But my practice has so much potential!

Why Buyers Choose Historical Performance Over Potential

Valuing and acquiring professional practices like those of veterinarians and dentists can be a tricky business. Unlike tech startups or companies in fast-moving industries where future potential can drive up valuations, veterinary and dental practices are usually assessed based on their past financial performance. This more cautious approach is due to the nature of these businesses, their risk profiles, and the metrics used to evaluate their value. In this article, we'll explore why buyers often prioritize historical financial performance over potential when making offers for veterinary and dental practices.

Stability and Predictability of Earnings

Veterinary and dental practices offer essential services that lead to consistent revenue streams. Unlike industries driven by innovation and scalability, these practices grow at a more predictable rate and aren't prone to sudden, exponential changes. This stability means that past performance is a reliable indicator of future earnings, making it a primary focus for buyers.

Recurring Revenue

Both veterinarians and dentists benefit from recurring revenue through regular check-ups, treatments, and long-term care plans. Historical financial data shows a steady and predictable income pattern, which buyers find more attractive and less risky.

Risk Management

Buying a veterinary or dental practice involves a significant investment and inherent risks. Buyers look at historical financial performance to understand the practice's profitability, cash flow, and operational efficiency. These metrics provide solid evidence of the practice's viability, reducing the risk of overpaying for uncertain future potential that may not materialize.

Scalability Limitations

Veterinary and dental practices have limited scalability compared to tech startups or large corporations. Their growth is often limited by the number of patients they can serve, the physical capacity of their facilities, and the availability of skilled practitioners. As a result, the potential for explosive growth is minimal, making historical performance a more reliable basis for valuation.

Market Comparisons

Valuing veterinary and dental practices often involves comparing them with similar practices that have been sold recently. Historical financial performance provides a standardized basis for these comparisons, helping buyers accurately assess the fair market value. Potential growth, being speculative, doesn't offer a reliable metric for such comparisons.

Due Diligence and Bank Financing

Buyers often need financing to purchase veterinary and dental practices. Lenders require robust evidence of a practice's ability to generate consistent revenue and profit. Historical financial performance provides this assurance, making it easier for buyers to secure the necessary funding. Potential growth, being speculative, is less likely to satisfy lender requirements. During due diligence, buyers scrutinize various aspects of the practice, including financial records, patient demographics, and operational efficiency. Historical financial performance forms the cornerstone of this analysis, offering a transparent view of the practice's health and sustainability. Potential growth, without concrete evidence, holds less weight in these evaluations.

Practitioner Dependence

The success of veterinary and dental practices heavily depends on the reputation and skill of the practitioners. Historical performance reflects the current practitioners' capabilities and the practice's established client base. Buyers are more confident in the continuity of revenue streams when they're based on proven performance rather than speculative growth dependent on future changes in personnel or reputation.

Does Potential Mean Nothing at All?

Potential does make your practice more attractive to buyers who are looking for something they can scale with minor changes and improvements. If your facility offers room to grow and expand, if your fee schedule could be increased over time, and if efficiencies can be found within your finances to reduce costs and increase profits, your practice may be valued at the higher end of a fair market valuation, or you'll attract more buyers who see the potential.

What Can You Do Today?

All those changes you think a new buyer could make, consider making them now to start increasing your overall profit. If you're a few years away from retirement, is now the time to make a huge investment and renovate your facility? Probably not, but making some updates and capturing some expense efficiencies to drive profit growth would make sense. In the end, buyers will focus on how the practice performed over the last 2-3 years, so if you're outside that window for selling your business, making changes now will increase your value and net you a better return on the sale of your practice.