August 2020 Market Update: The Corona Effect

September 27, 2020

Market Update: The Corona Effect Part 2

Public equity markets in the United States have staged a remarkable comeback from their swoon at the time of our last update in March, 2020. Indeed, all the major averages shrugged off the to-date impacts of the Covid-19 pandemic and powered to new all-time highs in August. 

While the stock market moves during the spring and summer confounded many pundits, historic monetary and fiscal stimulus and optimism regarding the potential for an effective vaccine has overwhelmed the bears. Additionally, certain businesses have performed remarkably well in spite of the challenging times. 

Well-run veterinary practices of all sorts seem to fit into this category of business. 

Veterinary Services have been essential during Corona

As Americans have been forced to spend more time at home, pets have become more important members of their families. In fact, the desire to create a more complete home life in the face of the restrictions imposed by the pandemic has led to a significant increase in the demand for pets of all sorts, particularly puppies and dogs. 

As the Washington Post reported on August, 12th regarding the demand for puppies and dogs,\

“What began in mid-March as a sudden surge in demand had, as of mid-July, become a bona fide boom”. 

Not surprisingly, veterinary services have become an essential need in this environment.

The Unexpected Boon of Corona on Veterinarians

Our discussions with a variety of veterinarians have confirmed this trend, as most DVM’s have reported robust demand for their services throughout the pandemic. The strengthening of the veterinary practice business in the face of one the U.S.’s most severe economic downturns in the last 75 years has not gone unnoticed by the consolidator community. 

Our recent conversations with investors in the business confirmed that many operators are actively looking for practices to purchase. 

As a result, our concerns about valuation diminution stemming for the economic impacts of the pandemic we expressed back in March have proven to be unfounded. Instead, COVID has unexpectedly been a boon to the specialty-emergency and much of the general practice veterinary services industry, which, in turn, has kept the market for practice sales at its all-time high level established at the beginning of the year.

Risk Factors and the 2020 Election

One of many risk factors we are carefully following is the potential political risk stemming from a Democratic sweep in November. 

While this is far from certain, if the Democrats control both the executive and legislative branches of Federal government, it would likely usher in a very different federal tax regime that could reduce after-tax practice sale proceeds by up to 50%, all else equal, when all factors are considered. 

We encourage any practice owners who are thinking of transitioning in the near term to consider this risk in their timing as the line for by-year-end practices sales is growing quickly and if you have not started yet, you may have difficulty getting a sale closed this calendar year.


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