How Does Debt Impact Clinic Valuations?
Veterinary clinics are usually sold on a “debt-free” basis, meaning that when a clinic is sold, at a minimum any interest-bearing debt (such as bank loans, credit cards and capital leases) is deducted from the selling price.
A clinic is valued at $1,500,000 and has $300,000 of debt. The net proceeds to the seller would be $1,500,000 – $300,000 = $1,200,000.
Does this mean that taking on debt is a bad idea for practice owners? Not necessarily.
Taking on debt to finance growth can be a very good investment. For instance, a lease for new equipment that generates increased revenue and profits might result in a higher sales price and net the seller more money even after deducting the remaining debt. Remember that clinics are generally valued at a multiple of earnings, so investing in equipment that produces $20,000 of additional profit per year will yield several times that much in increased value to the clinic.
It is important to continually re-invest in updated medical and office equipment. However, prioritize revenue-producing equipment over non-revenue-producing assets. For example, a new surgical laser that will generate new procedures (and additional revenue) is a better investment than, say, new TV’s in the waiting room.