Recently, TPSG published a “Broker Tip” highlighting the changing market for veterinary consolidators. We wanted to expand on the topic because the changes are taking place very rapidly and are affecting veterinary practice sales across the country. Many consolidators are not even buying practices today – they are waiting until the fourth quarter of 2022 to decide their direction for the future. All consolidators have tightened their acquisition requirements on location, gross revenue, and number of doctors. The EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) multiple and resulting offer prices are also coming down from a year ago.
So, what is going on? The market has been so hot the last couple of years, why is it slowing down? TPSG started seeing these changes right after the Orlando VMX show in January of this year. Continue reading to hear our take on what is happening as we discuss the multiple factors at play.
Five years ago, consolidators typically paid a price just slightly higher than the private buyer market value with the seller staying with the practice for four-to-five years. The seller took a pay reduction (compared to their income from the practice as an owner) that offset the higher price, so the offer was still essentially Fair Market Value. The consolidator felt secure with the seller staying on for this period, which helped the practice to maintain revenues. At the time, what also made the sale appealing to an owner was that part of the purchase offer included mandatory parent company stock. The consolidators boasted projected stock returns of huge multiples and thus showed a very lucrative purchase package to the seller. If the projection did not materialize, then the seller might see the package as having been artificially inflated.
In the last three years, acquisition criteria loosened as there was a frenzy for each company to gain market share. Consolidators were giving purchase offers/letters of intent for three times practice gross revenue or more with little due diligence before making the offer. Those offers were being made at 13-17 times adjusted EBITDA. Many consolidators were also buying solo practices. When sellers resisted a four-to-five-year work commitment, the consolidators reduced the employment contracts to only two-to-three years. The veterinary consolidators exercised free rein to pay whatever they had to for the acquisition. The prices offered have left many in our industry scratching their heads as to how the consolidators could make the deal’s cash flow positively.
Let’s talk about those multiples for a bit. Some consolidators are privately held or backed by family money and the acquisitions are planned to be a long-term investment for the company. This paragraph does not apply to them. Other consolidators are backed by private equity money. For those, the plan is normally to divest their interests in three-to-five years to a different private equity company for a larger multiple than they originally paid – cashing out with huge profits. This process repeats with the purchasing private equity company selling in a few years for bigger multiples than they paid, and so on. This process is called “recapitalization” or “recap” for short. This is like the tech boom in the early 2000s – it can go on forever, right?
Currently, things are starting to come together for the perfect storm. The private equity companies are not making their forecasted profits based on the return of investment assumed to support the practice purchase price, and they are not happy. It gets worse. Layer on COVID, limited hospital hours, sick doctors, sick support staff, stressed-out employees, and burnout. Let’s not stop here, we will keep going. Remember the two-year employment contracts the selling doctors signed? Well, many of them have fulfilled their contracts and are now leaving the practice and retiring. No problem. Just hire another doctor to replace them – piece of cake. Not a piece of cake. With the severe doctor shortage in our profession over the last couple of years, that practice is now in trouble if they can’t find a replacement. Remember, the consolidators are absentee owners. The problem is so large, that some consolidators are offering $100,000 signing bonuses to doctors to staff their hospitals. This is especially painful for the consolidator that bought a solo practice. They are not just down one doctor- they have no doctor.
Recapitalization has also become a problem. With lower profits, shortage of doctors, higher wages, etc. some consolidators are having difficulty selling/recapping to another private equity company for the multiple they want. They are stuck. Consequently, practice purchases have slowed or stopped for many consolidators. They are laying off acquisition staff, cutting costs, and staying dormant in the market. Prices for practices are starting to come down and consolidators are being much more selective on practices they do purchase. The inflated market appears to be correcting itself – like corrections we see in the stock market and housing market. Everything eventually comes back in balance.
One other factor to consider is the overall economy. Today, we are experiencing a stressed economy. The COVID pandemic has cost this country (and the world) a fortune, and we have the war in Ukraine, supply chain issues, labor shortages, high gas prices, stock market drops, and increasing inflation. We have had ten years of a strong economy. There are fears that a down economy is coming. This is not helping matters.
It isn’t all bad news – there is good news. The good news is that there are many financially solvent and well-run corporate consolidators. They will be here for the long term. The weak ones will likely be absorbed. There will always be good consolidators purchasing well-run profitable practices for very favorable prices and terms. Consolidators are here to stay within our profession, and it is not a bad thing – for example, many have raised the bar on staff wages and benefits that some private practices cannot or do not offer.
If you are considering selling your practice, contact a Total Practice Solutions Group Broker/Advisor now. We can help you navigate this complicated market and present your practice to the best buyers and negotiate the best price and terms for you, but time is of the essence.
Kurt D. Liljeberg DVM
Total Practice Solutions Group (TPSG)
Great Lakes Territory