Vet Practice Sales: Q2 Recap, New Changes & What’s Next For the Market?

Introduction:

• 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.

Specific examples:

• 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.

Overall impact:

• 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.