Amazing to think that we will soon be in the next decade. While 2020 always sounded like it was in the distant future; here it is, right around the corner. A new year presents a new opportunity to capitalize on your hard work and either sell your practice or work on a sound exit strategy.
With an upcoming election year and an economy that seems to be fluctuating, it can be difficult to know where your veterinary practice is going to be in the next few years. With some economists and investors predicting 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 there is a downturn coming?
With our economy running on all cylinders and the major impediment to growth for the veterinary industry being a shortage of veterinarians, an imminent recession just doesn’t seem plausible. However, the federal reserve board’s latest statement on interest rate management eludes to a global economic slow-down. The bond market has recently begun to shift into rates which reflect an “inverted yield” curve which has in the past predicated all recessions experienced in the United States, with one exception. Trade “war” policies continue to give investors the jitters.
On the positive side, consumer confidence is holding overall, though showing signs of slowing in some sectors. The fed has dropped interest rates which should help keep investment positive, and inflation remains low. On balance, there is enough concern on the part of the major business sectors that restrained spending and more disciplined investing is a likely scenario. Whether warranted or not, a recession fundamentally is an outbreak of pessimism. So, whether based on fundamentals or on a self-full-filling prophecy as a result of pessimism, a recession or economic slowdown is looking like a real possibility.
How might an economic slow-down impact your practice?
Veterinary Medicine, and the broader pet industry as well, tends to fair better than many other industries during a recession.
Since 1991 the spending on veterinary care 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, those in practice during the 2008-2009 recession experienced the challenges our industry encountered during that recession and the immediate years that followed. Client spending retracted, specialty and emergency clinics experienced retractions and growth in general practices showed strains, fueled by never-ending price increases. I guess you could surmise that the profession is recession resistant, but certainly not recession proof. The overall robustness of our industry during recessions is one of the factors 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 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. The timing should primarily be based on multiple 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 always changing. Maintaining strong business fundamentals that foster earnings and growth will always work to your best advantage. This applies to both 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 at least not emphasized to the extent they could and should be. Improving cash flow, improving your cash reserves, and reducing debt are 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.
The best time to prepare your business for an economic downturn is when the economy is still doing well. During a recession, your practice will be exposed to many more financial risks than normal. The history of the veterinary industry suggests that, with proper planning, a positive attitude, and the right mindset, you might not only be able to comfortably endure an economic decline, you may even be able to thrive during it.
Jim Stephenson, DVM, CBA
Joe Stephenson, MA