When Will Multiples Return To Their Peak?

I appreciate your time tonight and am excited to delve into a topic we are often asked about: the significant increase in valuations in 2021 and early 2022, and the possibility of it happening again. This surge can be attributed to two primary factors: the impact of COVID-19 and historically low interest rates.

In March and April of 2020, COVID-19 brought the country to a standstill, including a sharp decline in veterinary visits. However, as the world began reopening, veterinary visits experienced an unprecedented surge. This growth can be quantified – during the first and second quarters of 2021, veterinary visits spiked by nearly 10%. Why did this happen? There were two major drivers:

1. Work from Home Effect: With many people working from home, pet owners were more likely to visit veterinarians when their pets fell ill. For example, someone working from home might bring in their pet for a sick visit sooner than if they were at the office.
2. Puppy Adoption Surge: There was also a significant surge in puppy adoptions, especially among higher-income individuals. This led to a substantial increase in veterinary visits.

It’s important to note that while this growth was remarkable, it was also somewhat predictable. However, investors often anticipate the good times to continue, and this contributed to the bubble.

The second key factor was the Federal Reserve’s historically low interest rates. Before the pandemic, interest rates were modest, ranging from one to two and a half percent. During the pandemic, these rates plummeted to near-zero levels. This unique combination of soaring veterinary visit growth and rock-bottom interest rates created an asset bubble not only in the veterinary world but also in the broader economy.

To visualize this, we can examine the interplay between veterinary valuations, interest rates, and multiples paid on deals. When veterinary visits surged, interest rates remained low, leading to a spike in valuations. This spike was somewhat delayed as valuation data typically lags behind deal closures by three to four months. So, the question arises: will multiples ever return to the 12 to 18 times EBITDA levels seen in 2021?

The simple answer is that it’s unlikely, as it would require another scenario of rapid veterinary visit growth coupled with near-zero interest rates. While we can’t predict precisely when the next bubble will occur, history shows that they tend to happen periodically, so the vet industry might experience high valuations when the next bubble hits, likely in 2028-2032.

Now, let’s consider this from the perspective of individual practice owners. When should you think about selling your practice? Three critical factors come into play:

1. Personal Readiness: Consider your retirement plans. Selling your practice doesn’t mean immediate retirement; buyers often require sellers to stay on for three years. Plan ahead if you wish to retire in three to five years.
2. Practice Performance: It’s crucial to sell when your practice is doing well. Having a stable and fully staffed practice will make it more attractive to buyers.
3. Market Conditions: Market conditions can fluctuate. While it might not be as robust as 2021, current prices are still attractive. The key is aligning your readiness, practice performance, and market conditions.

In today’s market, particularly for larger practices, there’s a scarcity of available practices for sale, making them even more appealing. However, if you’re in a challenging market, especially in rural or semi-rural areas with a scarcity of doctors, planning early is advisable. Seek good advice because the market is evolving, and deals can become increasingly complex.