At certain points in time, there have been unique windows of opportunity, where market factors have driven veterinary practice valuations upward. For example, in 2012, America approached a fiscal cliff, due in large part to George W. Bush’s expiring tax cuts. If Congress and President Obama failed to act, which it appeared they might, it would have led to the largest tax increase in more than six decades. As this played out, many veterinarians raced to close their transactions, fearful of an increase in the capital gains rate.
In the end, Congress and President Obama reached a last-minute compromise that avoided most of the issues that veterinarians feared were inevitable – and the M&A market came back to earth.
If you fast forward to recent times, one trend driving transaction activity in the marketplace is the consolidation that’s occurring throughout the profession. We are now seeing the rapid emergence of private equity-backed consolidators, which are becoming a greater percentage of the overall marketplace. As a result, practice values and sale prices have been driven higher because of the different valuation concepts used by private equity compared to traditional veterinarian to veterinarian transactions.
Throwing gas on this already bright fire is the COVID-19 pandemic, which has caused many veterinarians who were contemplating their future to rapidly accelerate their timetable for transition. Simply put, many older veterinarians have been impacted by the stress of the pandemic, and when they’ve been presented with one of the lofty offers floating around the market these days, decided that they did not want the burden of running their practices anymore.
On top of this, we see a third factor emerging, which should lead to an unprecedented volume in M&A activity in the profession. Since the beginning of the COVID-19 pandemic, the federal government has been printing money at an unprecedented pace, including the $2.2 trillion CARES Act passed in March 2020, a $900 billion relief bill passed by the Trump Administration late last year, and President Biden’s $1.9 trillion American Rescue Act, passed in March of this year. On top of that, the Senate passed a $1.2 trillion infrastructure bill in August, and one day later a larger $3.5 trillion budget resolution.
When you add up these extraordinary pieces of legislation, you get a potential total of over $9.7 trillion of newly printed money by the federal government – in just over a year. Regardless of your politics, this spending will plunge the country deeper into debt, and there appears to be no plan to pay for any of it other than President Biden’s plan to dramatically raise taxes. Moreover, the intensity of political debate is fierce, as politicians fight for, and against, such a complete overhaul of the tax system.
If you’re contemplating a practice transition, it’s important to recognize that a material increase in the capital gains rate is a likely outcome from this debate, and that change will have significant adverse tax consequences if you sell a practice after December 31, 2021 (the President’s plan calls for making this increase retroactive in 2021, but most experts do not believe he has the support for such a drastic measure).
The current proposal calls for any person or family with a combined income of $1 million or more to potentially pay 39.6% tax on any capital gain or ordinary income, plus the Obamacare tax, resulting in an enormous tax of over 40%. Many in the tax profession believe it might be difficult for the President to gain the support of every single Democrat, which he will need in order to pass this huge tax increase, however the same experts are confident that there will be an across-the-board increase in the long-term capital gains rate from 20% to something in the neighborhood of 30%. While nobody has a crystal ball, when you reflect on the recent spending, and the fact that the country was already massively in debt, I think we can all agree that our taxes cannot stay the same.
Taken together, this perfect storm of conditions should lead to unprecedented veterinary M&A activity in the final quarter of 2021.
My advice to you is this: If you’re thinking about listing your practice, or considering a transition, you must start the process immediately. And for those of you looking to grow through acquisitions, I recommend you speak with your banker, line up capital, and be ready to strike at an opportunity with a motivated seller who is racing against the tax clock.