In 2020, the Covid-19 pandemic disrupted just about everything, and the veterinary care industry did not go unaffected. In response to Covid-19, veterinary practices have been forced to implement a wide range of day-to-day operational changes to safely continue operations. Asking clients to wait in vehicles during animal exam and treatment (“curbside care”), contactless payment processing, taking patient history by phone or virtually, drive-thru pick-up and drop-off and increased use of telemedicine, have all become part of a “new normal” for veterinary care.
But despite creating unprecedented challenges for veterinary care providers, Covid-19 also seems to have created new opportunities, which along with other factors will likely result in increased M&A activity for veterinary care practices in 2021. This article will review the pandemic’s impact on veterinarian practices, including the following key takeaways:
- Although the pandemic had devastating effects on other service businesses, veterinary practices will benefit from the rise in pet ownership prompted by the Covid-19 crisis.
- Post-pandemic veterinarian retirements continued strong practice valuations and fears about rising taxes will drive seller activity in the veterinary practice M&A market in 2021.
- Acquiring the right veterinary practice, after considering key value indicators, will remain a rewarding investment opportunity for the foreseeable future.
Covid-19 May Have Helped the Veterinary Industry
Far from being shattered by the global pandemic, the U.S. pet industry was identified by The Wall Street Journal in October 2020 as being “among the great beneficiaries of the new coronavirus.”
At the beginning of 2020, industry analysts like PetProductNews.com were concerned about the impact of declining pet ownership. Younger generations were not adopting pets at the same rate as prior generations, and advances in the number of new pets and new pet households were expected to decline for years. Covid-19 reversed that trend, as consumers turned to animal companionship to cope with months-long periods of remote work, remote school and social isolation. “Pandemic pets” became a measurable phenomenon, with the American Veterinary Medical Association finding that the rate of pet adoptions – adoptions as a percentage of animals taken into shelters – rose to 58.36 percent in 2020, compared with 51.49 percent in 2019. Through adoption and otherwise, overall pet ownership in the U.S. increased significantly in 2020. According to Packaged Facts, prior to the Covid-19 pandemic, 68 million U.S. households had pets, but that figure was projected to grow to 71 million by the end of 2020, representing more than half the number of households in the country.
As a result of increased animal ownership, veterinary practices saw a commensurate increase in revenues during the pandemic. Industry analyst VetSuccess reported that overall veterinary practice revenue was up 7 percent in 2020 compared to 2019, showing once again (as in the 2008 financial crisis) that the veterinary industry is extremely resilient in the face of even the worst economic downturns.
In short, the increase in pet ownership brought about by the Covid-19 pandemic, in combination with the “pet humanization” phenomenon (where pet owners are willing to pay for premium products and services for their animal “family members”), has created an environment in which veterinary services will continue to see significant, and largely recession-proof, demand.
A Popular Year to Sell a Vet Practice
For most veterinary clinic owners, 2020 was likely a far better year financially than might otherwise have been anticipated in the early days of the pandemic. Nevertheless, 2021 is shaping up to be a very popular year in which to sell a practice, as many owners who were previously “on the fence” may now be ready to transact. A number of contributing factors – such as the sheer stress of owning a business during an unprecedented event like the Covid-19 pandemic, the resulting desire to diversify investment risk, the continued pressure of competing with industry consolidators, and veterinary practice valuation levels remaining at or near record highs — will likely work together to drive increased seller activity in 2021. Perhaps most significantly, concerns about a possible repeal of capital gains taxes under the Biden Administration could well create a frenzy of sell-side deal activity, as practice owners become motivated – even anxious – to close deals before any new tax policy goes into effect.
In addition to the factors driving veterinarian practice owners to sell, the 2021 market is also primed for buyers with capital to invest in businesses that have maintained strong performance and balance sheets. While other industries present the opportunity to “buy low” due to the pandemic’s impact, veterinarian practices offer the incentive of stability and turnkey returns. Historically low interest rates and lenders who are looking to add strong loans to their portfolios should also support increased buyer activity. Veterinary practices should be attractive acquisition opportunities for private equity and venture capital buyers who are sitting on historic levels of capital, as well as for traditional buyers who are looking to invest in strong businesses.
Issues for Buyers to Consider
Buyers looking to acquire a veterinary practice should therefore find no shortage of opportunities in 2021. However, fundamental business and legal issues should always be considered when evaluating an acquisition opportunity, such as:
- Performance During Covid-19 Pandemic. If a clinic’s performance remained strong in 2020, that’s probably a good indicator of the clinic’s future performance. But even if a clinic underperformed during Covid-19, it could be a diamond-in-the-rough. If identifiable changes to the business would improve financial performance (e.g., expanded care options, different client service models, greater use of telemedicine), a buyer might be able to acquire a valuable practice at a discounted price.
- Associate Veterinarians. Associate veterinarians are often the key to a practice’s future success after a sale. If associates need motivation to “sign on” with the buyer, enhanced compensation or benefits may need to be offered. Given that many private equity-backed consolidators are showing increased willingness to permit equity investment by non-owner associate veterinarians, buyers should consider whether some type of equity or quasi-equity (e.g., phantom stock) incentive may also be appropriate. However, today’s key associate veterinarian could be tomorrow’s competition, so buyers should also be sure to protect their investment through reasonable non-compete or non-solicit agreements with associate veterinarians.
- Lab Services and Equipment Agreements. A buyer should always undertake a thorough review of a clinic’s agreements with lab service providers and equipment lessors. Key contract provisions to note include early termination penalties, creation of liens on clinic assets, and assignment and consent provisions.
- Real Estate. Buyers typically prefer to lease, rather than acquire, veterinary practice space. However, a buyer should ensure that it can remain in the space for as long as needed, whether through a long-term lease or a shorter lease with renewal options. For clinics where the real estate is owner-occupied by the selling veterinarian, buyers should consider obtaining a right of first refusal to acquire the property, if the veterinarian ever decides to sell.