If you’re a practice owner looking to sell your veterinary hospital, perhaps you’re hearing from buyers that the iron is no longer hot. That you’ve missed the peak, and purchase price multiples are coming down. We’re here to clear the air: 2021 was a great time to sell…and 2022 is still a great time to sell.
For context, the second half of 2021 was an all-time peak in valuations for sellers. At Ackerman Group, we saw valuations hit record levels: for the first half of 2021, the average purchase price multiple stood at 11.9x EBITDA (or profits) for closed deals. That number climbed to an average multiple of 14.7x for deals closed in the last six months of 2021, and we continue to see that level hold as we move into the new year.
When multiples hit highs like this, buyers will try to “talk the market down” in hopes of negotiating deals that are more favorable to them. And it works—this is especially true for practice owners who attempt to sell themselves without an experienced broker. They don’t know what they don’t know, so these “DIY” sellers accept a lower price for their practices.
Why is there a disconnect in what buyers tell the market (multiples in decline) versus our reality (multiples remain high)? Let’s explore some of the factors that lead to this situation:
We know that there are many buyers out there, each in their own various stages of investment cycles with their private equity (PE) owners. With these cycles in mind, the buyers who pay the “Market Clearing,” or top price, for a veterinary practice shifts every six to nine months. The buyers currently paying the Market Clearing price are different from those that paid top price in the second half of 2021. Tracking these changes is critical to understanding who is paying top price at present.
There are a handful of these buyers that are (what we call) growth ‘machines’. The name speaks for itself: over the last year, four to six of these groups purchased over 50 locations, or nearly one practice each week. At least two groups purchased close to 100 locations or a pace of two practices per week. As these groups are armed with larger teams and frequent contact with DVMs, it’s easier for their word to spread like wildfire. These growth machines will “talk the market down” and ultimately try to speak lower pricing into existence.
Gifting Money to Buyers
It’s always in the buyer’s best interest to “talk the market down” and urge practice owners to accept lower prices. Oftentimes, owners who forgo a broker and attempt to sell themselves “gift” money and additional value to the buyer. Without a pulse on the market, and without knowing which buyers are paying top dollar, DIY sellers are ill-equipped to secure a deal that adequately reflects their practice’s true worth.
At Ackerman Group, we estimate that six to eight buyers will complete recapitalizations this year. What does this mean for valuations? During the recapitalization process, there’s a window where the buyer will pay the Market Clearing price for hospitals that fit their respective strategy. Staying attuned to these movements can help prospective sellers not only know who is paying top price, but when they’ll pay top price as well.
Post-Recapitalization Deal Pricing
In 2021, at least five buyers went through recapitalizations. After recapitalization events, groups typically begin to pay less for practices. Why? In most cases, the “new” PE firm owner is fresh to the industry and thinks they can outsmart everyone by offering lower value deals. This mindset usually lasts anywhere from six to 18 months post-recap, until the new PE owner realizes that their strategy doesn’t work. Groups will then return to paying fair market prices for quality veterinary practices.
We’re beginning to see market demand divide, specifically between “A” practices and smaller practices. The “A” practices, those with $800K+ EBITDA, 20%+ margins, and at least four DVMs, are highly sought-after and in high demand. On the other hand, smaller practices with less than $600K EBITDA may not meet the criteria of some of the buyers. With less demand for the smaller veterinary practices, prices may decline as a result. Nevertheless, over here at Ackerman Group we’re forming creative ways to achieve strong values for these smaller practices.
Hearing that fellow practice owners are accepting lower prices and falling for buyers who “talk the market down” may seem disheartening, but as we’ve laid out here, the current market remains robust. Right now is still an ideal time to sell your veterinary practice; don’t believe that pricing is down if buyers try to convince you to take a lower valuation.
We hope you don’t settle for 5-10 percent less, we hope you don’t “gift” corporate buyers a lower price, and we certainly hope you don’t fall for buyers who “talk the market down”…no matter how much you like their BD representative.
Selling your practice is the most important and complex financial transaction of your lifetime, and valuation is just one of the many factors to consider in a sale. Your transaction deserves the time, energy, and knowledge to make sure it’s done right. That’s where Ackerman Group comes in.
At Ackerman Group, we helped veterinary practice owners sell 64 hospitals last year for over $675 million which gives us unique access to market changes, the buyers and their strategies, and the intricacies of the transaction process. We are on pace to help even more hospitals sell in 2022, so our market information is current and real-time. We work on your behalf to help you secure the best price, best fit, and best terms so you can sell your veterinary practice successfully.
If you’re interested in learning more about what we do, give us a call at (804) 382-5160 or schedule a 1:1 with a team member here.