featuring Sarah McFadden, DVM, MBA, CVA | Blue Heron Consulting

Running a veterinary practice is about more than providing excellent medical care—it’s also about building a sustainable business. Whether you’re preparing to buy, sell, or simply want to better understand the financial health of your hospital, knowing how practice valuations work is essential. A clear picture of your numbers today paves the way for stronger decisions tomorrow.

The Foundation: Financial Statements

At the core of any valuation is your Profit and Loss (P&L) statement—the record of “cash in” versus “cash out” on a monthly, quarterly, or annual basis. Think of your P&L as a map: it shows where revenue is being generated and how expenses are being allocated.

To make this map useful, organization is critical. Following standards such as the AAHA Chart of Accounts helps group line items into broader “buckets,” making trends easier to spot and compare. Without this level of clarity, tracking financial health quickly becomes overwhelming.

Breaking Down the Buckets

A healthy P&L organizes expenses into categories that align with veterinary benchmarks. Here are the most important buckets to monitor:

  • Revenue (Bucket 1): Your top-line number, influenced by market conditions and client demand. Benchmarking against reports like the AVMA Economic State of the Veterinary Profession helps set realistic goals.

  • Cost of Goods Sold (Bucket 2): Inventory and direct costs of providing care. Ideally, this should represent 20–25% of revenue. Slipping above 30% is a common pitfall, signaling the need for tighter inventory control.

  • Compensation & Benefits (Bucket 3): Payroll, taxes, and employee benefits. A healthy range is 44–46% of revenue, though location and practice type can drive variability. Striking the right balance here ensures you’re both competitive in the job market and profitable as a business.

  • Facility & Equipment (Bucket 4): Rent, repairs, utilities, insurance, and technology. Typical spending falls between 5–10% of revenue. Watch for red flags like above-market rental expenses.

  • Administrative & Miscellaneous (Bucket 5+): Everything from office supplies and marketing to accounting, legal, and bank fees. This bucket also includes less predictable items like penalties, charitable contributions, or bad debt fees.

At the end of the day, what’s left—your net income—is what ultimately determines value.

Turning Numbers into Value

So how does all this translate into what your practice is worth? The basic formula is:

Adjusted Net Income × Market Multiplier = Practice Value

For example, if a hospital with $1.7 million in revenue posts an adjusted net income of 15% ($255,000) and the market applies a 5x multiplier, the practice is valued at $1.275 million.

Multipliers typically range between 3–8x for non-corporate sales and 7–13x for corporate transactions. This explains why two practices with identical revenue can be valued very differently depending on profitability.

A Tale of Two Practices

  • Practice A: $1M revenue, $100K net income (10%). With a 5.5x multiplier, the value comes to $550,000.

  • Practice B: $1M revenue, $200K net income (20%). Even at a slightly lower multiplier of 4.5x, the value jumps to $900,000.

The lesson is clear: profitability drives value more than revenue alone.

Valuation 101: The When, Why, and Who

  • Why: Valuations are essential for buying or selling a practice, but they’re also a powerful planning tool for long-term growth.

  • When: Don’t wait until you’re ready to transition. A valuation every 3–5 years acts as a “pulse check” to keep your business strategy on track.

  • Who: Look for a Certified Valuation Analyst (CVA) with veterinary-specific expertise to ensure accuracy and context.

The Big Picture

Valuations aren’t just about numbers on a spreadsheet. They’re about creating clarity for your next chapter—whether that’s expansion, sale, or simply peace of mind. By understanding your P&L, aligning expenses with benchmarks, and regularly assessing your practice’s worth, you’re investing not only in financial success but in the legacy of care your hospital provides.