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The veterinary hospital squeeze
Market conditions aren't ideal, but they're improving. So why are veterinary practice sales still sluggish?
Last year, veterinary practice owners were hesitant to sell, buyers were anxious to own, and the economy was supposedly on the road to recovery.Fast forward twelve months later and the veterinary industry finds itself in much the same place. Practice revenues are growing, but at a sluggish pace. Profits are recovering, but only slightly. And practice values are inching in the right direction, but not that rapidly.
Meanwhile, potential sellers are still lamenting their loss in practice value, eager buyers are waiting on the sidelines, and veterinary financing from many lenders is still a mixed bag.
So where does that leave us? After speaking to 23 attorneys, lenders, brokers, consultants, consolidators, and potential veterinary practice buyers, I offer this picture of the complicated purchasing puzzle.
There is a growing pool of capable, qualified buyers who are increasingly frustrated with the generally poor product available on the practice market. However, these buyers deserve credit—and so do those advising and teaching them—for not settling for what’s available today. Most of these up-and-comers are sticking to their principles and waiting for the right practice to come along.
This wait-and-see attitude results in two things in the marketplace. One, the less-attractive practices—with poor cash flows or troubling flaws—are sitting on the market and watching their asking prices drop. And two, when an appealing, fair-priced practice comes onto the market, buyers converge on it. It might be an exaggeration to say there’s a bidding war, but it’s fair to say that sellers of these gems usually get their full asking price.
This is all part of a new era in educated practice purchases. Buyers are increasingly sophisticated in the inner financial workings of veterinary practices. Valuations, feasibility analyses, financial projections, owner carrybacks, and cash flow—all terms that were once a foreign language to inexperienced buyers—are now a key part of their vernacular. But it’s not just about understanding these concepts—buyers are putting them into action. Veterinary practices that don’t stand up to a feasibility analysis or aren’t supported by a proper valuation are passed over by savvier potential buyers.Smart buyers are refusing to budge, no matter how eager they are to own. They’re offering only what the practice is worth—not what it used to be worth or could be worth.
These qualified buyers—young men and women with good credit and even better skills—have spent the past few years watching their bosses and competitors struggle in unenviable and financially untenable situations. Call it a lesson learned.
While the overall economy may feel better to much of the country, continued high unemployment, languishing home prices, and a still-squeamish consumer tell a different story, at least on paper. And this story is what’s squeezing the overall veterinary practice market.
Potential sellers are in a holding pattern. They’re reasonably confident that their practices won’t drop further in value and may actually increase in value over the next few years. So, they reason, unless absolutely forced to sell, what’s the point in doing it now?
The veterinary practice sales market will remain in limbo until that large group of owners—the ones who own and manage the most sought-after practices—decides it’s time to sell. But that won’t happen until both the general economy and the veterinary industry recover, which should lead to the recovery of veterinary practice profits, an increase in practice value, the realization that retirement is possible again, and finally, the decision to sell.
As most people know, the Bush-era tax cuts are set to expire Dec. 31, 2012. These tax cuts included a lowering of ordinary income tax rates and long-term capital gain tax rates. If and when these cuts expire, there will be a return to the higher rates of years past. For potential sellers, the most important of these rate hikes will be the long-term capital gain rate. This rate may jump from a favorable 15 percent to 20 percent, or even 25 percent.When a veterinary practice is sold, the majority of the taxable gain is taxed at long-term capital gain rates. So a higher tax rate applied against this gain results in higher taxes for the seller.
There had been speculation that the tax code uncertainty would result in an increase of practice sales before the end of the year. Sellers would, understandably, be anxious to lock in the lower, long-term capital gain tax rate and therefore try to get the transaction finalized before the end of 2012. But this hasn’t happened as predicted.
Savvy practice owners have run the numbers and asked themselves: Are we better off financially by selling now, or would we be better off trying to increase our practice value and sell at some point in the future?
Many potential sellers, who believe they can increase value and who feel the market will remain stable, are opting to keep their practices off the market. Those who believe there’s no practice growth on the horizon, or those who feel compelled to leave ownership for personal or physical reasons, are opting to sell with the goal of getting the transaction finalized before the end of 2012. Either way, it’s a tough decision.
Further complicating things is a marked increase in the number of practices that have closed their doors for reasons not of their choosing, such as bankruptcy or creditor protection, partner or shareholder dissolutions, or just an inability to pay the bills.
Some key players who are actively involved in the purchase and sale of veterinary practices—attorneys, lenders, brokers, consultants, consolidators, and buyers—believe these closures will continue until the economy rebounds in earnest.
This group has also noted an increase in more fixed location start-up practices and mobile practices. Some of this is the result of a lack of quality practices available to purchase, and some of this is due to a tight job market.The consensus on financial assistance is mixed. Half of these industry insiders believe the lending world has become more difficult and time-consuming over the past twelve months, and the other half believes there’s more money available now or things are about the same.
While each of these components plays an important role in the current state of the veterinary practice sales market, one certainly carries the greatest weight—the economy. Until the economy begins a nationwide recovery in earnest, we’ll continue to face these issues now—and probably again this time next year.