When selling a veterinary practice, ensuring a clear and accurate financial picture is key to maximizing value. Potential buyers will closely examine your financials, but there’s more to this process than just looking at profit and loss statements. This is where the concepts of “add-backs” and “one-offs” come into play.
Understanding Add-Backs
Add-backs refer to personal or non-recurring business expenses that the owner has run through the practice’s books but are not expected to do so again. For example, many small business owners cover personal costs—like personal vehicle expenses, family member salaries, or even personal travel—through the business. When selling the practice, these expenses need to be added back to the earnings before interest, taxes, depreciation, and amortization (EBITDA), as they don’t impact the future profitability of the business.
By identifying these expenses, sellers can provide a more accurate representation of what the business truly earns without these non-operating costs, and thus, boost the practice’s value. In fact, add-backs often show that a business is more profitable than it appears on the surface, which can drive a higher offer.
The Role of One-Offs
One-offs, on the other hand, are unusual or one-time expenses that won’t reoccur for a potential buyer. These could be things like large, one-time equipment purchases, costly renovations, or a significant legal settlement. While these are legitimate business expenses, they shouldn’t reduce the value of the practice because the new owner won’t face those same costs.
For example, if a practice purchased new medical equipment costing $25,000, that’s a one-off expense unlikely to happen again for years. Adjusting the EBITDA to remove the one-off expense makes the practice’s earnings look better and gives buyers a clearer picture of the ongoing financial performance.
How Add-Backs and One-Offs Impact Valuation
Both add-backs and one-offs serve the purpose of “normalizing” the financials of the business to reflect its true earning potential. By presenting this adjusted EBITDA to prospective buyers, sellers can demonstrate the full profit-making potential of the practice.
This is critical when attracting offers, especially from corporate buyers, as they typically rely on EBITDA as a primary measure of a business’s value. The higher the adjusted EBITDA, the more valuable the business appears, leading to better offers.
Preparing Your Financials for Sale
Before going to market, it’s essential to dive deep into your financials to identify add-backs and one-offs. This not only ensures transparency but also strengthens your negotiating position. Many owners underestimate the importance of this step, but with careful preparation, you could discover hidden value that substantially increases your practice’s worth.
Working with an experienced broker who understands the intricacies of veterinary practices can help you pinpoint these opportunities. At 360 Vet Sales, we make this part of our process, ensuring that your financials are in top shape before hitting the market.
If you’re thinking about selling your practice and want to ensure you’re getting the best possible deal, reach out to us at 360 Vet Sales. We’ll help you navigate the complexities of add-backs, one-offs, and everything else that goes into maximizing the value of your veterinary practice.