Q1 2023 Retrospective and
Go Forward Forecast

In this webinar, we shed light on the current economic intricacies of Q1 2023 while emphasizing the unprecedented uncertainty in the U.S. economy. The contrasting views among economists regarding the future add to the complexity of future outlooks and forecasts.

Pre-COVID, there was a period of prosperity before the abrupt halt caused by the pandemic in March 2020. A pivotal moment here is when the government’s response to COVID included a $5.3 trillion injection into the economy, significantly affecting the veterinary industry. Amidst the chaos of COVID, a surge in pet adoptions also led to a spike in veterinary visits, creating a challenging environment of supply-demand imbalances, inflation, and increased clinic prices.

We also discuss high interest rates. Notably, the rising interest rates have led to changes in deal structures for practice acquisitions, with a shift towards conserving cash and offering more structured transactions. Additionally, as a result of high interest rates, there’s been a delay in IPOs and recapitalizations among consolidator groups, which slows down the rate of practice sales. We predict this won’t last forever; Ackerman Group expects these dynamics to ramp up and resume sometime in 2024 when interest rates are projected to decrease.

As for veterinary clinic valuations, we’re reviewing the timeline for multiples: there was a decline from the peak levels of 2021, however, today there is still robustness compared to pre-COVID times. Rich Lester, CEO at Ackerman Group, offers qualitative insights into the market’s nuances, such as the scarcity value for A or A+ practices, where high valuations and less activity are noted due to owners waiting for more favorable conditions.

Summary:

Revenue Growth Pre-COVID (2010-2019): The veterinary industry experienced predictable growth, with revenue increasing by 4 to 6% annually, and visits growing 0 to 2% per year, averaging 1%.

Impact of COVID (2020): A notable drop in revenue and visits during March-April 2020 was followed by a surge in visits in late 2020 and throughout 2021, with a significant deviation from the industry’s historical visit growth average.

Visit Growth Post-COVID: In 2021, the industry witnessed an 8% visit growth, significantly higher than the historical average of 1%. However, by 2022, visit growth declined by about 3.5%, with an expected 1.5% to 3% decline in Q1 2023.

Interest Rate Increase: Federal Reserve interest rates rose from near-zero to 4.75% in a year, impacting consolidators’ costs significantly when acquiring practices, leading to adjustments in deal pricing and structure.

Impact on Pricing: Clinic pricing, represented by EBITDA multiples, experienced a peak in 2021 during the COVID boom, with a subsequent decline. However, as of the webinar, pricing remained robust, with transactions occurring at 8 to 13 times EBITDA, still above pre-COVID levels.

Delayed IPOs and Recaps: Higher interest rates led to delays in initial public offerings (IPOs) and recapitalization, with expectations of market dynamics potentially changing in mid to late 2024.

Scarcity Value for A/A+ Practices: Practices with EBITDA of $800,000 or more, often termed A or A+ practices, commanded top-of-market valuations, reflecting a scarcity value in the market.

Market Dynamics (2023): The market in 2023 demonstrated ongoing activity, with the emergence of new buyers and increased diversity among purchasers, including three new buyers within the first four months.

Current Deal Structures: Due to the economic climate, consolidators are conserving cash, leading to more structured deals, including joint ventures and contingent notes, reflecting a shift in buyer strategy.

Market Resilience: Despite economic uncertainty, the veterinary industry and market remain active, with reasonable deal flow, although not at the peak levels observed in 2021.