Dr. Ivan Zak and Ryan Leech discuss the safest methods for consolidators to implement post-acquisition changes in clinics and ultimately empower the practice team to live their passion.
Welcome to consolidate that. Ryan, how are you today?
I am doing really well. How are you, Ivan?
Pretty good. We had lots of snow and with rain on top of it. So, Canada at its best.
You know, you gotta go south of that border and come down here where it’s the sun’s out, it’s warm, it’s beautiful. Today’s going to be fun though. Cause we have had guests the past couple of episodes that we’ve recorded and it’s going to be nice for us just to get back to the original gang and spend a little time chatting about some things. So, I’m excited to talk to you today.
Agree. So what do we want to talk about today?
I want to talk about the idea of whether or not practices can stay untouched and how that’s going to fit within the value creation plans of different consolidators. So a lot of consolidators say that they’re not going to be changing anything when they buy them. And some of them been real successful at that.
And is that possible? Is it true? Are they able to actually do those things?
Well, I think it depends on what are you articulating behind “We’re not going to change anything”. You know, I think that when you’re going and talking to practice and say “Okay, we want you do you, we’ll not going to change the brand. We’re not going to change the title of the clinic. You’re not going to have to wear a uniform”. Do we talk about all the processes? Do we talk about how is it going to work on the team? So I think it’s all about the partnership model and this strategy that you’re following and if you’re consistent with it.
Okay. So let me run through my brain here of the different possible models. You have de novo. So starting brand new clinics. You have brand building, I think, that’s the term that you and I like to use for starting a new brand and growing that. You have franchising. You have a full, a hundred percent ownership of the purchased and acquired practice by the corporate group.
Then you have the partnership, which is a partial partnership, maybe 60% to 80% ownership by the original and former owners. So, which one of those types would be able to be untouched and work within that aspect?
Well, I think there’s a mixture. So, some of these things, you know, like a franchise, that really articulates that you should be using certain processes, certain vendors, and things like that.
But there’s a gray area in those that are fully acquired. Fully acquired could be with the owner stain. Fully acquired could be with the owner, is sort of phased out in the first year or a couple of years. And then those partial acquisitions, they’re also kind of a gray area because, you know, they could be acquired and then the promise is that we’re going to improve your margins were going to improve your EBITDA, your revenue, and all of these things, but you’re going to stay on touch. So, that one usually confuses me cause you were saying that we’re going to help you with all of this stuff, but nothing’s going to change.
So, my next question would be that, “Well, how are you going to do that?”. But again, the most important thing I think for the seller pre- and post-acquisition, is that what you heard? From the organization, pre-acquisition that it stays the same with what they do after the acquisition. I think that’s the most important.
Great. So, for the rest of the episode, we’re going to be talking mostly about that 100% percent ownership by the corporate group and then the partial ownership. The idea that the consolidation has been really growing and it’s been evolving. What do you think the ownership levels and then that change portion is going to look like over the next five years?
So, you know, I think it’s worthwhile to look back at what happened in the last 10, 20 years and just compare different regions. If you look at Europe, which is, we know that that’s been crazily consolidating, and right now is North of 60%. And then in North America, we see about 20%. And so, if we are going to be at the same level where Europe is there’s a 40% window that is still going to rapidly consolidate the clinics. Now, what we see in Europe is that now arbitrage is not the only game that they have to play because right now for the next 40%, it’s really about buying the clinics and you’re looking more at the private equity firms investing into the domain.
But as these smaller consolidators are looking to create the return on investment for private equity within their sort of three to five-year window. Then the home office capital is sort of taking over and then they’re left with truly improving that margin through operational efficiency. So the character of what’s going on will change. So with those that are acquired to just be flipped in the next three to five years – yes, this intermittent owner for that period of time may keep their promise, if the only thing they will do, they will buy the clinic plugin financial, HR, benefits, gain the efficiencies on all of those processes and then not touch the clinic, and then flip it to the next consolidator, and then the change needs to happen there. So, in their message, they will probably stay true to their strategy, but for the most part that doesn’t happen. A lot of them are buying the clinics and then on to its sort of second/third year of the organization they understand that arbitrage was one side of it, but then they want it to increase EBITDA. And how do you do that?
While the most common ones are sort of managed the cogs, inventory, vendor management, and your marketing to increase the top line. Well, that’s a change. So, those are the changes that are coming down the line. And then someone says, “Oh, let’s, let’s make PIMS the same because we can’t get the data from it”.
Well, that’s a huge change. So we know a couple of consolidators that are really large, that started with that message, and then halfway the message change. And there’s nothing more frustrating to the seller when they sold it on one sort of narrative, they gave that narrative to their team and then they promise, they said, “We’re being acquired. I’m going to retire in 5-10 years, but nothing’s going to change. You gotta be all great guys!”. And then a year later, the financial system changes three times, then the PIMS are changing, then the labs are changing, and then the owner stays there and he has to face these people that promise no change, but the change is happening.
So that’s why I’m putting emphasis on what you have to stay within the narrative that you provided during the acquisition.
Yeah. I could only imagine how hard that is. I mean, just thinking about the lack of wanting to change things in your daily life, in a non-integrated or consolidated business, it would definitely be difficult as you’re growing and work with a lot of different ones.
So, would you say that the whole idea just comes down to how people go about and look at their change management structure? Or is there more to that?
Well, change management is the big component of it, but I want to go to sort of my favorite topic of burnout and think about what happens through that transition and how that deceiving message influences people.
Because when private equity is buying the hospitals and when the message changes, let’s say if nothing changes and those vets that they bought the clinic with are staying, but if you had two associates and one goes, “Look, you promised me nothing will change. They changed the PIMS I hate this new thing, whatever it is, and that I’m going to work for someone else”.
So, now all of a sudden, you don’t just improve efficiencies and operational, and everything else that is associated with that. But now you just lost the entire producer. And that’s a huge impact. So, think about the burnout triggers, we talked about it in the past, and there’s sort of six classic by Christina Maslach.
So think of a lack of control is a sort of one of them. So, you just sold your practice. You handed off your team and then you can’t do anything, but the corporate is now pushing the change and they’re saying, “Well, you know, we bought a hundred percent of your practice. We are controlling everything. So this is what we’re going to do”. And then you don’t have control over that.
The other situation is when the owners are retaining a large portion of the equity in the hospital, and it sounds like a really nice promise to the veterinarian because everything that will be the arbitrage, as well as the efficiencies they’re incentivized. But then when the corporate comes with a change, they go, “Look, I’m almost equal partner of yours and go, you know, go hike. I’m not going to do this change in my hospital”. And that happens. We’ve heard this before. So, that’s a lack of control, change in values. So the team now transitioned and then you are now looking at new core values that came from the organization. You can just adopt them. Your team is different. Then insufficient reward, because they drop all of these new processes through change, and then people feel like they are taken for granted for doing more work, but not being paid less because we’re using the economies of scale and trying to, you know, to trim the non-vet labor. And then the work overload, of course, that’s coming with that. And then unfairness as well as the breakdown of community, because there’s no feedback loop back to the corporate. You used to give feedback to your practice owners. And those are all six classic triggers of burnout that you will see with this sort of no change. And then rapid change.
Definitely. It comes to a lot of those ideas there that people are expecting one thing, you pull the rug out from under them, and then it’s very very difficult. And then once that burnout starts to happen, I know, you’ve done some great research on it, but it’s hard to reverse that. It’s something that once the ball starts rolling downhill on a lot of those things and people lose that trust or that confidence in the place that they’re working, it’s really difficult to win them back over. I know we were talking, we always think of different books that we’re going to recommend, and we were talking about one, which was Start With Why by Simon Sinek, which I think was good, but I think I’m going to switch up my recommendation to How to Win Friends and Influence People by Dale Carnegie.
Interesting one. And that’s an oldie.
That’s a very oldie. But, you know what? They stick around for a reason.
And I think that might be part of it, right? People need to feel really comfortable with whether it’s depending on the size of your group, but if it’s the executive or the BD people that are making those first contacts, knowing that they’re going to be able to be confident in what they’re saying. Cause that’s those ideas and we talk about the value creation plan. Those ideas need to be really-really strategic and understood by all people in the organization. So that the BD person isn’t approaching a clinic to talk about purchasing them and then telling them nothing changes, getting them through the strategic filter, and then getting to the point where the executives are purchasing them. And then they’re ready to change a bunch of stuff.
So what would be the main process that you would put in place to, let’s say, you’re a huge group and you’ve 5, 10, 15 years down the road with dozens and hundreds of clinics? And now you’re realizing that it’s time to start changing some things and putting in place things that maybe are different than what you had originally thought.
Yep, and I want to answer that, but I want to touch on what you mentioned there. When the BD is given the message that is different from what’s going to happen. And that is very important. We talked about the upstream and how it influences the downstream. That’s the exact break between the two departments. And when you are growing really fast and the message that the BD is delivering, just to get incentivized by the EBITDA that they acquire, they don’t really look at what’s happening downstream in the integration and change management process. This is where the whole breakdown of trust is happening.
And I liked that you went into, you know, what, what’s going to happen with these clinics. And what comes to mind, what you mentioned before is changed management. And, you know, there are various books and courses and everything about change management. And I heard people, you know, writing songs to change things, making t-shirts let’s breathe. Let’s introduce this process.
You know, we were in one of the universities, we were putting Smart Flow in and they had this whole, like in PIMS change, it was all, you know, textbook change management thing, like literally invested into, one of them invested into creating a song about the management change management that they do.
Do you want to sing it? Do you remember it? You could sing it for us.
I don’t know the lyrics and it would be awesome. I think that change management is sort of the outdated way to approach it. And it’s not that you shouldn’t use the strategies that are included, you know, early wins, the change agents, the celebrations, all of those steps are important and then inform early, make it visual. But, if you nurture the culture of continuous improvement, that radically changes how you approach these things. And what I mean by that is, you know, that comes from lean. And we’ve seen a lot of that when we’ve traveled to human hospitals that implemented lean. The culture of continuous improvement is a part of the lean thinking.
a) You, you respect the people that do the work. So you actually listening to actual care providers rather than pushing the change from top-down. And you’re giving people not the solutions, but the problems that they need to solve. And then you’re asking for their feedback on that.
But then when you’re allowing people to optimize things around their place of work, which they are the specialist in, don’t tell the vets how to do vet job. And then when they get into the mode of inventing their own continuous change, that creates an environment in which people are looking for a change.
It’s not that they’re ready for change, but they’re looking for a change. And that completely flips the model and makes it really agile company. And then to your question about what’s going to happen, you know, there’s, there’s quite a few of the consolidators and a couple of really large ones that went on the premise of buying hospitals with no change. And what they probably are resulting in is the lower EBITDA than is in the clinics that just ripped the guts out and then replaced the PIMS, the lab equipment.
And then they changed wellness plans, everything altogether. And those are probably more successful. But the sellers now can select from different buyers. It wasn’t just like, you know, VCA, Banfield, and NVA, just three. Now there’s 47 of them and that’s today, and maybe it changed from a couple of weeks ago that we checked that.
So sellers now are looking for, where do I want to be? And this is where upfront you need to not only say that we’re not going to change anything or we’re going to improve your back-office processes. How, how are you going to do that? Or we’re going to take care of veterinarians. How do you measure that?
Show me how your organization measures that at the top of the organization, that you balanced scorecard level. Not just your EBITDA revenue on the financial metrics, but how are you measuring the experience of the employees or how you’re measuring the experience of the customers? So, you know, the Veterinary Emergency Group, David is awesome because they grew the entire culture based on the customer service and NPS of the entire organization is at that top of their, you know, balanced scorecard. That’s the number that they’re looking at. So when you’re selling the practice or for those sellers that are listening here. When you were selling the practice and the group says, we’re all about people, just ask, how do you measure that? And my favorite actually is another one is when the organization says that our people love our group.
You know, everybody who works here, it feels like they are in the family. My sort of the, you know, it’s my test is to ask a veterinarian for many groups and say, “Where do you work?”. And if you get the answer, “I work in the Riverside Animal Hospital”. They don’t say, “I work at Banfield”, or NVA, or VCA, or Rarebreed, or whatever consolidator it is.
That means that they value the values of that hospital. And they understand that they work in that group. But if they answer, I work for, you know, these bigger guys or the actual group, then you got your culture right and then they love you. They respect you and they want to work there.
Yeah. I never, I never really thought about that.
But when you are at a conference or something like that, you can tell there are people walking around and you’re thinking, man, a lot of these people work for VCA, but a lot of them probably work for another really large group or something else. That maybe they’re thinking, yeah, I’m still with the Mocking Bird South Texas Clinic or whatever it named, but that’s pretty cool.
I think it’s neat to think about the continuous improvement and the way that works, but going back to the idea of touch vs untouched, I think if you were just coming in fresh from never speaking to veterinarians, or if you were to just try and go about this with being a little shy or scared to shake things up.
A lot of veterinarians might say, “Well, I want to work with a consolidator that doesn’t touch anything. I want to go somewhere where it’s untouched and I can keep doing what I want”. And it’s this infusion of capital and maybe a weight off your shoulder to worry about payroll, but perhaps the idea of investigating further. And if consolidators as a group can get better about vocalizing what they are going to change and how they’re going to change it with the real strategic and cultural assessment, that would probably be pretty nice too, because people would then say, “We are going to change things. We’re going to be touching the way that your business works, but here’s why, and here are the successes. And here’s the team that we have. And here’s the buy-in that we want from you”. It’s not just a top-down approach. So it’s cool. I think people will probably hopefully when they listened to this, but on both the veterinary side and the practice level side and the consolidation side, we’ll find some value in maybe being additionally transparent about their goals on each side, when they’re negotiating and discussing the businesses.
Yeah. Basically, be specific. If you’re a seller, you know, be specific. You’re not going to touch our practice, what exactly does that mean? How do you measure success if you’re not going to change anything, or if you’re going to improve the back office, what are you changing?
And then, for how long? Because if it is a short cycle PE firm, then, you know, three to five years and if you plan to practice for another 10, the ownership will change and nobody will ask you at that time if they’re going to change or not change. So yeah, I think there’ll be a cool episode for some of them to listen to.
And I think that that was a great question, Ryan. So I was happy to chat with you about that.
Well, I appreciate it, Ivan. And I think our next episode, we’ve got some fun guests and again, people that are listening we’ve got two book recommendations today. Start With Why by Simon Sinek, and then How to Win Friends and Influence People by Dale Carnegie.
So the Dale Carnegie one, you might have to get a newspaper print because it’s so old.
From the library.
From the library, yeah. Ask your great grandfather if he has it, but it’s a good one. So, well, Ivan, thanks again. And thank you to everyone for listening. This was a fun episode today.
Thanks, Ryan. See you next week.