
Real estate expense below 5%	Real estate expense above 9% of revenue
High-income client demographics	Low-income demographics
Service sales above 80%	Product sales above 30% of revenue
Low turnover

Suiter writes that a practice with $1.5 million in revenue "could have a valuation difference of over $1 million" depending on these metrics [4]. The VPP guide is a published framework, not a survey, and the sources give no sample or method behind its thresholds.

Price and value are not identical. Watson notes that a buyer may pay above appraised value for an attractive metropolitan location, equipment quality or room to improve earnings. He adds that "the price must 'cash flow'" for the buyer to obtain financing [3]. He describes a healthy cash flow as about 30% of gross, and says lenders test it against debt payments using an earnings-to-debt-service ratio [2].

Market cycle and deal structures

In an illustrative scenario, Leech described a practice owner who in March 2022 considered an offer at 18 times. A few months later, that owner was receiving inquiries offering at most 8 times [6]. Leech named two main factors in the slowdown.

• Failure to recapitalize: several large consolidators failed to recapitalize. He tied this to Federal Reserve rate increases that raised borrowing costs, along with visit volumes reverting to pre-COVID numbers.
• NVA setbacks: National Veterinary Associates abandoned its planned IPO, and the FTC delayed NVA's acquisition of Ethos Veterinary Health [6].

His description of a reversion to "eight to 13 times" is his own characterization rather than a survey figure [6].

Sparrow, Castner and Wood modeled a 50-year-old owner of a four-plus-doctor practice with $3 million in revenue [5]. They valued it at 5 times EBITDA, or $2.25 million, compared with 10 times, or $4.5 million, from a consolidator [5]. Assuming 6% annual growth, their pre-tax totals were:

Option	Pre-tax payout
Sell 100% now at 10 times	$4.5 million over one year
Sell two-thirds now, one-third later	$5.65 million over three years
Keep ownership five years, profit-share, sell at 5 times	$7.48 million over five years
Sell to an associate in stages over 10 years at 5 times	$10.26 million over 10 years

These figures are one illustrative case built on the authors' growth and margin assumptions, not observed transactions. The longer options also include years of the owner's continued work and business risk [5]. The authors describe minority holdbacks as often valued at the same EBITDA multiple as the initial purchase, with a two- or three-year employment agreement for the seller [5].

Limits of these sources

All six sources are trade press columns or broker and appraiser pages. Five are dated between 2017 and 2023, and one is undated. None is presented as peer-reviewed research, and no source presents a transaction survey with a stated sample size. The multiples above are therefore expert estimates and illustrative cases. The cited sources do not address tax treatment of asset versus stock sales, and they cover real estate mainly through rent and real estate expense. Multiples shift with interest rates and buyer demand, so in our view any figure here should be read against its publication year.