Vet Practice Sales: Q2 Recap, New Changes & What’s Next For the Market?
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Rich Lester, Co-CEO of Ackerman Group shares a succinct, data-driven, 30-minute outline of the economic and market conditions necessary for sellers to realize all-time high valuations again.
- Rapidly evolving macroeconomic conditions
- How rising interest rates affect practice valuations
- Current buyer behavior and new entrants to the market
- The rest of 2023: What the future holds and our predictions
Co-CEO at Ackerman Group
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- Rich Lester shares his outlook for interest rates and inflation over the next six months.
- He expects interest rates to remain between 2.5% and 3.5%, with inflation fluctuating between 3% and 4.5%.
- He does not expect interest rates to start declining until mid-2024.
Private equity activity and pricing:
- Private equity firms are paying more for loans to acquire veterinary practices due to rising interest rates.
- The number of deals that private equity firms are doing in the veterinary industry is declining.
- As a result of these factors, the value of veterinary practices is declining.
- Private equity-backed businesses like the consolidators in the veterinary industry are now paying, on average, 10% interest on their loans, up from 4% when the Fed had rates at zero.
- Deal activity in the veterinary industry peaked in 2021 and is now declining.
- The approximate multiples that the consolidators were sold for throughout the 2020s peaked in 2021 and are now starting to come down.
- Individual practice multiples are following the trend of consolidator multiples and are currently around a seven or eight-turn discount to what the consolidators sell at.
- Private equity activity and pricing in the veterinary industry are declining due to rising interest rates.
- This is likely to continue in the near term as the Fed continues to raise rates.
Other key takeaways:
- Revenue and invoice growth have become more volatile, with a decline in visit growth in 2022 and 2023. Consolidators are now placing a premium on clinic owners who can demonstrate the ability to grow invoices and volume in a challenging market.
- Four significant consolidators have changed CEOs in the last four months, with a shift from growth-oriented executives to those with deep operating experience in multi-site businesses. This suggests that consolidators are now more focused on optimizing revenue and profit growth at individual locations rather than simply acquiring as many clinics as possible.
- Access to capital has become more difficult due to rising interest rates. This is putting a hold on recapitalization and sales of large consolidators.
- Consolidators are becoming more selective about which clinics they acquire, and are focusing on those that are well-managed and profitable.
- Clinic owners who can demonstrate the ability to grow their businesses in a challenging market are in high demand.
- It is becoming more difficult for consolidators to raise capital, which is slowing down the pace of consolidation in the industry.
- Clinic owners should focus on optimizing their revenue and profit growth and demonstrating this to potential acquirers.
- Clinic owners should also consider their own financial situation and whether they have the resources to weather a downturn in the market.
- Clinic owners should work with qualified professionals to develop a strategic plan for their businesses and to navigate the sales process if they decide to sell.
- There has been a two-year hold on large consolidators selling their businesses due to rising interest rates and a lack of access to capital.
- Smaller consolidators are still acquiring and growing, but some are struggling to find buyers.
- Branded de novos are also having mixed results, with some doing well and others not so well. The key to success for branded de novos is to have a thoughtful recruiting strategy.
- Valuations for veterinary practices have declined from their peak in 2021 but are still above historical levels.
- Deal structures are evolving, with buyers offering less cash upfront and more contingent payments.
- Overall, the veterinary services market is in a period of transition, with rising interest rates and a lack of access to capital impacting consolidation.
- The percentage of cash upfront in deals is declining, and deal structures, including joint ventures, contingent notes, and top co-equity, are becoming more complex.
- Retention is becoming more crucial, and buyers are becoming more diligent.
- The buyer market remains robust, but the buying pool has changed.
- The best time to sell a practice is when you are personally ready, the practice is fully staffed and fully adopted, and the market is favorable.
- If you are a producing doctor, a buyer will likely want at least three years out of you post-closing.
- There has been less deal volume of A+ practices, which are defined as practices with an EBITDA of $800,000 and four or more veterinarians.
- Overall, the market for buying and selling veterinary practices is in a period of transition, with buyers becoming more discerning and deal structures becoming more complex. Sellers should be aware of these changes and plan accordingly.
- A+ practices are in high demand, and there is a scarcity of value to them.