If you own a vetrinary clinic in Canada, there are several questions and tools you should consider to help you determine if you should sell your practice.

1. Working Draft
Last Modified 21/01/2009 8:27:07 PM Eastern Standard Time
Printed
Clinic ownership
and management
CONFIDENTIAL series
The ownership
life cycle
2010
Document
Date
This report is solely for the use of client personnel. No part of it may be
circulated, quoted, or reproduced for distribution outside the client
organization without prior written approval from McKinsey & Company.
This material was used by McKinsey & Company during an oral
presentation; it is not a complete record of the discussion.

2. A bit about us
We’re family and friends. We’re building a business to reflect the values we
believe in. It is a family business, and we believe that if the needs of our staff,
clients and patients are taken care of, the finances take care of themselves.
Michelle Cutler, DVM and Bernie Caplan, DVM Karen Allen, DVM Jon Shell, MBA
Orin Litman, MBA
Jon was a small business
Michelle is an OVC ‟00 grad, where she An OVC ‟77 graduate, A WCV graduate, Karen
operator for several years
co-founded Global Vets. In addition to Bernie‟s Annex Animal owned Mill Creek Animal
before getting an MBA.
being a co-founder of VetStrategy, Hospital has been a fixture Hospital since 1996 before
Following graduate school,
Michelle is a practicing vet at McLean in his neighbourhood for 30 joining forces with
he was an associate with
Animal Hospital.. years. He has participated Vetstrategy. Karen has been
international consultancy
Orin, a scientist by training, spent in the ownership of other actively involved in the
McKinsey & Company
most of his career with Katz group, clinics, and is a founding AbVMA and facilitates
before helping to found
helping to grow their pharmacy director of VetStrategy. thorough and critical review
VetStrategy n 2006.
business in Ontario. He received his In addition to being a of current research to
Jon focuses his time on
MBA before helping to found clinician at Annex, Bernie ensure our vets have access
clinic operations as well as
VetStrategy in 2006. Most of Orin‟s focuses his time on to information they need to
administration. Many of
time is spent on development and veterinary community make sound clinical decisions .
processes that are used to
marketing. relations as well as acting as Karen and her husband Lyle
make facilitate smooth
When they are not working, Michelle a senior operational advisor. are happily raising their
operations within our
and Orin spend their time with their children on a farm outside of
clinics have been developed
three children – Kobe, Beck and Jude Edmonton.
by Jon. 2
and their Viszla Bubba.

3. When should I consider selling my Practice?
• Key questions to ask yourself
• Is now the right time?
• Answers about the process of selling
• VetValuator: a clinic value calculator
3

4. What questions should I be asking?
YES NO
• Is your clinic growing over 10% per year?
If you
• Do you enjoy the day-to-day running of the clinic? answered no
to most of
• Have you recently made significant investments in the clinic? these, you
may want to
• Do you have any Associates who would buy your practice? consider
selling your
• Are you prepared to work more if an Associate leaves? practice
• Do you need to own my own clinic to meet your retirement
goals?
4

5. Where am I in the ownership lifecycle?
Owner works in clinic
Value less often. Additional
More associates staff and management
of brought in, revenue
clinic reduces cash flow
increases
Revenue and
Owner builds operations stabilize.
client base and Slow growth, strong
reputation cash flow
Age 30 40 50 60 70
Reasons to • You‟re not enjoying • You‟re a serial • Revenue is growing, cash • You no longer want owner
think about owner lifestyle entrepreneur – time to flow increasing, staff is responsibilities
selling • Cash flow is very start and grow a new stable • Threat of HR instability
tight practice! • Your Clinic‟s value is is a big business risk
• You‟ve enjoyed being a highest – sell at the top!
veterinarian, but are
thinking career change
I love my clinic, but hate management – how can I become a practicing veterinarian again? 5

6. Is there an option between selling and owning?
• I hate HR. Hiring, firing, labour laws – it‟s the worst part of my job
• I’m not an administrator. I don‟t enjoy the financial management, pay tax penalties from
time-to-time, and spend too much time on it.
• I love medicine. I love my clients and my patients, and would like to spend every day doing
that.
• I want to do more. I wish my clinic was more progressive, but I just don‟t have the time.
• I can’t find the right manager. I‟ve tried a few practice managers, but nothing is up to
what I want.
BUT… I’m not ready to sell.
These days, there are a lot of options between selling 100% and keeping 100%
• If your clinic is big enough, you may be able to bring on a partner
Sell 50% • In some cases, this partner could do the administrative tasks
• Lock in the value of your clinic today, and stop doing the administration
Sell and Stay • Continue to direct medical practice, and maintain your clinic heritage
• This option is becoming more and more common
Join other • Partner with other clinics, and hire central administrators for the
clinics administrative tasks
See page 13 for VetStrategy’s options for the Veterinarian who wants to keep
practicing, but stop administering 6

7. Who could I sell to?
There are different ways to think about succession
Pros Cons
• Associate has rapport with • Often need to self-finance
Associate staff and clients • Few associates have sufficient risk
within • Little business interruption tolerance
Clinic* • Deals often fall apart – if the
associate leaves it can affect clinic
value
• May be able to transition clinic • Often fall apart due to risk-
Another over several years, which may aversion and lack of deal-making
veterinarian be more comfortable experience
• Often replace entire staff
• Need to advertise makes sale public
• Confidential; no need to • Uncertainty about “corporate”
Veterinarian advertise treatment of patients and staff
Group* • Deals occur fast and simply
• Cash up front
* We can help with both of these – please keep reading! 7

8. We can help your associate acquire your clinic
Deals with associates can break down for a number of reasons. We have services
designed to help facilitate these acquisitions.
Partnership
• We have developed a tax-advantaged approach to partnering with Associates
Financing
• We have access to capital and can help provide better terms than Associates
can get on their own
• Our approach leads to immediate payment to you, not over time
Clinic operations
• We can implement our management solutions for Associates who want to own,
but may not want to manage
Economies of scale
• Working with us enables savings on supplies and products
• Our network provides help finding great staff
We may be able to make your deal better. Give us a call – it’s worth a coffee!
8 8

9. VetValuator: What is my clinic worth?
Veterinary clinics can be valued based on three things:
cash flow, value of assets and inventory, and the story*
• Amount of cash produced by the operations of the clinic
• Calculated before accounting for taxes, depreciation or
service on any debt
Cash flow • Expenses are “normalized” to account for any amounts
special to the current owners, such as car payments,
salaries for relatives, or rent below market value Formula:
Cash flow
• The multiplier, or story factor, accounts for the specific x
context of each clinic
• This accounts for things like revenue growth, location, Story factor
employee stability, condition of clinic, etc. +
The story • With the story factor, we try to answer two questions: Current value
– “How sustainable is current cash flow?”
of assets
– “How hard will it be to increase cash flow in the future?”
• Story factor is generally between 3 and 4 and inventory
Assets and • Value of sellable inventory at cost (food and drugs)
inventory • Current value of equipment (initial cost minus depreciation)
* There are several methods used to calculate clinic value. Please see page 30 for more details 9

10. Clinic value: Example
Clinic details
“I have a three veterinarian clinic with $1.25 million in revenue. I own the building, but don‟t want to sell it. I manage expenses well,
so when you add up my purchasing costs and lab bill, it‟s about 30% of revenue. My assets and inventory total $150,000. What‟s my
clinic worth?”
Cash flow
• Total revenue is $1.25M Revenue $1,250,000
• After adjusting for owner„s compensation, total labour Cost of goods $375,000
costs are 40%, or $500,000 Cash flow
Labour Cost $500,000 $212,500
• Occupancy costs, using a market value for rent, is 8%, or Occupancy Cost $100,000
$100,000 Other Costs $62,500
• Other costs are 5%, or $62,500
Story 1 Story 2
• Long-term associate and technician will leave after • All staff committed to staying
sale • Clinic growth an average of 8% over past 3 years
• Last renovation was 30 years ago • Renovation in 2005, new digital x-ray For this
• Clinic showed no growth for the past 3 years • Good practice in new, growing area
• Clinic in an old neighbourhood with declining example,
population VetValuator
would value
Story factor = 3 Story factor = 4 the clinic at
$787,500 to
$1,000,000
Cash flow $212,500 Cash flow $212,500
x by Story factor X3 x by Story factor X4
To value your
Plus Assets $150,000 Plus Assets $150,000 clinic, use the
VetValuator at the
= Clinic value $787,500 = Clinic value $1,000,000 back of this
document
10

11. How may a difficult economy impact practice value?
We believe that veterinary clinics are a great long-term investment. Revenues in our industry will be much more
resistant to a bad economy than others. We‟re in it for the long term, and that is why we are still buying!
However, if you‟re thinking of selling in the next few years, you may want to think about selling now. Flat or declining
revenue, even in the short term, could have a big impact on cash flow and the story.
Let‟s take a look at two examples using our vet from the last page, using Story 2, which had a story factor of 4, and a
value of $1,000,000
Example 1: Flat revenue Impact Old value = $1,000,000
What happens in the next twelve months? • Cash flow declines by
$15,000 to $197,500 New value = $880,625
• No revenue growth – $1,250,000
• Small raises of 3%, now labour cost is $515,000 • No growth decreases
• No other changes story factor to 3.75
down by $119,375
Example 2: Revenue declines by 5% Impact
Old value = $1,000,000
What happens in the next twelve months? • Cash flow declines by
$33,750 to $178,750
• Revenue decline to $1,187,500
• Don‟t hire summer staff, reduce labour by $10,000 to • Revenue decline
$490,000 decreases story factor New value = $775,125
• Keep cost of goods at 30% to 3.5
• No other changes
down by $224,875
11

12. Some questions and answers about selling
How long does it Agreeing on a price is usually easy and takes 1-4 weeks. After that,
take? closing the deal can take 6-16 weeks. Longer periods are most often
caused by lawyers who take a long time to respond, so be careful when
choosing your lawyer.
When do I get paid? Immediately upon the deal closing.
Should I tell my It depends. If the staff knows, the transition period is smoother and
staff? more comfortable. However, you don‟t want your people to leave as
that may affect the deal. We‟d be happy to help you decide – this
always depends on the context.
What if I am This is a very important time to call us. In the past, we have been able
currently in to pay more than other parties. If you are dealing with an associate,
discussions with we may be able to help reduce the risk to him/her.
another party?
What will my role This is really up to you. We are happy to help you reduce your role and
be moving forward? the time you spend at the clinic. Alternatively, we are willing to take
over the administrative element of the practice and allow you to focus
on being a practitioner.
Will VetStrategy Simply, no. We don‟t have any views on the practice of veterinary
influence the practice medicine. We‟re about efficient support operations, allowing
of medicine? veterinarians to practice the standard of medicine they believe in.
12

13. What would I do next? How would my income change?
We can almost always offer the following contract to vendors:
 6-month renewable contracts
 A significant salary for whatever schedule you wish to work
 Six weeks paid vacation
 No weekend hours
 No management responsibilities
 Continue to practice medicine the way To
you want! calculate your
veterinary income
post-sale, use the
simple income
calculator on page 24
13

14. We have solutions for all ownership stages
We can help buy your clinic outright, and we have three approaches for
veterinarians who aren’t ready to leave their practices.
Keep practicing, Stop Administering
• If you still love practicing, and you‟re proud of the clinic you‟ve built, let us
take over the hassles
• Sell your practice, and stay on as Medical Director
• We will take over HR, finance, negotiating with suppliers, marketing,
maintaining the facility, technology - everything that gets in the way
• We will stay out of the medicine, and give you the time and freedom to build
your medical practice the way you‟ve always wanted
• Your clients won‟t see a change, other than a happier you!
Partnership
• Sell part of your practice, and let us take over some of the administration
• We can work out a buy-out over time, and let you benefit from continuing to
grow your practice!
Join us, without selling to us
• We have developed a program that lets you take advantage of our buying
power, our technology development and our operational experience
• Make more money today
• Sell when you‟re ready, and not before!
There are many ways to make your life better – let’s talk about it! 14

15. Contact Us
Internet: www.vetstrategy.com
E-mail: info@vetstrategy.com
Corporate offices: VetStrategy
780 Hwy 6 North
Waterdown, ON L0R 2H1
Phone: 1-866-901-6471
Orin Litman Jon Shell Michelle Cutler Karen Allen
Managing Director Managing Director DVM, Owner DVM, Medical Director,
416-999-9543 416-951-1476 416-737-0168 780-288-1584
orin@vetstrategy.com jon@vetstrategy.com drcutler@vetstrategy.com drallen @vetstrategy.com
Bernie Caplan Sherry Hughes Christy Roulstone
DVM, Director Ontario Operations Alberta Operations
416-254-1590 Director 780-916-6803
289-338-6022
drcaplan@vetstrategy.com sherry@vetstrategy.com christy@vetstrategy.com
15

16. VetValuator
16

17. VetValuator: A Valuation primer
Disclaimer: This is not a replacement for a proper professional valuation, but a way to get a range of what your clinic may be worth. A
lot of factors go into valuation – if you are ready to sell, we’d advise you to get your valuation done professionally.
Accountants prepare financial statements differently. We’ve tried to use the most common terms. If your financial statements don’t
match, ask your accountant or feel free to e-mail us and we’ll be able to help.
How are clinics valued?
In the past, people have used “one-times revenue” as a rule of thumb for the value of a veterinary clinic. Many
studies show this to be incorrect, and valuators now use different techniques to value clinics.*
Most are perfectly acceptable, and valuators will use several methods, and then choose the one they think is most
appropriate for your clinic.
Main types of valuation
While there are many methods of valuation, they all fall into two categories:
Category 1: Add up the current value of a clinic‟s assets and its “goodwill”
Category 2: Compare a clinic to other clinics that have recently sold
Goodwill
The most complex thing in valuation is to calculate goodwill.
The clientele and staff you‟ve built lead to cash flow for your clinic every year. Goodwill is an estimate how much
that annual cash flow is worth today. To do this a valuation needs to estimate how much that cash flow really is, and
how likely it is to continue.
The VetValuator method
VetStrategy‟s VetValuator is a “Category 1” valuator. We use a “story factor” or multiplier to estimate goodwill.
Remember, this is only an estimate. Have fun with it!
* For more on some of the different ways to value clinics, see page 30
To use the on-line version go to www.vetstrategy.com/vetvaluator 17

18. VetValuator: Getting the information
1 Find your last year‟s financial statements*
Revenue
2 Use your practice management software to calculate revenue for your
last three fiscal years from
financial
3 Use your last year‟s financial statement to calculate expenses statement
Labour Labour
• Start with labour expenses on your statement
• Do you pay anyone who is not involved with the practice – family members? Subtract these
• How much do you pay yourself out of labour expenses? Subtract this. Now add:
– For full-time work, you should include $100,000. Multiply $100,000 x hours you work per
week/40. For example, if you work 20 hours a week, add $100,000 x 20/40 = $50,000
• Include all benefits
• For help calculating normalized labour expenses, please see page 26
Cost of goods sold (or Cost of Sales) Cost of
• Add your purchasing costs (food, drugs, etc) to your laboratory costs and your cremation costs goods sold
• For help calculating Cost of Goods Sold, please see page 27
Occupancy costs Occupancy
• Rent plus maintenance plus taxes cost
• Do you own the building? Do you pay yourself rent?
• Make sure the rent makes sense for your location
• For help calculating Occupancy Costs, please see page 27
Other expenses Other
• Add up the rest of the expenses
• Subtract management fees, any other amounts you pay to yourself, amounts for personal items
or cars, taxes, depreciation, interest, and amortization
• Should include things like communications, marketing, CE, etc.
• For help calculating Other expenses, please see page 28
* If your clinic is split into a management company and a professional company, try adding both together. This may not work, and if so, contact your accountant
To use the on-line version go to www.vetstrategy.com/vetvaluator 18

19. VetValuator: What is my Story Factor?
Each clinic has its own context, or story.
Some have been around for 50 years, and some for 5. Some are growing rapidly, while others are in decline.
These differences affect the purchaser‟s expectation of cash flow in the future. Wouldn‟t you be more
confident buying a practice that was growing at 5% a year instead of one that hadn‟t grown since 1998?
In order to account for these differences, Cash Flow is multiplied by a factor that takes each clinic‟s story
into account. In the veterinary industry, this factor tends to range between 3 and 4. A clinic in decline, in
need of repair, with high turnover will get a 3, while a clinic showing high growth, with excellent long-term
staff and new equipment will get a 4.
Evaluating your story
On the following page, we ask some questions to help you estimate your story in these categories:
• Clinic performance
• Human Resources
• Costs
• Facility and Location
There are many different questions that you could use to estimate the story – these are the ones we look at first.
Story Factor – An imperfect measure
Figuring out the value of your story is one of the most difficult things to do. How one person looks at a clinic may be
completely different than another. Every valuator uses different questions!
When you‟re done, do a reality check. Does the number reflect where you think your clinic ranks among other clinics?
To use the on-line version go to www.vetstrategy.com/vetvaluator 19

20. VetValuator: Evaluating your story
Clinic Performance YES NO
• Has your clinic revenue growth averaged over 5% in the past 3 years?
• Is your clinic revenue more than it was three years ago?
• Do you get more than 15 new clients per doctor per month?
• Have your number of transactions grown in each of the last three years?
Human Resources
• Have your doctors been with you for more than five years?
All “yes”
• Will your doctors stay after the sale? answers
• Do you have at least one long-term receptionist and technician? moves a story
• Will they stay after the sale? value close to
4, all “no”
Costs moves it
• Are your labour costs less than 40% of revenue? closer to 3
• Are your occupancy costs less than 8% of revenue?
Facility and location
• Have you been in your location more than 10 years?
• Is most of your equipment less than 5 years old?
• Have you done a renovation in the last 5 years?
What do you think
• Is your neighbourhood growing? your story factor is?
• Is there another clinic within 1 km? Is it bigger than yours? Choose a number
between 3 and 4
To use the on-line version go to www.vetstrategy.com/vetvaluator 20

21. VetValuator: Reality check – Do your numbers make sense?
YES NO
• Is your revenue on your financial statement similar to your practice
management software?
• Is your labour cost between 30-50% of revenue?
• Is your cost of goods sold between 20-35% of revenue?
• Is your occupancy cost between 5-12% of revenue ?
• Are other costs less than 10% of revenue ?
If you answer “no” to any of these, your numbers are different from what we
would expect in a veterinary clinic. Please double check the calculation. If you
answer “yes” to all of these, try to estimate the value of your clinic on the next
page!
To use the on-line version go to www.vetstrategy.com/vetvaluator 21

22. Calculating final value
Inputs Clinic value range
Revenue:
Low range High range
Expenses A A
Labour: – x3 x4
Cost of goods: – = =
Occupancy cost: –
+ B + B
Other expenses: –
Your clinic value is estimated at:
FROM = TO =
Cash flow: = A
Clinic value using your story estimate
Asset value = B
For help calculating Asset Value, A
please see page 29
x C
Your
estimate of =
= C =
your story
factor
+ B
To use the on-line version go to www.vetstrategy.com/vetvaluator 22

23. What does this mean?
There may be strategic reasons why your calculated value may underestimate the
true value of your clinic
You should now have an estimate of your clinic‟s value. It‟s a great start to understanding the
true value of your clinic!
Could it be worth more than that range? Of course!
Here are a just a few reasons:
• You may have underestimated cash flow
• We look at certain underlying trends in your numbers that may indicate that your practice is
ready for significant growth
• Your clinic may be in an area where we really want to grow
• Working together, we may be able to improve operations and significantly increase cash flow
We have used a story factor of MORE THAN 4 for some clinics that we really wanted.
If you call us, you can rest assured that we will look on your story in as positive a light as we
can – we always look for the hidden value in clinics – that‟s how we succeed!
We look forward to talking to you.
23

24. If I sell, what will I make?
This very basic sheet will help you calculate your veterinary income if you do sell your practice
Proceeds from sale
Sale price
Financial position from
Clinic debt - veterinary sources
Clinic proceeds4 = A Money in the bank A
x 5%1
Return on
proceeds = B Annual income
Real estate income Return on
proceeds B
Rent2
C
Rent2 + C
Veterinary salary
Annual veterinary
salary
+ D
Hours worked
per week
x $3,0003 Annual income =
Annual
veterinary salary = D
1 Assumes an after-tax annual return of 5% when you invest the proceeds from the sale
2 If you own and keep your building
3 Assumes $120,000 for a 40 hour work week
4 Assumes no capital gains tax (use capital gains exemption of $750,000) 24

25. VetValuator
Reference
and
Calculation
Pages
25

26. VetValuator: Calculating labour costs
Labour expenses in financial statement
ONLY subtract items that
Payments to individuals not involved in practice are included in your labour
–
operations or management* expenses on your financial
statement. If you do not take a
regular wage, but instead take an
Salary paid to owner* – owner‟s “draw” or professional
fees, do not subtract anything
here.
Hours owner works per week
x $2,500**
Replacement cost of owner =
+
Benefits*** +
Locums and other veterinary professional expenses +
Normalized labour cost =
* Subtract these only if they are included in the labour expenses on your income statement. If they appear elsewhere, do not subtract them here
** Assumes $100,000 salary for 40 hours/week
*** Add this only if net already included in labour expenses on income statement 26

27. VetValuator: Calculating cost of goods and occupancy cost
Cost of goods sold Occupancy cost
You own the building
Rent/sq. ft. in a similar location
Supplier 1 cost
nearby
Square feet x
Rent =
Supplier 2 cost +
Utilities +
Property tax +
Cremation cost +
Building maintenance* +
Occupancy cost =
Laboratory cost + You don„t own the building
Rent
Utilities +
Other cost of
+
goods sold Property tax +
Building maintenance +
Total Cost of
= Occupancy cost =
Goods Sold
* Estimate average annual maintenance cost 27

28. VetValuator: calculating other expenses
Legal
Marketing +
Accounting +
Don‟t include any personal
Equipment maintenance + items, such as automobiles, or
any capital expenses, such as x-
ray machines or blood analyzer
Telephone + purchases.
General administration +
CE +
Uniforms +
If you pay yourself management
Computer Costs + fees or other fees, do not
include them here. These are
Cleaning, housekeeping and Landscaping + often referred to as
“professional fees” or
“management services” on your
Bank and Credit Charges + financial statement
Insurance costs +
Other +
Total other costs =
28

29. VetValuator: Calculating Assets
All of the other calculations were based on your Income Statement.
Calculating Assets is based on your Balance Sheet*.
Assets and Inventory Look for a line called “Inventory” on your balance sheet.
Most clinics have between $25K and $75K in inventory. If
Inventory your balance sheet is different from this, try to estimate the
A
cost of your drug and food inventory.
Some Balance Sheets calculate the Current or Net Asset and
Initial Asset Cost Leasehold value for you. If so, just enter the Current Asset
and Leasehold Value
Depreciation and - Some Balance Sheets will combine Leaseholds and Assets. If
Amortization so, just enter the number once.
Current Asset Value = B Most clinics over 5 years old will have between $50K and
$200K in current assets plus leasehold value combined.
Total Assets
Initial Leasehold Cost
Inventory A
Depreciation and - Current Asset Value + B
Amortization
Current Leasehold Value + C
Current = C
Leasehold Value
Total Asset Value =
* Some Balance Sheets total your current Inventory, Assets and Leaseholds for you. If so, just use that number on page 22! 29

30. Valuation methods
There are a number of different approaches to valuing veterinary practices. Good professional
valuators will usually use a few approaches to try to get an accurate value. Here are a few examples:
Comments
• First step is to get an estimate of the cash flow if a clinic • A good method, but
Discounted • Cash flow is projected for a period of time (usually 10 years) very sensitive to
cash flow • Each year is discounted by a certain rate and added up to get chosen discount rate
the value of a clinic‟s goodwill • More complicated
• Goodwill is added to your assets and inventory to get a value than others
for your clinic
VetValuator Method:
• As with discounted cash flow, first step is to get an estimate • Can be less precise
Multiple or of the cash flow of a clinic than Discounted Cash
story factor • Cash flow is multiplied by a “story factor” to get the value of Flow
goodwill • Easy to understate
• As with discounted cash flow, goodwill is added to your assets and calculate
and inventory to get a value for your clinic
• Your clinic is compared with similar clinics that have been sold • Too few vet clinics are
Comparable recently sold to make this
transactions • Based on the comparison, your value is determined reliable
• Clinics tend to be sold for between 45% and 90% of revenue • “Ranking” can be hard
• Based on how your clinic ranks on a number of factors, your to justify
Market clinic is assigned a position within that range • Simple and easy to
understand
30