Behind the Scenes of Consolidation

22min
Season 2
Listen directly on:

Ivan and Ryan are thrilled to be returning with this first episode of our second season, where they discuss the formation and insights into Galaxy Vets, including strategy, leaders, practices, and more. 

Topics discussed: 

  • Kicking off with an exciting pivot; season two includes our Galaxy Vets journey.
  • Framework called Three P’s and Three S’s.
  • Galaxy Vets mission: giving veterinary medicine back to veterinarians.
  • Reinventing how we do vet medicine, vertical integration, providing equity, and more.

Helpful links:

Speakers

Dr. Ivan Zak has earned multiple accreditations in veterinary medicine. After graduating, he worked in 35 veterinary hospitals across Canada, where he was inspired to create Smart Flow, a first-in-the-industry workflow optimization system. Smart Flow was subsequently acquired by Fortune 500 company IDEXX, where he became General Manager of the Software division. After consulting 500+ practices worldwide on workflow optimization, he decided it was time for a new adventure. Dr. Ivan has a holistic view of the whole veterinary business market and he’s making his next step the creation of a more cohesive, unified platform that will ultimately benefit the veterinary professionals.

Transcript

Ryan Leech, Director of Sales
Ryan Leech

Welcome to Consolidate That! Season two. Ivan, I’m really excited to kick off a new season and a really cool new direction for the podcast. Why don’t you go ahead and kick off some of the ideas of what we’re going to be talking about this season with everyone and then we can dive in.

Ivan-Zak
Dr. Ivan Zak

This is going to be quite the pivot, I don’t think that we will change the content, it’s going to be still very rich in business methodologies and how to build consolidation but because we got this opportunity to build Galaxy Vets now and because I think we – eventually I can call it, failed to convince others to care about their people, then we will walk the listeners through every step of our journey and disclose how we build Galaxy. So the history will be recorded into the podcast and if you want to replicate it, we’ll be happy to this with you and yeah, so that’s the idea.

Ryan Leech, Director of Sales
Ryan Leech

Yeah, I think at the end of this season, if other groups out there want to just mimic and take the whole Galaxy Vets concept, we would welcome it because I think that’s the best thing that could happen to the vet industry. We want to see a way and a path forward for veterinarians to really get, and the whole teams to get taken care off in the way that they should.

Ivan-Zak
Dr. Ivan Zak

Absolutely. Let’s talk a little bit about how we arrived here, Ryan, because you joined – it’s been a year, was it?

Ryan Leech, Director of Sales
Ryan Leech

No one sent me an anniversary gift, you know, I think the first year is diamonds but I’ll just have to get those for myself but yeah, it’s been a little over a year.

Ivan-Zak
Dr. Ivan Zak

It’s been a year. I’ll send you an earring.

Ryan Leech, Director of Sales
Ryan Leech

Okay, if I pierce my ear, you have to send me an earring. Deal.

Ivan-Zak
Dr. Ivan Zak

All right, well, let’s talk about it. We were working on VIS and we’ve developed several assets, right? We’ve developed the consolidator material model, we develop consolidating operating framework and all of that was geared towards preventing burnout. Ryan, in your experience, what did work and what didn’t work applying it to other consolidators?

Ryan Leech, Director of Sales
Ryan Leech

I think the parts that make people a lot of money worked really, really well. I think the vision and the consolidator maturity model made a lot of sense to a lot of people but we came across a lot of issues where, when you’re beholden to certain investors or certain groups of investors that are looking for reinvestment horizons, the best plans and the long-term plans that can come together, kind of fall apart. And the first thing that can fall apart there is the burnout prevention because there’s not a 100% line item where you can say, “I did this and it gave this reduction in burnout and it made me this many dollars.”

I think that’s where, like I said, maybe we can probably say that that was – that did fail but we did create some amazing things from it.

Ivan-Zak
Dr. Ivan Zak

Yeah, I think those two assets, maturity model and the framework which we use right now internally and it’s publicly available on our website. You can download it, you can walk the steps with us but basically, that created an incredible roadmap that we essentially were creating for three years to follow ourselves.

The interesting thing and the reason why I wanted to pivot and invest all our time into sort of this one consolidation called, Galaxy Vets Healthcare System, is because burnout prevention is not anymore silent, it’s really how do you – we shouldn’t even not talk about burnout prevention, it’s basically having happy employees and happy people.

One thing that I repeatedly notice in most consolidators we worked with, there is no purpose and that’s sort of, we’re going to be talking about this new framework. And Ryan, this is a bit of a surprise to you, I think I did mention it to you but there is a framework that I like to follow as we’re building Galaxy, aside from – maturity model is very tactical, but it’s a framework that’s called three Ps and three S’s.

Let’s go from the top down. The first P is purpose. Then you go to the right and it’s the first S and the first S is the strategy and then the second P is the process and then the second S is the structure and then the third P is people and the third S is systems.

When you’re building any sort of company, it’s not only consolidation. When you start with strategy, which most of the people that we talked about and the strategy is geared towards, “Oh, we’re going to buy a bunch of hospitals, we’re going to put them together and then we’re going to improve their EBITDA and then we’re going to resell them to a bigger guy.” That is strategy and it’s not wrong.

It’s a good solid strategy, there’s arbitrage, there’s money to be made. And then it’s a little bit failing these days on the operational improvements, because there’s usually three cards that most consolidators have to play. One is, that’s what they’re telling their investors, they’re saying, “We are going to improve marketing, we are going to improve labor costs, so manage the labor cost and we’re going to improve cause utilization through inventory management.”

Well, if you look at our market today, improving marketing doesn’t really matter. We have overwhelming demand, we have a three week wait time for a general procedures in the hospitals or preventative visits, and we have six to eight hour wait all across United States in the emergency hospital. Increasing marketing will actually increase the demand and there’s not enough supply.

The second one on the labor cost management, everybody wants to get under that magic 45% combined doctors and the staff, but we might not be – not anymore in that market and you can’t anymore squeeze anything out of people. Because we’re paying more veterinarians, we’re paying more technicians, and so that’s not available anymore.

The third one, vendor management, yes, everybody can do that and you can probably improve one or two percent on top of what you require the hospital with but essentially, they’re all left only with arbitrage. That’s where their strategy, even if it’s there, it’s not going to work, at least in the majority of consolidators I looked at in the last three years. There’s really arbitrage left.

Ryan Leech, Director of Sales
Ryan Leech

Well, you know, to interrupt you there, even the arbitrage is starting to become a difficult thing as the multiples get higher and higher and higher. And people are paying higher and higher dollars because at some point, you’re cutting – every multiple that you pay higher, you’re cutting out your arbitrage opportunity there too.

Ivan-Zak
Dr. Ivan Zak

Exactly. Well that, that’s where we kind of thought about this and we said “Okay. Those two sides of it don’t work. It’s actually, would be very risky to start a new consolidator company right now, but nevertheless, they appear every other week and there’s more and more funding pouring into the veterinarian domain.

But if you go back to what I just started with the 3P and the 3S, if you start with the strategy but you didn’t tackle the first P, the organization will not last long. And the first P is the purpose. If you build your organization that has solid strategy, that has the process and has the structure, people, you have all the systems in the world, that’s what investors are looking at, they want to know your tech stack.

If there’s no purpose, it’s not going to live long. You’re not going to have – and especially again, in this day, when people need to understand, why do they want to work for you, why should they work for you? And veterinarians have all the choices in the world to go to other consolidators and work or for independent practices, there’s still 70 plus percent of those.

That’s what we arrived to the decision, maybe we should, instead of trying consulting – and the problem with consulting in any industry is that you come in, you suggest your great ideas and then you provide the playbook, you do the gap analysis and then nobody does anything, and then they feel like it’s just a sunk cost. The only way to do it, I think, is to actually roll up the sleeves and do it ourselves.

The good news is that for three years, we were learning how to build consolidation. At this point, I think we’re very well prepared, I assigned a lot of personal money in building VIS. At this point, I’m joking that I went through a three-year, most expensive university in the world on how to build consolidation. And I just graduated, so I feel like we’re ready to do this.

Ryan Leech, Director of Sales
Ryan Leech

Yeah, it’s going to be, there’s a lot of learnings that we picked up and you know, in the year that I was with you, prior to us starting Galaxy Vets, it’s been very interesting to see. And we’ve looked at a lot of different models, we’ve looked at a lot of different ideas and things that are out there that we can use to be able to drive forward. And hopefully, what we’re putting out here, the last season was designed for people to learn what everyone else does too, and this season should hopefully be able to share the insights of what we’re learning as well.

Outside of VIS – we talked about what we did at VIS, the learnings we had, but I think the reason why we started VIS, which is the same goal and the same mission that we’re driving into Galaxy Vets, is taking care of the veterinary professionals. I think in its most pure sense, consolidation should be a tool that can actually improve the lives of every person that shows up to work in a veterinary consolidator. Because you are able to alleviate the difficulties that can happen for the selling practice owners that might not want to be business people anymore, and you’re able to provide a greater scale and a great breadth of opportunities for people that are working in the clinic, that if it’s an associate veterinarian that can’t afford to purchase their own clinic, they’re offering opportunities to grow their career.

As a technician, you’re offering opportunities for them to extend their career outside of the pain and the troubles that can come from just wrestling dogs on the ground and when that becomes a difficult option, being able to grow from there. What do you think outside of the money that consolidators are bringing to the space that we can bring, and what we should be bringing to consolidation as Galaxy Vets?

Ivan-Zak
Dr. Ivan Zak

You just went deep on the topic of the main two problems that we’re solving. I think there’s actually three problems that anybody who is thinking of tapping into a veterinary domain should be thinking about. One is high multiples, and veterinarians cannot buy practices, so you said that.

The two is, there’s not enough professionals, we don’t have enough vets, we don’t have enough technicians. 45% of clinics are lacking 1.8 veterinarians, meaning that about 90% could take another veterinarian so they’re not up to their capacity. But nobody wants to work. 64% of ads from consolidators stay unopened.

But the third thing is what’s happening to the overall pet population and the humanization of the pets. Basically, not only we have more pets, not only our throughput suffered due to COVID, but also, we love our pets more than before. We even see them more at home, because of those jobs that’s switched to be at home.

Those are the three problems and that’s what we’ve developed our thesis to tackle those particular three problems. I am going to go over all three of them. The first one is high multiples, most consolidators are investing into purchasing the hospital so they can buy the cash flow of this hospital and then consolidate that EBITDA and resell it. Well, they’re doing it by purchasing 100% or there is some joint venture initiatives of the hospitals.

I thought that it was kind of clever to do these joint ventures, so you leave the equity behind, you know, 30, 40% with the owner. The challenge with that, if you have two hospitals under the same network, under the same consolidator being across the road from each other, they will never collaborate if they still own equity in those two hospitals so you can’t leave equity behind and expect everybody contributing into the organization as a whole.

They are still bound to their personal hospital that they use to own or still own part in it. It’s not motivating that much for them to contribute to the organization as a whole. There is just sort of like their bank account and investment and left some equity behind in the organization. What we decided is that instead of taking more money from private equity and then taking full ownership from the vets, we said, “Why don’t you own part of Galaxy?”

Basically enrolling more than 50% of their ownership in the hospitals back into the parent organization, into the Galaxy and eventually becoming shareholders and becoming significant shareholders. And that seemed to work really well because we started this marketing research and it turned out that we got a 136 hospitals as of today that said, “Can we talk to you? We want to join you.” Which is in this market is absolutely nuts. I did not expect this result but that shows a tremendous success in our thesis.

Ryan Leech, Director of Sales
Ryan Leech

Yeah, it’s made my job very different than I think we thought it was going to be from day one, where I was expecting to be sweating it out on the streets, beating down doors to get meetings with people. And now we’re in a situation where we’re trying to do load management of process in all of the meetings with people that are interested. It’s the opposite swing that every business development teams wants but it’s been incredible to actually see that and hear.

When we started talking about Galaxy Vets and when we talk to some industry people, we got some opinions that we were crazy I think, and some opinions that we were really on to something unique. It’s neat that as we talk to more and more practice owners, a lot of them have said, “You know, I have talked with other people. I’ve talked to other groups but I don’t want to do it. I fear about where I’m going to send my people and what I’m doing for my team.”

Then we are actually hitting on something that’s unexpected and actually resonating with the community.

Ivan-Zak
Dr. Ivan Zak

Well, that’s the second part of the thesis. So essentially, when you sell your hospital through this crazy multiple, A, if you are not retiring tomorrow then you are disconnected from your practice. With this, I think that it resonated with a lot of people that we talked to, that they want to stay active, they want to stay plugged in. But they don’t feel like they own the hospital anymore.

It is not interesting anymore. All these veterinarians, they are entrepreneurs and then once you own the business, it’s almost like you can’t go back. So you do want to be a part of it and significant part, so that’s why having to vote, from the owners of the hospitals, is important and that’s how our share structure is built. And everything that we do is geared towards that. It’s essentially giving the veterinary medicine back to veterinarians.

What’s interesting part is that, how do you keep the rest of the team engaged? Most acquisitions that happen right now they end up with, “Hi team, I found a wonderful home for you. This is a great organization, which you’re all going to be working for.” And then immediately after the acquisition, you have people leave because – someone did really well through this acquisition, so they should, they are owners of the practice.

But then everybody else is just thrown to the wolves and then someone will be managing them who is not here and they don’t have again, the purpose behind it. There is no purpose behind the organization, we were just sold to someone else. They are afraid to lose their job, and not necessarily the person that they trusted to get the job from will be leading their team anymore.

We came out with a thesis that, can we do – can we make it work that the entire organization actually belongs to everybody? We worked on our business model and our financial model that, actually you could create an organization where it belongs to not just the seller but the associates that work for the seller, the emergency veterinarians that never get equity unless they started with owning the hospital, they were just hourly employees like I was all my life.

Then relief veterinarians, they’re also going to be a part of equity share holders. The receptionist, the technicians, down to the janitors, everybody in the organization is built into having equity. And surprise, surprise, we’re just closing our first group of hospitals and we have 250 job applications before we had the first hospital. That is an incredible support from the market, that is incredible support from our colleagues, and I really didn’t expect that we will have a pool of people now to add to the clinics that we’re acquiring, instead of just looking at what is your EBITDA and revenue.

We know that if 90% of clinics require one vet, well, we have the whole team waiting, can’t wait to start in their area or relocate to help us. So that has been an incredible experience as well in the last three months.

Ryan Leech, Director of Sales
Ryan Leech

Yeah and I think drawing on that, there was this stat, I believe this was from the Brakke Consulting report that 38% of – you’re expected a 38% return rate when a consolidator comes in to acquire a practice.

Ivan-Zak
Dr. Ivan Zak

I didn’t know about that one, holy cow.

Ryan Leech, Director of Sales
Ryan Leech

Yeah.

Ivan-Zak
Dr. Ivan Zak

38%.

Ryan Leech, Director of Sales
Ryan Leech

Yeah, I think yeah, that was – our team gave me that one and that was a pretty interesting thing. If you are selling your practice and you look around and you think, over one in three people are going to leave. If you are 10 doctor or 10 people in a clinic, it greatly changed it and that is over the first year so it’s not a mass exodus from day one.

But yeah, it is a pretty big one and the thing is those people probably aren’t leaving the profession. They are going to work somewhere else and they’re either scrambling around to try and find the last few independent veterinarians that they can in their area, or they’re going to go work for another group that they feel more confident in and safe and secure in where their job is going to be there.

Ivan-Zak
Dr. Ivan Zak

That’s so crazy. The third part is very interesting that we have too many paths, the workflows are complicated, we weren’t that efficient as veterinarians. And I can probably attest to that through my SmartFlow experience, at least before we sold it to IDEXX. I can’t say I did it hands on, but participated in improvement of 650 hospitals work flow, so I do know that there is an opportunity. But when the COVID hit, we didn’t adapt to it well.

It became the curb side assistance and all these texting apps and all of that stuff. We are not ready and vets are not very adaptable. I think that the key to the thesis that we came up at Galaxy is actually, the third component is to increase the throughput. And the only way you can do it is by using technology, by using optimized routing of the patients through teletriage, through telemedicine.

That’s really reinventing how we do medicine and how you do it at scale as the organization not as individual hospitals. Because again, through all of these JVs and through the combination, I don’t know if VCA is really leveraging the network between Banfield and VCA too, as far as I know, I think they are still separated as management.

But I think there is a tremendous opportunity to actually plug in the entire system and create a vertical integration between the emergency hospital, lab component, GP hospital, telemedicine, tele-consultancy and tele-triage and really reroute the patients and significantly increase the throughput of the system. At the same time, increasing the upside and the revenue and improving the bottom line so you can actually provide equity to all the participants. That is how we’re looking at Galaxy in those three parts underpinned by the purpose of preventing burnout is where we came with this idea from.

Ryan Leech, Director of Sales
Ryan Leech

Yeah, it’s going to be cool. It’s already started off on a really fun high and a lot of opportunities for people to grow their businesses, and I think we’re going to have a pretty interesting season here because we are going to open it up. I mean, we’re opening the doors, we’re opening our books to show it to everyone.

We want everyone inside of Galaxy Vets who listens, everybody outside in the industry that wants to listen and we want people to be able to see what’s going on and hopefully, take the things that you think are working and take the things that are good because we want it to be a really unique way to be able to drive an improvement across the industry.

Ivan-Zak
Dr. Ivan Zak

Absolutely, and all the materials are available. We are going to be using our consolidator maturity model. We’re going to be using our consolidator operating framework and we are going to have these series of webinars and the podcast bringing along how do we choose the strategy, who do we have as the leaders and we’ll interview all of them, why did they join us and interviewing the hospital that joined us and how they see the change management going through these hospitals.

It’s going to be an exciting season, I can’t wait to dive into this. There is already a pipeline of interesting episodes that we’ve talked about and I’m very excited to dive into it with you, Ryan.

Ryan Leech, Director of Sales
Ryan Leech

Same to you. Well, thank you everyone for listening. Welcome to the new journey of Galaxy Vets and we can’t wait to go on this adventure with everyone.

Ivan-Zak
Dr. Ivan Zak

Cheers.