While this year always sounded like it was in the distant future, here it is. With it comes a unique opportunity to capitalize on your hard work and either sell your practice or work on a sound exit strategy.
Following cultural events such as an election of a fluctuating economy, it can be challenging to know where your veterinary practice will be in the next few years. When some economists and investors predict an economic slowdown, does it make sense for you to change your exit strategy based on these predictions? How will our industry be impacted? What should you do to prepare in the event a downturn comes?
Suppose we are in a time when our economy is running on all cylinders, and the major impediment to growth for the veterinary industry is a shortage of veterinarian shortage. In that case, an imminent recession may not seem plausible. However, take 2020 as an example. The federal reserve board issued a statement on interest rate management that eluded to a global economic slowdown. The bond market also started to shift into rates that reflected an “inverted yield” curve that in the past had predicted all recessions experienced in the United States, with one exception. Trade “war” policies continued to give investors the jitters.
On the positive side, consumer confidence held overall, though showing signs of slowing in some sectors. The federal bank dropped interest rates which should help keep investment positive, and inflation remained low. On balance, there was enough concern on the part of the major business sectors that restrained spending and more disciplined investing was a likely scenario. Whether warranted or not, a recession is fundamentally an outbreak of pessimism. Whether based on fundamentals or on a self-full-filling prophecy due to pessimism, a recession or economic slowdown looked like a real possibility. Now let us fast forward to today.
How Could an Economic Slow-Down Impact Your Practice?
Veterinary medicine, and the broader pet industry as well, tend to fare better than many other sectors during a recession.
Since 1991, veterinary care spending has grown almost three times as fast as the U.S. gross domestic product. Pet-care spending even increased during the past two recessions: 29 percent during the 2001 recession and 17 percent during the 2009-2009 recession¹.
However, during the 2008-2009 recession, those in practice experienced the challenges our industry encountered during that time and the immediate years that followed. Client spending, specialty and emergency clinics experienced retractions, and growth in general practices showed strains fueled by never-ending price increases. This could indicate that the profession is recession-resistant, but certainly not recession-proof. Our industry’s overall robustness during recessions is one-factor drawing private equity into the practice consolidation flurry we have seen in recent years. They recognize the industry as a solid bet, recession or not.
Should These Predictions Influence Your Veterinary Practice Exit Strategy Plans?
Selling your veterinary practice is the final triumph in your practice ownership career. Ideally, the sale is a goal of a long-term strategic plan. Trying to time such a monumental financial event based on speculation regarding the onset and severity of a recession is a tall order that escapes even the most successful investors.
Instead, you should base the timing primarily on a few factors. Have you reached your personal and professional goals that ownership has afforded you? Do you need the funds from a sale for financial security? Is your health a factor? If all these factors point you in the direction to move on a sale in the next few years, the good news is that there is still time before a possible slump in activity and optimism. If you are looking to sell your practice you may have another 12 to 18 months to benefit from the premiums today’s sellers are getting.
Consider how long you are willing to wait to sell your business if the market were to drop. If you do not plan to sell within around five years or more, you can wait patiently for the next market rebound. But if you are determined to sell in the next couple of years, it may be wise to get serious about your exit strategy while conditions are still favorable. Keep in mind; it does not mean that after this time is over, you will not be able to sell. Companies are always looking to grow through acquisitions, and the market is ever-changing and maintaining strong business fundamentals that foster earnings and growth will still work to your best advantage. This applies to both the marketability and value of your practice and for vet-to-vet as well as consolidator transactions. You do not need to feel completely discouraged by any economic slowdown. Think about what is right for you, your business, and your family when deciding when to make a move.
What Should You Do To Prepare for an Economic Downturn?
First and foremost, you should get back to the fundamentals of proficient management. When growth is good, and clients are knocking on your door, these fundamentals can be forgotten or not emphasized to the extent they could and should be. Improving cash flow and reserves, and reducing debt prudent and essential in helping you weather a downturn. Consider the following action steps:
1. Accelerate your retention of earnings and reduce distributions to shareholders to improve your cash on hand.
2. Increase your line of credit.
3. Reduce discretionary expenses.
4. Make conscientious decisions based on key financial performance metrics (Key Performance Indicators – KPIs).
5. Right-size your labor force.
6. Carefully weigh the benefits relative to return on investment (ROI) for capital expenditures, such as equipment and building expansions.
7. Increase your marketing activities to remind your clients and community you are there for them, in good times and bad.