Should I sell my veterinary practice now?

If you're a longtime veterinary practice owner, you're likely facing a tricky decision: Is now the right time to sell your practice? Let's see what the Magic 8 Ball says. "It is certain" ... "Reply hazy, try again" ... "Outlook not so good." All right, maybe a toy isn't the best oracle to divine the right time to cash in your nest egg. But if you're desperate for answers—from any source you can find—you're not alone.

Today's environment has many practice owners scratching their heads over the state of the veterinary market. All indications are that the economy is recovering ("signs point to yes"). And that's good news for sellers and buyers alike. But how much better might it be in two years? In five? And how many other potential sellers out there are thinking the same thing?

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Sell now and you might miss further upside. Sell later and you might get stuck in a flooded market. While no one is certain how the next five years will play out, I'm venturing to predict that we'll see a rush of practice owners cashing out in the next half-decade. Let's take a look at the demographic and economic shifts on the horizon in this country so you can make a more informed choice about your impending practice sale.

BOOMERS RETIRE

Baby boomers—those people born between January 1, 1946, and December 31, 1964—number nearly 78 million, a quarter of the U.S. population. They started hitting the retirement age of 65 on January 1, 2011. It's estimated that every day of this year and beyond, another 10,000 baby boomers will turn 65. On a national scale, this will lead to a whole host of problems. Our economy, our Social Security system, and our healthcare system are all buckling under the strain.

These same percentages mostly hold true inside the veterinary industry. Of the estimated 28,000 privately owned veterinary practices across the country, thousands are owned and operated by veterinarians on the cusp of retirement. Many are single-doctor practices. Many don't have a firm transition plan in place—or any plan at all. These owners aren't grooming an associate to take over, nor do they have partners ready to buy them out. Their endgame is simple: Put the practice on the market, sell it in a bidding war, and walk away with all cash.

This plan may work for a few, but probably not for the majority. The question will be in the timing. How many for-sale veterinary practices can the market absorb at once?

RETIREMENT PLANS RETURN

Many practice owners' retirement plans have been delayed by three devastating factors. First, the stock market crash of 2008 and 2009 shrunk investment portfolios 20 percent to 40 percent. Second, the real estate crash cut residential and investment property values 10 percent to 30 percent. Third, the gloomy economy pulled down veterinary practice income, which in turn impacted business values.

Combined, these three factors rewrote many retirement timelines. Check out "How the recession has affected practice owner retirements" to see some examples of how practice owners have dealt with this blast of bad financial luck. The end result, of course, was the painful realization for many aging practice owners that retirement would have to wait.

Today, while the real estate market remains in the doldrums, the stock market has recovered and the general economy is improving. Two out of the three major components of a sound financial retirement are heading in the right direction. Older practice owners are just now feeling more secure about their future. This means that these same practice owners are now more willing to revisit their plans for retirement and selling their practices.

BUYERS APPEAR

Since the beginning of this slowdown, associates eager to buy practices have been slowly lining the proverbial sidelines. But thus far, they've chosen to wait to get in the game. They saw that the overall economy was shaky and that high-quality veterinary practices weren't up for sale (the side effect of all those practice owners waiting to retire).

These potential buyers also saw that things had changed. In the past, a veterinarian could buy a practice and succeed without doing much in the way of improvement or management. In the high-growth market of 1997 to 2007, most owners made money in spite of themselves. Throw open the clinic doors and the owner's bank account grew. This is no longer the case.

Potential buyers have been taking notes on these trials and tribulations. The smart ones now know what works and what doesn't. The perceptive ones realize the difference between troubling stagnation and potential growth. The savvy ones see the emotional toll that financial pressures can take. These buyers are picky. They're analyzing factors like profitability trends, growth potential, client visit data, and location. After all, why jump into a business that isn't exactly what you want?

So the stage is set. There are lots of qualified, financially able buyers. They're waiting for their moment. They're socking away cash and patiently looking for the right fit. Once sellers flick the switch, once quality practices begin to hit the market, there will be buyers waiting.

PRACTICE VALUES RECOVER

During the recession, most practices saw fewer client visits, less client spending, and stagnant or shrinking revenue. Lower revenue led to shrinking profits, and shrinking profits led to descending practice value. Combine all that with scarce financing and the feeling of impending doom we were all operating under, and it's no surprise that the veterinary practice market got shaky.

Over the past couple of years, the dynamics of the veterinary practice market have been similar to those of the housing market. Given the steep decline in real estate values, now is not an ideal time to sell your home. The same goes for veterinary practices. Unless compelled to do so (such as in cases of illness or divorce), most veterinarians have chosen not to sell their businesses.

Now, as the economy recovers and veterinary practice income improves, practice values are beginning to climb again. They may not reach the high water mark of a few years ago, but values should recover to the point that an owner can now justify selling again.

TAX RATE HOLDS

Another force that should drive practice sales is taxes. With the Bush tax cuts in place, sellers are assured that capital gains tax rates will remain at 15 percent through the end of 2012. But after that, who knows? Given our national deficit and debt load, we can reasonably expect that taxes will rise in the future. I've heard rumors of a jump in the capital gains tax rate to 25 percent and ordinary income tax rates for the higher brackets jumping another 5 percent. On a sizable practice sale, the increased taxes could be substantial.

All other factors being equal—decent practice value, a willingness to sell, a steady economy—this jump in potential tax rates may motivate some potential sellers to accelerate their timetables.

FINANCING LOOSENS

When the housing market crashed and the recession blossomed, lenders took a defensive position. They squeezed off the money spigots, assessed their loan portfolios, and licked their wounds.

Veterinary lenders have done their best to weather the storm. Of existing veterinary practice loans, defaults did tick up, with an overall "problem" loan rate of 3 percent to 5 percent (previous rates were about 1 percent to 3 percent). But compare that to the 15 percent to 25 percent problem rate for loans in construction and many other industries, and the odds are still pretty good that lenders will get their money back.

Many analysts believe that as practices' financial numbers improve, traditional lenders will loosen up. And as lending loosens, associates will finally start buying. Throw in the willingness of today's seller to cover a portion of the sales price, and you have the ingredients for a spike in veterinary practice sales.

Is a huge spate of practice sales guaranteed? Nothing's for sure. But you can turn to your handy Magic 8 Ball for my answer (it's really there): "Outlook good."

Tom McFerson, CPA, ABV, is a partner with Gatto McFerson CPAs in Santa Monica, Calif. The firm has appraised veterinary practices and assisted veterinarians with practice purchases for more than 20 years. Send questions or comments to ve@advanstar.com.