Building vs Buying: Different Types of Financing

21min
Season 1
Listen directly on:

Steve Thomas, the Co-Founder and CEO of Vets Pets, joins us to discuss their unique growth business model and talk about the different types of financing based on the different types of seller economics.
Learn more about how Vets Pets has evolved over the past 14 years, the idea of avoiding private equity money, the cost differences between de-novos and acquisitions and Steve sheds light onto the pros and cons of each.

Topics discussed:

  • Insight into the business’s acquisition economics;
  • Why Vets Pets tries to avoid private equity money and how they structure their veterinary partners’ loans;
  • Understanding the good-fit target partner;
  • The differences in the costs of building de-novo versus acquisitions;
  • The long-term goals of Vets Pets;
  • The benefits of being able to leverage assets across existing nearby practices;

Helpful links:

Speakers

Transcript

Ryan Leech, Director of Sales
Ryan Leech

Welcome back to Consolidate That! Ivan, good morning, I’m excited to learn some more things from our guest today.

Ivan-Zak
Dr. Ivan Zak

Steve’s the co-founder of Vets Pets and serves as the president and CEO. Prior to starting Vets Pets, Steve worked in finance at Bank of America Securities. He received a BBA in management from University of Georgia and MBA in finance from Wake Force University. Steve, thank you for coming, thank you for finding the time.

steve-thomas
Steve Thomas

Glad to be here, thanks for letting me join.

Ivan-Zak
Dr. Ivan Zak

Very interesting topic today. We’re going to talk about different types of financing based on different type of a seller economics. I’m very excited to dig into how the deals could be structured. Just by the way of introduction, Steve, can you tell us a little more about Vets Pets, where you’re at and what are sort of the goals ahead, and where you guys going?

steve-thomas
Steve Thomas

Sure, we’ve been around for about 14 years now. We started with two practices, one emergency hospital, one general practice and we have grown over the years through acquisition, de-novos, and expansion of services at our existing hospitals, we now operate, I think it’s about 25 locations. Four of those are emergency specialty, the rest are GP and then we have a couple of pet resorts as well.

Our growth has been, I guess, it’s not linear but about 20 to 25% growth in top monitory year and our goal is to continue to keep that growth rate for the foreseeable future.

Ryan Leech, Director of Sales
Ryan Leech

Steve, you guys have been around for a good amount of time, right? When did you found everything?

steve-thomas
Steve Thomas

I had the foresight to get luckily financed, right before the market crashed, and actually, it was complete luck and then complete unlucky to start in this industry right before the great recession. Yeah, we started 2007.

Ryan Leech, Director of Sales
Ryan Leech

If we see that you run away from the veterinary thing, we’re going to follow you, we’ll keep our eye out. What your magic ball says?

steve-thomas
Steve Thomas

I think that’s one and done out there.

Ivan-Zak
Dr. Ivan Zak

You used it up. Very interesting, you told us before about different structures and of the deals and different structuring of the financing towards them. I want to dig a little bit into the economics of what are acquisition economics, when you guys do this, what kind of deals do you structure? A lot of, there’s different styles right now, there is a full acquisition, 100%, there is a partial acquisition or some people call it a JV with a vet, which I don’t think it really is.

There’s also the structure of the deals could be keeping the sort of percentage or rolling equity of the acquired part instead of cashing out. Those are all the variables that you offer to the acquirers and what are the most popular let’s say on them these days?

steve-thomas
Steve Thomas

We do things a little bit differently, most of the acquisitions we make are smaller practices and typically, the veterinarian is either wanting to back off how much they’re working, or discontinue working entirely pretty quickly, or maybe they’ve come across a stroke of bad luck and haven’t been able to maybe grow to the extent they would like to.

Typically, we’re coming in these days and buying a practice with a veterinary partner that does not currently work there. That might be another veterinarian that’s working in another practice with us, that might be another veterinarian that we’ve met over time and have a good strong feel for. That’s typically how we’re doing this is we’re partnering with a new veterinarian to go and purchase a practice and they’re going to be the lead, and kind of take the practice to the next level.

Ivan-Zak
Dr. Ivan Zak

Interesting. Is that sort of shared ownership that you guys get into with the – if I break it down and share ownership, they own a part of the practice and then – but the financing of the dealers that usually buy you guys and they just get it as sweat equity or do they contribute as well financially?

steve-thomas
Steve Thomas

They contribute, this is where it gets a little bit tricky. We borrow together typically. I might call that sweat equity because man, some of our partners are well off but we probably have deeper pockets than most of them. If we borrow money, we’re borrowing it together, co-borrowers and we’re all fully guaranteeing the loan. We do typically put some cash in on the sides but we try to keep that pretty minimal. For a lot of our veterinary partners, don’t have a pile of cash laying around. That’s typically how we will do it in a new venture.

Ivan-Zak
Dr. Ivan Zak

Okay, then the veterinarian technically then is obviously earning just the paycheck but working as a veterinarian and then they own the equity in just their hospital or in the entire organization?

steve-thomas
Steve Thomas

Just their hospital.

Ivan-Zak
Dr. Ivan Zak

Okay, that makes sense.

steve-thomas
Steve Thomas

Although, we have several veterinarians that have multiple locations, so they’ll have done one of these projects with their practices and they like it and enjoy the business aspect, so we’ll add on another one or two in the same type market or close by market and then they’ve got multiple practices that they have ownership in and partnered with us.

Ryan Leech, Director of Sales
Ryan Leech

You were talking about when it comes time and I think the idea of finding the talent to bring to the location is a really smart idea because that’s one of the things we’re always talking about, there’s – I’ll take Ivan’s line but there’s more pets than vets and keeps getting worse and worse each year with people having more and more animals there.

You have the opportunity, right? To bring in debt or have you looked to go in the private equity route, how do you guys decide when you’re looking to buy on private equity versus a traditional debt model?

steve-thomas
Steve Thomas

We’ve deliberately not tried to raise private equity money, a lot of that is – I think they’d be interested and get called on all the time but I don’t know if they know enough to know if they’d really be interested or not. We’re pretty long-term focused so we don’t like the idea and maybe it would be fine but I don’t like the idea and theory of kind of fitting into a five-to-seven-year timeline where you’re growing and kind of managing for an exit. Our veterinary partner’s loans are typically 10 years of amortization straight so we tell our veterinary partners, “Look, I’m not going to make you sign a 10-year contract but you’re borrowing a 10-year loan.”

We kind of expect, this is – to go into this is a 10-year, at least a 10-year agreement and probably longer. Really, we hope that we’re in business together for the rest of our careers. We really focus mostly on debt financing.

Ryan Leech, Director of Sales
Ryan Leech

That is unique because as I was looking at your LinkedIn and some of your background, that was really interesting to see how long you’ve been in the space. It’s different, a lot of our – a lot of the people that we have on the show have been with their groups for three years, two years, just starting. It is neat to chat with someone that’s been in the similar space for a good amount of time.

Ivan-Zak
Dr. Ivan Zak

I think that the key behind here and this is what’s interesting is because a lot of these consolidators, the younger consolidators right now, especially back by PE because PE thesis is to turn the capital around pretty quickly and then that’s why the promise of a long-term partnership is not really happening there and that’s what we’ve been sort of looking at and then you truly can present that as your thesis because you have a completely different structure.

Did you find that closing some of these deals and partner up with the veterinarians actually helped because you explained this concept? Or do veterinarians now understand that this is a private equity borrowed money, this is the debt and then therefore, there is truly long-term partnership, or you find that veterinarians are still sort of not very fluent on the topic?

steve-thomas
Steve Thomas

As far as veterinarians selling their practice?

Ivan-Zak
Dr. Ivan Zak

Well, mostly probably buying with you because what we find sometimes gets sort of a “gotcha” kind of effect is that when someone is selling partially their practice to a private equity-backed partner, they would say that it’s for the long term and you know, we’re partnering up, we want to build the future and then in three years, they recap, they exit, get their money and then everything changes.

Even if these guys truly didn’t change anything, it will change everything with the new owner, so that’s what sort of is happening, and do you find that the vets can actually parse the difference when you explain it to them?

steve-thomas
Steve Thomas

Yeah, they’re extreme – I don’t want to generalize but as whole extremely intelligent individuals and profession. They know what’s going on and it’s a very frequent question I get asked, “Who owns the company, and what are your plans?” Very frequently, I get veterinarians and are asking, “Are you going to just go sell in five years or three years?” because really, our target partner, that’s not what they want. They want a good partnership with us and we meet a lot after getting to know each other, it’s not the right thing.

They do want a quick flip and make some money in five years or they don’t feel they need us, they can do it on their own. Those are all legitimate other avenues they could take and we’ve been fortunate enough to find some really good partners and see eye-to-eye with us and we’ve been doing this for five years now with partners and the majority of our hospitals have partners, it’s gone really well. It’s been a really nice relationship, we get them together, we’re kind of in a smaller geographical area.

We have partner meetings, we have partner development initiatives, we have monthly Zooms based on some management books to try to learn form each other and be more professional in the way we approach business in our people.

Ivan-Zak
Dr. Ivan Zak

Interesting. I assume that your model evolved a little bit in the 14 years, right? This sort of partnership as you said, five years. What was it in the beginning and how do you transform in this and where do you find benefits of partnering rather than the way you were running it before?

steve-thomas
Steve Thomas

Yeah, we started purchasing them outright, like I guess the traditional consolidator model, we did fine, although probably I guess I said, we struggled a little bit, we probably bought practices that needed more work than we were expecting and it’s management intensive, especially if you only buy a few and you don’t have a leader veterinarian remaining on to help you push forward.

We found ourselves struggling to recruit and found ourselves with some practices that were underperforming and then we actually had our first partners approach us and say, “Hey, we’ve heard about you and met some mutual colleagues, would you be interested in doing a partnership?” We’d consider ourselves very flexible so that’s when we evaluated the opportunity with them and we ended up partnering with them and it went really well and then we recruited another veterinarian for a hard to place location, kind of dangling this partnership model with her and she ended up not liking that location but liked the model.

She said, “Hey, here’s where I’d like to live, would you consider looking for a practice in this area?” and I said, “Sure,” so then we went to the area. We look for both de-novos and acquisitions and we found an acquisition and bought it together, and then after doing that, we realized, “Well, if we are doing this for business development and growth initiatives, it’s only fair that we would go to some of our existing leaders that are at practices we hold holy and we offer them the opportunity to partner” and we did that.

Then we found two or three of our existing veterinarians were interested so they bought into the existing practices and then other practices we’ve [inaudible 0:10:53.9] as we start to recruit, we start to recruit veterinarians with the eye with them that didn’t have to want to be a partner but it was working both for us. If we found somebody we intended to find veterinarians interested in partnering in existing practices. It’s kind of how it’s evolved.

You know, a little bit of tough part is dilation intended for our partners to be able to use their portion of ownership to pay off their loan and to do that, it kind of caps the value you can put on it. If you are going to pay out over 10 years, you can only price it so high so that they don’t have to go into their personal income. That is another reason why it may not be as attractive to the sponsor world or the private equity world because there’s kind of a ceiling on the price. If you are going to continue to hold that philosophy that they’re going to pay off a loan in 10 years and not have to go into the person.

Ryan Leech, Director of Sales
Ryan Leech

It’s pretty cool the way that you are speaking about it. It’s different than the last stuff that we have heard and one of the things that I liked on your website, which is the vetspets.com, I always like to give people a plug, but I thought it was really neat. There’s a lot of the traditional websites and consolidation, a lot of the groups talk about people first and all of that but I think you guys are maybe one of the firsts that I have come across that really highlights the word entrepreneur, which is exactly what these veterinarians are getting into and in the joint venture space.

I think that is pretty neat to be able to be candid about some of the business language around veterinary consolidation or veterinary partnerships. That is something that’s not normally seen out there and I think that’s a really cool differentiator for what you guys have.

steve-thomas
Steve Thomas

I appreciate that. We think so too. There are certainly challenges and negatives to it and if you want a traditional private equity type of growth, pretty hard to do. You know, we were fairly – we don’t have a stamp, don’t do the things the same way or replace. It takes time to create value versus buy it. We don’t grow as quickly as they do, so we’re probably limited in the size we would ever get but we’re okay with that. We’d rather be hopefully as great operators as we can be, you know grow at a nice clip but to be able to operate that we want to operate.

Ivan-Zak
Dr. Ivan Zak

That makes sense and you mentioned about building versus buying. Did you guys dabble in trying to start de-novos and what does that look like? And did you find the difference one better than the other or they’re just a part of an overall structure for you?

steve-thomas
Steve Thomas

Yeah, we’ve done several. Let’s see, one, two, three – so we’ve got five-ish de-novos. They’ve all been different. The obvious benefit is you have no legacy culture, you got to create it from the start. That’s really nice and you know, a lot of times we don’t have a strong preference. They’re both good, the way we’d approach it now is when we find a veterinarian we feel like we want to partner with. You know we will evaluate both, we’re doing it right. We’re doing this right now.

You know we’ve approached practices to acquire, we’ve also been looking at spaces to do a de-novo and through that process, our veterinary partners working with us in that process and learning the differences between both and they have a preference. I think he prefers to do a de-novo after seeing kind of what can come from an acquisition. In today’s market, I think you can be successful in either one just because of the demand for our services is high. There’s pros and cons to both.

Ivan-Zak
Dr. Ivan Zak

The economics behind de-novo from what I understand are a little better even though you are starting fresh but then, A, you’re not getting this legacy culture and you establish your own, and then also, you’re sort of— you’re out of pocket a couple of million dollars for your practice but you’re anywhere between 250 and three or 400 to start the new one.

steve-thomas
Steve Thomas

That’s right. It’s gotten more expensive, the construction costs are outrageous. You know, our de-novos typically run about a half a million to fit up a lease space around 2,500 square feet in the store front and then you got a lease on top of that, but you’re right, the upfront capital of half a million dollars typically, and then operating losses will vary depending on how quickly you ramp, and the salary commands or needs of the veterinarian.

Now, if you are buying a practice, you all probably know what multiples of that these days. I mean if you are buying a large practice, you’re probably paying two times sales or close to it and that’s – it actually can be fine so long as it continues to grow but it is just a whole lot more cap.

Ivan-Zak
Dr. Ivan Zak

Yeah, absolutely.

Ryan Leech, Director of Sales
Ryan Leech

But finding the talent before finding the location, you sort of flip that around a little bit, which is unique. It’s similar to some of the things we’ve seen or some of the franchise models that we’ve spoken to that are doing pure de-novo. It is a cool way to look at it and I think it’s an interesting idea for everyone that listens to look at that. We always talk about the consolidation, is an acqui-hire or a talent acquisition and you’re acquiring the talent and partnering with them. That’s a really cool idea.

I know we’re getting close on our time so I want to ask you one question and then ask some of our normal questions here, but where would you put your long-term focus? You guys have been together and doing this for quite a few years, where do you see the Vets Pets five years from now and where do you want to see it even beyond that?

steve-thomas
Steve Thomas

We want to continue the growth trajectory of a 20 to 25% annual sales growth indefinitely, so 10 years like that, how that looks and that’s just so far out. You know, having been in this for 14 years to be able to say it’s going to look like A, B or C is pretty difficult. You know, we try to be nimble to respond to market opportunities and market demands but that growth rate we’d been able to do that so we think that it’s been an achievable growth rate.

Our big focus though is really to be able to grow operational initiatives that will help our existing practices improve at a rate greater than we are growing exterior. We want to grow what we got quicker than we’re growing by acquisition or startup, so we don’t just want to move on to the next deal. We want to grow the foundation. We are really seeing the importance of that and our big focus is on people development like everybody and then also a client experience. Those are our two big focuses now.

Ivan-Zak
Dr. Ivan Zak

I know that you mentioned that you are targeting sales growth but that obviously depends on the expenses you run with it. Just like you said, the acquisitions would probably require capital expenditure, and then technically it would grow sales but the same-store sort of purchases is what you are looking at. Just maybe a quick question before we round up, what are those areas that you guys are focusing on to exploit especially when you’re starting a sort of practice?

What are those thesis like one, two, three, or maybe four things that you are thinking, “We’re good at this” maybe it’s a cogs management, maybe it’s maximizing efficiency in the front? Is there any sort of golden nuggets that you are looking for in practice when you’re buying it that are synergistic to your thesis or is this sort of a little bit of everything?

steve-thomas
Steve Thomas

It’s a little bit of everything. I wish that we found a silver bullet that we could just go in and flip the switch and tweak some margin on cost or apply some lean principles and gain efficiency. You know, we have incremental benefit in those areas but I think really, probably what our biggest benefit is, is being closer geographically we can leverage our management a little bit easier than if you – I think maybe not but for us it works well to leverage management across sites and share ideas and resources and then also, there are some strategic areas.

Again being close, if you have a practice that is slower, you know you could probably close for a day and then transfer phones over to another close location as long as they are friendly, which ours typically are and move the business so that you are not technically closed. You could share resources in that way or if you are very busy in one location then your capacity can strain, you can do the same thing. You can start to move clients over to another location that’s nearby. It allows you to maybe leverage some assets outside of existing four walls and with practice.

Ivan-Zak
Dr. Ivan Zak

That makes sense. Well, we ran through 20 minutes pretty quickly, so that is usually what we promise to our listeners. We always ask two questions at the end, they are pretty similar so, is there a book that you read or maybe a YouTube video or something that you would recommend to our listeners to kind of tap into your wisdom and how did you get there? Is there any book that you would recommend?

steve-thomas
Steve Thomas

There’s several, they all are similar. The one I thought of is Shoe Dog, which is Phil Knight’s, I don’t know if that is called a biography but it is a summary of his journey in Nike, you know from startup to – I think from startup to going public and talk about some resilience and dealing with just whatever comes your way. It’s an amazing story, so that’s what I gain from that book. It’s an easy read and quite enjoyable.

Ryan Leech, Director of Sales
Ryan Leech

Yeah, it is a good one. The final question, who would you like to recommend as an interesting guest on the show with us?

steve-thomas
Steve Thomas

I recommend Mike Cooper with Shore Capital. I think he was the partner that led the financing for both Southern Vet Partners and I think it was Midwestern, now it’s Mission that partners and tremendously successful. If he’d be one to come on or interested, I would enjoy listening to him. I have met him, he’s a great guy. I met him very early on in his journey so I’d love to hear what all they’ve done and how they approach these things and these are the opposite side of the structure and they’ve grown two platforms to a very large size and they have a very good reputation.

Ryan Leech, Director of Sales
Ryan Leech

Fantastic. Well, as always, thank you. We always enjoy having guests and people that can bring different views for us. Ivan, thank you as well. Thank you for joining us and thank you, everyone, for listening.

steve-thomas
Steve Thomas

Yeah, thanks a bunch. I appreciate the time, I enjoyed talking to you.

Ryan Leech, Director of Sales
Ryan Leech

Cheers.