Boomers chillingly refer to the Carter Administration (’77 - ’81) as the 20-20-20 years.
20% unemployment. 20% interest rate. 20% inflation.
It was the time of mullets, bell-bottom jeans, big hair, product shortages and lines at gas stations. Like me, ageing politicians and grey-haired bankers still carry the emotional scars of that era and it’s why we’re alarmed at what we’re seeing happening now in our economy.
The administration says the economy is booming yet there are skyrocketing prices for food and energy, Walmart has empty shelves, the $1.9 trillion stimulus package is dead-on-arrival, and our elected officials are more concerned with voting rights than supply chain issues. Now, even a minor uptick in the 10-year bond rate is a cause of concern.
Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen recently conceded that inflation is not “transitory” and the National Association of Business Economists panellists project that the overall consumer price index will rise 6% year-over-year in the fourth quarter of 2021, compared to September's forecast of 5.1%. CPI inflation is expected to remain elevated by the end of 2022 at 2.8% year-over-year, compared to September's forecast of 2.4%.
With all this turbulence, is now the best – or worst – time to be selling your practice?
A few things to consider:
First, the price paid for a practice typically is primarily based on today's value of the future profits the buyer can expect to receive from the acquired company. If inflation proves to be persistent, the real (i.e. inflation-adjusted) value of future dollars taken in will be less, thus driving down the amount a practice would sell for.
This means that buyers who expect inflation to remain at the 7% level announced this week would likely seek to trim what they're willing to put in because they anticipate the ultimate payout won't be as good as it would be in a non-inflationary scenario.
The only counter to that is to show that your rate of profit growth will outpace the rate of inflation. With costs rising and no indication (yet) that insurance companies will be increasing reimbursements, a 7% profit increase could prove difficult. Alternatively, you could choose to provide data in terms of patients seen as well as the dollar value, as that helps take inflation out of the picture. This can also come into play when a potential buyer tries to ascertain the impact of supply price inflation over the prior year.
Inflation could also affect a deal because the Fed has traditionally raised interest rates to cool the economy and slow inflation. This increase in borrowing costs would also slow demand for homes and could lead to slower business growth especially for practices in newer communities. Fortunately, consumers' desire for housing today remains very strong and according to a recent Evercore/ISI survey of major builders, most builders think 30-year mortgage rates would have to rise to at least 3.8% and perhaps even 4.25% before they would affect demand. In my opinion and based on history this amount of rate increase would require at least 12 to 18 months. So while it’s not a factor today, this could become a very negative force on the valuation of your practice in the not-too-distant future.
Regardless of when you think interest rates will spike from rising inflation, I think we can all agree that significantly increasing costs are inevitable. And, when costs rise across the board, maintaining profitability becomes increasingly difficult. You can conclude that persistent inflation will negatively affect the seller's payout. We're not at that point yet--indeed, we're only at the point where people are getting nervous about what might happen. That nervousness will start to show up in any sale discussions you decide to have in the next few months, but it shouldn't affect the sale amount until the last quarter of 2022.
Keep in mind that negotiations typically take months, not weeks so if you’re thinking of selling, now is the time to start.
It’s sunny now, but storm clouds are on the horizon. If you're thinking of selling, discover all your options now. Call 703.298.1690 or click HERE to schedule a Discovery Call NOW with Stan Kinder for the best options whether selling or retiring.
