It seems like every day we’re hearing of another veterinary practice acquisition, and for good reason: valuations have hit unprecedented highs within the industry and sellers are taking advantage. When we add on pandemic fatigue and the recruiting challenges for DVMs and non-DVM staff, you have the clear forces that are driving rapid veterinary consolidation.
Valuations
The major driver of high transaction activity has been the ever-rising valuations for veterinary practices. So why are valuations for individual practices rising? It’s due to the pricing that private equity firms are paying for each consolidator when they sell. From 2011 to 2013, when there were 8 to 10 consolidators, these companies would sell for approximately 12x profits or EBITDA. Today, consolidators sell for double that amount at 22 to 25x profit. Meaning, a consolidator in 2012 with $30 million of profit would have sold for around $360 million. Today? That same consolidator would sell for more than $700 million.
You can see the clear relationship between practice prices and consolidator prices in the chart below. In 2012, individual practices sold for 5-6x profits or EBITDA. In the second half of 2021, Ackerman Group saw average multiples approaching 15x.
The simple answer as to why there’s a sudden ‘rush to exit’ among veterinary practice owners is because of the high valuations being paid. The question is, will these valuations last?
Why the High Valuations?
High valuations are driven by two overriding forces: the veterinary industry’s appeal and current macroeconomic conditions.
The attractiveness of the veterinary industry can be summarized by these key factors:
- The human-animal bond is growing strong
- Our industry is recession and pandemic-resistant, showing quality performance relative to other businesses in challenging times
- Solid historical growth rates of four to five percent, the pandemic’s spike of 8-12 percent growth, with a good outlook on future growth rates.
- Pricing power, where pet owners are already willing to pay for the healthcare of their pets
Macroeconomic conditions, the second force impacting valuations, affect prices as a result of the following factors:
- Record low-interest rates during the past decade, making capital cheap for practice buyers
- Stable economic conditions and slow but steady economic growth
- An abundance of investment capital, and many investors finding our resilient industry to place their funds
While the convergence of industry and macro-economic forces brought valuations to record levels in the second half of 2021, in early 2022 we’re starting to observe cracks in the macroeconomic environment. Interest rates are rising, inflation is hitting record levels, and the war in Ukraine all have caused growth stocks to tumble so far this year. As a result, valuations in the industry are softening. But worry not — there are still plenty of buyers out there and demand remains strong, however, pricing is starting to come down from its all-time high in 2021.