As a veterinary business owner, it can be tempting to set lower rental rates to save money and increase profits. However, it is crucial to understand the long-term impact of paying inadequate rental rates on the valuation of your veterinary business.
Valuing a veterinary business requires considering various factors, such as assets, revenue, profits, and liabilities. Rental rates, in particular, play a crucial role in determining the value of a veterinary business because they affect the business’s profitability and sustainability.
Paying inadequate rental rates can negatively impact a veterinary business’s profitability by reducing its net operating income. Net operating income is the difference between revenue and expenses, excluding taxes and interest payments. If the rental rates are too low, the business may be paying less than the market rate for its premises, which can reduce its profitability. This, in turn, can affect the valuation of the business because buyers typically evaluate businesses based on their net operating income.
Furthermore, inadequate rental rates can also affect a veterinary business’s sustainability by making it vulnerable to changes in the real estate market. Suppose the rental rates are significantly lower than the market rate, and the real estate market experiences an increase in rates. In that case, the business may find it challenging to renew its lease or find a new location, resulting in business disruption and potential loss of customers. This can also affect the valuation of the business, as buyers may be hesitant to invest in a business that is not sustainable in the long term.
In contrast, paying adequate rental rates can have a positive impact on the valuation of a veterinary business. By paying market rate or above, the business can demonstrate its profitability and sustainability to potential buyers. This can increase the business’s value by making it more attractive to investors.
Moreover, paying adequate rental rates can also help to maintain a positive relationship with landlords, which can be beneficial for the business in the long run. A good relationship with the landlord can provide stability for the business, as it may lead to more favorable lease terms, such as longer lease durations and lower renewal rates.
In conclusion, paying adequate rental rates is essential when valuing a veterinary business. Inadequate rental rates can negatively impact a business’s profitability and sustainability, while adequate rental rates can increase its value and make it more attractive to potential buyers. Therefore, veterinary business owners should consider the impact of rental rates on their business’s valuation and strive to pay market rate or above to ensure the long-term success of their business.
Need help? Let our valuation team at VP Veterinary Advisors evaluate your current rental rate and properly advise you as to how to progress forward.