Special – Piece of the Pie: Incentivizing Veterinarians Through Partnership

1h 5min
Season 1
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In our special episode of the Consolidate That!, Dr. Beth Davidow, Clinical Assistant Professor at Washington State University, and Dr. Karen Felsted, CPA, Founder and consultant at PantheraT, join Dr. Ivan Zak to discuss the evolution of partnership models and how sellers can get the best terms for themselves and their employees.

Topics discussed:

  • Different partnership models and their pros and cons
  • Ways to increase practice valuation
  • When it’s a good time to sell a practice
  • Things you have to ask the buyer
  • What effect does acquisition have on the team

Helpful links:

Speakers

Beth Davidow is an Assistant Professor at Washington State University and Consultant at VIN. She also blogs The Veterinary Idealist, where she covers essential topics in the industry. Beth worked in many types of veterinary practices and held almost every position, including kennel, reception, assistant, associate, emergency doctor, criticalist, medical director, and owner. In 2003, she co-founded the first 24/7 multi-specialty hospital and community blood bank, which grew to two locations and 150 staff and then was merged and sold. Since 2002, Beth has been a consultant for the Veterinary Information Network (VIN). From 2017–2019, she was the vice president of the American College of Veterinary Emergency Critical Care and is now the president-elect of the organization.

Transcript

Ivan-Zak
Dr. Ivan Zak

Okay, so we are live. Excellent. Thank you everybody for joining today. It’s an interesting topic today and it’s very timely on our vibrant market. Today’s webinar is dedicated to partnership models in consolidation and I’m happy to introduce two of our speakers.
So Dr. Beth Davidow, an assistant professor at Washington State University and a consultant at the Veterinary Information Network. She also blogs at the Veterinary Idealist blog. Beth, can you introduce yourself?

Beth Daviodow
Dr. Beth Davidow

Yes. Thank you, Ivan. Thanks for having me today. Previously I was actually a practice owner and owned two multi-specialty hospitals in Seattle, Washington. Practices joined Blue Pearl, so I’ve got some experience with both partnerships and also some of the stuff that’s going on in the market.

Ivan-Zak
Dr. Ivan Zak

Excellent. Thank you for that. And then we have Dr. Karen Felsted. She’s a founder and the consultant of the PantheraT company. She’s a CPA and an expert in veterinary economics. Karen, why don’t you introduce yourself?

Karen Felsted
Dr. Karen Felsted

Happy to. I’m a CPA and a veterinarian and I practiced for a number of years. So I work now with practices, helping them on any aspect financially of their practice. Particularly in the last year or so, most of the work that I’ve been doing has to do with practice transitions, particularly the sale of practices, very often to corporate groups. So I’m familiar with partnership models out there, and some of the things that people need to think about when they’re thinking about selling.

Ivan-Zak
Dr. Ivan Zak

Excellent. Thank you for that. And we’re going to review a couple slides before we dive into the conversation. I’m going to share that in a second here, and we’re just going to talk about a couple statistics that we found recently.

There are some trends with consolidation that have been rampant and crazy last year, and especially right now, when some news is coming with the company’s IPO. And the multiples are crazy.

There were about a thousand practices actually acquired last year, which is almost a 50% increase over 2019. And if you think about the situation with the world and everything that’s been going on, nothing slowed down this particular process. So many practices will be on the market in 2021. And it’s just accelerating.

Brakke Consulting expects that we’ll be about 25% consolidated as an industry in North America in the next year. And the corporate practices will represent about 50% of the volume of cases that are seen by the vets.
Brakke slides

There are over 50 consolidators on the North American market right now. I think there’s 65 global, and it’s been a very frothy environment and they pop. Every other week you see a new consolidator coming supposedly with a new thesis.

We also know that independent practice is approached by 40 to 50 brokers on a daily basis trying to acquire practice. Essentially that’s another business that’s evolved from that. So we set out the stage and start our discussion with that.

The sellers they’re now becoming more picky. Do you remember the times when being first was Banfield? It was a one corporation, and then VCA came with their model and they had a hundred percent acquisition, where they do a lot of changes and things like that. Models evolved.

Then further we’ve seen other models where there’s retention and some of the equity, so sellers become picky, which they should as it’s the professionals that build these businesses for their entire career. And for a lot of them selling their practice is a life event. So one of the things that they need to discover along the way is what is the value of the practice. Karen since you’re dealing with this on a daily basis, can you tell us how it works and can it be increased in any way for the seller?

Karen Felsted
Dr. Karen Felsted

Sure. We could talk about practice valuation for a solid day, and I think that’s more information than anybody wants. But there are just a couple of key points here.

One practice valuation is largely driven by the profits or the EBITDA of the practice. And that’s just essentially what’s left over after all of the normal necessary expenses of a practice are paid. And then the profit level is converted into a value via the use of a multiple. And I think that multiples are a really interesting topic right now. So if you have profits of $100,000 and a multiple of 5, then your practice is worth $500,000. But what’s really interesting now, there is such a difference in the kinds of markets out there. If you’re going to sell to an individual veterinarian, your multiple probably is in the range of 5, but if you’re selling to a corporate group, your multiples range from 4 to 22. 

So the corporate multiples tend to be much higher, which really means for a certain level of profitability, assuming you’re a decent practice that a corporate group is going to want and they do have certain parameters, you’ll probably get more for the same amount of profitability.

The answer to the second part of your question about improving profitability is absolutely yes. Some of it is by improved value, some of it is by improved profitability: if you can reduce your cost of goods sold, if you can use your team members more efficiently, if you can bring more clients in and your veterinarians are more productive. 

There are some intangible things that you can work on in your practice as well, that would influence the value of it: if you have a more stable workforce, if you have a well-trained team, if you have good managers in your practice, if you’ve got a great marketing campaign, if you’re very well thought of in the community, if you have a great facility. So there’s lots of things that practice can do to improve their value and their profitability.

Ivan-Zak
Dr. Ivan Zak

That makes sense. And I have the next question: is it a good time right now to sell a practice? 

As you said, there’s such a difference between the corporate… Are we in the bubble? Some people say that it is inflating to the multiples. I mean, 22 is now astronomical to someone who sold it. So is that a good time to sell a practice or not? And this is just for the entire industry. You can tell them right now and they’ll do what you say. No pressure.

Karen Felsted
Dr. Karen Felsted

I think it’s a great time to sell now, if you’re thinking of selling in the next five years. If you’re 40 and you’re going to practice for the next 20 or 25 years, and you don’t really have an alternate plan in place, no, it probably doesn’t make sense to sell now because you’ll make as much money continuing to practice, assuming you’re doing well on the practice and then you’ll still be able to sell it at the end. If you’re thinking of selling in the next couple of years, yeah, I would certainly start looking. 

I think the bubble question is really interesting and I’m not sure any of us have perfect crystal balls here. I think we are in a bubble. And the big question is how big is that bubble? How long is that bubble going to last, right? I don’t know.

Ivan-Zak
Dr. Ivan Zak

Yeah. So with that, Beth, question to you. Karen mentioned a couple of things there that if you’re planning to practice continuously, there are models that allow you to continue practicing after acquisition. So what are the different partnership models that you see today? You sold your practices. Were they available then? And whether you wish they were, if you can open up on that a little bit. 

Beth Daviodow
Dr. Beth Davidow

Yeah, I guess I would say a couple of things. You know, one of the things you talked a little bit about 25% of the market being kind of owned by consolidators right now. I think we have to talk a little bit about the difference between primary care practices and specialty practices. 

The specialty market is 75 to 80% consolidated. It is way farther along on that road. And I think that makes it very very different in terms of both what it’s like to be a veterinarian, what it means to finish, what is that gonna mean for the profession?

When we made the decision to sell our practice, we were cold called by lots of different people saying, we want to buy your practice. We were originally not thinking about selling, but we were at a point where we had two locations and we needed a third location. My partner was 15 years older than me and wanted to retire and I could not by myself afford to both buy her out and to build a new facility. And so what I was looking for was actually a different partner and the partners in my practice we had really aimed to sell our practice to our associates. We had actually offered up 20% of our practice for sale to our associates and had only managed to sell 6% to two associates. So we did have four partners. But we didn’t have a way internally to have partners buy out my main other partner. We were looking for different partners.

I think there were a lot of things that were out there. So private equity was out there and a bunch of different private equity people called us. And what we ended up doing is at that point, Blue Pearl was actually owned by 80 veterinary shareholders. And the model at that point was that all the founders were still in as owners running a group practice all together. I was fairly young and my goal was to stay, run my practice, but with partnership. And so that was the original model of Blue Pearl. 

And I think that’s a really intriguing model. The problem is, again you end up in these situations where on a bigger scale, it’s also they ended up with the same problem. We, on a low scale, ran up with, you have these people who started these practices, the practices grown exponentially, and then nobody who comes in later can afford to buy them out. I think it’s an industry-wise transition problem. They ended up getting private equity money and then eventually sold to Mars so nobody’s owners anymore. And that changes your motivation and what it feels like to work there. 

Ivan-Zak
Dr. Ivan Zak

Yeah, that makes complete sense. And I picked up when you said 75 to 80% of the specialty practices, you’re absolutely right. The number is higher. I’m wondering about yesterday’s news about another acquisition – the “Ethos” was acquired by NVA. So that’s the new number there.

Beth Daviodow
Dr. Beth Davidow

Yeah. And they recently bought SAGE as well. We are now at the point where we really have four major players, I guess, on the specialty side. We have a Pathway that owns over 80 practices. We have Mars, a single family, who owns just an enormous number of specialty practices. And then we also have NVA Compassion-First, which is owned by a German family that owns a great deal. The only veterinary group is MedVet and they only own about 30 practices. 

Ivan-Zak
Dr. Ivan Zak

Yeah, exactly. There are currently 50 consolidators shopping for practices in North America and the overwhelming majority of them are run by non-vets. That was an interesting thing that we bumped into. And as you said, you were exiting into the shareholder community, which would contribute with their ideas and the management and the know-how of the veterinary domain. But do you think if there were more vets in the leadership positions, consolidation would be more attractive as an employer? Or what are your thoughts on these, guys? Jump in. 

Karen Felsted
Dr. Karen Felsted

I think having more veterinarians makes sense, but a lot of that is “Are the veterinarians just figureheads or are they genuinely involved in making a difference in the practice”? I mean, I’ve seen it both ways, and not every veterinarian, who works for corporate is necessarily good at the management side of it. It’s like we routinely take technicians and make them into practice managers and they’re terrible at it. And just because a veterinarian was a good veterinarian, doesn’t necessarily mean that he or she is great at being a regional manager or business acquisition person or whatever they are. So I think it’s a little offensive to not have veterinarians involved, but a lot of it comes down to details. 

Beth Daviodow
Dr. Beth Davidow

Beth, do you have things to say?

Beth Daviodow
Dr. Beth Davidow

One thing that is interesting: there are studies on the human side that have looked at human medical centers. The practice groups on the medical side that have the best outcomes in terms of patient care outcomes, quality measurements, all of those are run with CEOs that are MDs.

And so I think some of it depends on what’s important to you and what’s your motivation. As Karen said, and it’s really important – it can’t be a figurehead. It makes a difference when your CEO is a veterinarian or an MD, not just having somebody who’s one person on the board, who’s the only veterinary voice out of eight people on the board. 

And I think what’s more important about these groups is what your “why” is. Why did the group form? And what is so concerning about so many of these groups is most of the groups right now are forming because of the multiples, because of the flip.They’re not forming with the “why” of how do we provide the best possible care to our veterinary patients? How do we improve the profession? And if our profession is going to be run entirely by groups who are only looking for finance, I think we’re going to end up in worse staff shortages and worse burnout than what we’re seeing now. 

Karen Felsted
Dr. Karen Felsted

Well, and I think at some point too, we’re going to have a client revolt. And this isn’t just a corporate thing, this is individual veterinarians as well with a lot of “I’m going to improve my profits, so I’m going to raise my fees” and we’re certainly getting price pushback now. And at some point, people start looking for options, right? And I mean, you know, part of the reason we have trouble with non-veterinary channels for the sale of drugs, is that somebody looked at that and said “Hey, we can sell that cheaper to pet owners”. And pet owners said ”for me this is a commodity, why should I spend double at my veterinary practice?”. I think there could be a lot of challenges if it becomes all about the money. 

Ivan-Zak
Dr. Ivan Zak

Can’t agree more. I like the topic of the “why” because there’s another option there that the “why” that they’re saying to these clinics when they’re buying them as one, and the “why” in the boardroom is different. Unfortunately, that’s not visible immediately, but as any strategy, when it fractures at the top, you can really see it with the time where it’s actually not what they do, that’s what they say. So this is another unfortunate part of this. Beth, you did sell to a consolidator, so what do you think is the impact of private equity and what impact it has on our industry? We touched on this a little bit, but if you can dive deeper into what it could lead to?

Beth Daviodow
Dr. Beth Davidow

Just to give people a little bit of background. So private equity is basically money set up in funds, that is a way to allow investors to invest in non publicly traded companies. There’s a lot of people who are out there who made money in the stock market, but feel like they have too much money in publicly traded funds. They’re looking for places to invest. They want to invest in other things. But the way these funds are set up is the funds really have a four- to five-year timeframe. And so they put money in and they need to get their money back out again. So it’s not permanent money. And I think the hardest thing about this money is that fund managers have a direct responsibility to improve the return on investment for the people who they are investing for. That’s where their goal is. They have no kind of obligation either to clients, to veterinarians or to pets. Their obligation really is lined up with their investors. And just because of the way it’s set up.

The other thing is  if you’re set up to make money in four years, you aren’t playing a long game on quality. You’re playing a short game on how do I maximize growth and profit margins. Partly what’s driving the acquisitions is the fastest way to grow your revenue bottom line is to buy lots of things. So you buy all these practices. If you buy 60 practices in a year, you are not paying attention to how do you operationally make things better? How do you improve the experience for your employees? And I think that that frothy acquisition and the lack of time we’re spending on operations is exactly why we have staff shortages on the specialty side right now. It is why it’s so hard to get into emergency practices. 

Ivan-Zak
Dr. Ivan Zak

Absolutely. And it’s interesting when that’s exactly what I’ve experienced, when I sold SmartFlow to IDEXX. I got to work more with consolidators and it was surprising to me because SmartFlow was such an easy sell to veterinarians. I literally had one vet say “Did you ever have “no” on the demo?”, cause everybody sees it and they go, “it makes sense” and there was no competition. But then I got into IDEXX and I started talking to executives of the consolidation. They just weren’t getting it. And I thought, why wouldn’t you get it if all vets want to use it. So then I built this pyramid of “why” behind everybody’s role in the pyramid and I started with the pet. What does a pet want? What does a pet owner want? What does the veterinarian want and what does the corporate want? Pet, pet owner and the veterinarian are really interested in the wellbeing of the pet. And then when you go to corporate, it’s exactly what you said. They’re interested in shareholder value. There is nothing wrong with that because that’s their thesis, but there is a major disconnect between the incentives and then when the shareholders are not people that are working with the pet owners and the pets, then there’s a disconnect. So I totally agree with that. 

Karen Felsted
Dr. Karen Felsted

Well, I think part of it is the short-term timeframe that we’ve discussed. But the other part, if you’re a corporate group, it’s a whole lot easier to buy 50 practices than to improve one. I mean, we’re not complex businesses, I get that from a grand scheme, but when you’re talking about a lot of people, about taking care of pets, so there’s a level of empathy in veterinary practices, that you don’t have at companies that manufacture widgets, running an individual veterinary practice well is not a completely easy thing to do. I don’t think most corporate groups are well set up to do that. And yet it’s quite easy to go out and buy a bunch of different practices. Now I do think there are some corporate groups out there who are really recognizing how difficult this is and trying to run their practices better and taking some steps to make that happen. But they focus on what’s easy. 

Ivan-Zak
Dr. Ivan Zak

It’s easy to run out of time because they have this window of opportunity that they need to turn their investment. In preparation for this webinar we recorded “What is the one thing that you would ask a consolidator”? And I mentioned, what is your investment horizon? Because if you need to return your money in three years, it doesn’t matter what you tell me when I sell my practice to you. It really is how long you going to be doing that for what you just promised to me. Cause I can promise you, I’m not going to change anything, you be you, do vet medicine and we’ll do business, but in three years they sell it to another person. And that person doesn’t make any more deal with the end seller veterinarian. They’re dealing with the corporate. So thesis changed dramatically, and I don’t have any input in that. It’s one of the questions that I would ask the buyer – how long are you here for and who’s funding you? Is it private equity? How is it structured? What is the horizon of your investment? I think that’s very important, and we’ll go back to this.

Also what influences the deal and how they proceed, I think it’s the variety of partnership models that exist out there. So what is those sort of joint venture? Karen, you deal with that probably on a daily basis. Can you tell us more about different models and the pros and cons behind them? 

Karen Felsted
Dr. Karen Felsted

I probably would divide practice sales into three groups when we’re talking corporate practice sales here, not sales to individual veterinarians. One there’s the all cash sale and you’re certainly seeing those and it may have some kind of an earn-out component. So you’ve got to continue to seek growth or whatever to get all of the purchase price. But essentially the seller veterinarian has no continued ownership. 

The second is what you mentioned is the joint venture. So the seller-veterinarian continues to own some portion of their individual practice. Usually it’s the minority position because usually the corporate group wants a majority though I’ve seen some that have been different.

The third one, and this is using the term partnership maybe a little bit more loosely, is where the seller-veterinarian has no continued ownership and their individual practice, but invests some of their purchase price money in the parent company. So he or she has X number of shares in the group of a hundred hospitals that the corporate group owns. And even a 100% sale in my mind is a partnership, depending on how you use the terms, right? 

I think you have to separate. Not every corporate group offers all of those options. I think there’s a lot of difference in the details, but at least the clients I’ve been working with, those are the three main categories that they’ve been looking at these days. 

Ivan-Zak
Dr. Ivan Zak

Interesting models. Beth, do you have an opinion on how these different models influenced the relationship post acquisition and maybe dip back into your experiences?

Beth Daviodow
Dr. Beth Davidow

I think if you’re a seller you have to think a little bit about what your goal is and what your horizon is. And again, this comes back to what Karen said about, is this a good time to practice? You could make really good money from a corporate group. And I think if I was 70 right now and 

I’d run my practice for 40 years, I wanted to retire and none of my associates wanted to buy my practice, I wouldn’t want to stay very long. So I would be negotiating. I wouldn’t sell until I was ready to leave. And I’d be negotiating for the shortest time I could. Because I think one of the things we don’t talk about is if you’ve built a practice that is your child, and for many people who have done veterinary practices, it’s not your business, it’s a labor of love. It’s what you’ve done for your career. And watching somebody else change it is incredibly hard. 

The number of practice owners I’ve talked to who said “Year and a half was all I could do. It was awful that last year”. Not everybody, but a large enough portion of people. That’s why I say you really don’t want to have to stay longer than a year if you don’t have to.That’s the kind of decision I would make if I was 70. If I can negotiate a way to sell and keep a little bit into the parent company, especially if I thought they were going to flip in three years, that is certainly a way to make more money. And you can look at who the funder is. If the funders private equity, and they’ve been in for three years, they’re going to sell in the next few years. You want what we call the second bite. And so you want to keep a little money in if you can, but only if you don’t have to stay for too long would be sort of the way I would think about it. Now, if you’re selling your practice and you think “This group is going to be great,  I’m going to be in the management structure for this group. I really want to be all in”, then having equity in the big group is certainly what you want to do. But you need to know what your backup plan is because I’ve certainly had a number of people who thought they were going into one group… I know one person who sold his practice to a group. He had spent a year investigating it. Two months after he sold them they flipped to another owner and he didn’t know that was coming. That’s pretty hard. 

You need to know what’s your backup strategy. If you’re 40 and you’re selling your practice, it turns out they’re not going to give you a management position. You don’t like the group. What’s your non-compete? How big is it? Are you going to have to move? Are you okay if you work as an associate in somebody else’s practice? So looking at those parts of the thing, I think are really important. And then I think these partnership agreements, if you’re really going to be a partner in the big group, how much say do you have, if any? Because I think one of the things is that we call them “partners”, but you’re not really a partner, you’re a shareholder and usually a small shareholder without a voice. But you almost always, if you become a partner or shareholder have an incredibly big onerous noncompete. And so you just have to really think about what’s the trade-off between the money I’m getting here and the fact that I might not be able to work where I live for three to five years. Am I okay with that? And what am I going to do? So some complicated things you’ve got to think about. 

Karen Felsted
Dr. Karen Felsted

I think these are really great points and I’d add a couple of things. If any corporate group tells you they’re not going to change anything in your practice – run away. Because that’s going to happen.

It may be as simple as we’re just going to change how the bills are paid and how you purchase equipment and drugs, a relatively simple step, but it may be that we are going to totally revamp your management structure and you’ve got too many employees and they’re paid too much etc.

So I think that the better run your practice is now, the more smoothly it’s run, the less you as the seller will probably be committed to having to stay with the practice, the fewer changes they’re going to make. The more problems you have in your practice, the more likely they are going to come in and make some changes. If not immediately, but within a year or so.

Getting your practice to where it’s truly a well-oiled machine, it’ll increase the price that you’ll get for it, and give you, as a seller, more flexibility too. Coming back to what Beth is saying, it’s important what the buyer of the practice, the corporate group, wants, particularly because prices are so high right now. And you can certainly understand this is taking more effort to minimize their risk because they’re paying such high prices right now, but they want to know that this practice will continue to operate smoothly for a couple of years after they buy it.

Now, at some point it’s on the corporate group, right. But there is a transition period there. If you as the owner of the practice are the only one that knows anything about the management, you don’t have a good quality manager in place, you produce most of the revenue or a good chunk of it, you’re going to have to stay until all of those things can be replaced.

If you’ve got a couple of owners, if you’ve got a great long-term practice manager, if you just hired another doctor that can replace you, then you can probably negotiate a shorter time period to stay. So there’s a real incentive beyond money to make sure that your practice operates well before you sell it.

Ivan-Zak
Dr. Ivan Zak

Totally agree with that. Another interesting thing that I’ve observed in the consolidators through the VIS lens is asking the question. Because a lot of consolidators say you do yours, we’ll do management and everything’s going to be great. A good question to ask, what is your value creation plan?

It’s basically how are you planning as a consolidator to deliver value to your investors? One is arbitrage. You’re going to buy a bunch of clinics and resell, and we know that. But if you’re planning to expand the margin, what are those one, two, three things that are on your strategic plan that you’re going to implement in my practice and are aligned with your strategy.

And if they can well articulate that and say this is exactly what we do, e.g we change PIMS. Why? What does that do to the numbers? We’re optimizing COGS or inventory management. How do you do that? How much disturbance to the workflows that we have right now. So be very specific about what is that value they bring, not just like they’ll buy the practice and everything’s going to be great. What is the value creation plan? 

There’s a caveat to that because quite a few consolidators that I’ve seen, have a value creation plan in their presentation to their investors, not necessarily in their operations. You need to understand that they have the thesis and they practice the thesis. So that’s also an important thing. 

You both have touched on the staff and how they’re motivated and managed. So after your acquisition, there’s definitely a stressful moment. So especially if the owner or a couple owners benefited from the transaction, they deliver the news, and then everybody else thinks about their job security, benefit package, whatever they have the agreement with the owner about. There’s quite a lot of things that are happening. So what effect does acquisition have on the team and what to be prepared for? How can we keep the teams motivated during transaction, post transaction and when the new changes come in if there is a change.

Beth Daviodow
Dr. Beth Davidow

I would say there’s a couple of things. One of the things we did that I think made our transition go better than it could have at the beginning was we actually told our staff very early. Different corporations will let you do things in different ways. But we actually said at the point we had signed a letter of intent, but before we had a sale agreement: we’re in a negotiation phase and we are a family and we think this is the right thing for us for a lot of different reasons, but we want you to know, and we want you to find out as much as you can about this group also.

And so our staff knew actually way before we signed the agreement that that was going to happen. Now, I think that’s fairly unique, that doesn’t happen lots of times, but I do think that by doing that, it was less fearful when it actually happened. We gave them some information. 

We also negotiated quite hard for our staff. I think one of the things that was interesting and sort of disappointing is that actually the way staff were compensated was not as generous as what we had done. And I think that that’s more true than people realize: the biggest way most corporations minimize their costs is that staff is the biggest cost in all veterinary hospitals. And so if you ask about value creation… Most corporate groups that I’ve been involved with (and I worked for Pets Choice in the 90s as well) won’t tell you that their value creation plan is to minimize your staff costs. What that means is for most large specialty practices, somewhere around a year and a half and two years after sale, the staff will realize that they are not being compensated as well as they were prior, even though they’re part of a bigger group.

I think some of that’s changing because it has to because of the spike in demand. But I do think that individual veterinarians are often very generous to their staff in the way that corporate consolidators who live 3000 miles away are not always as willing to be. There’s some tricky things, ways to get your staff on board, but also the things that you have to realize about what is likely to happen afterwards.

Karen Felsted
Dr. Karen Felsted

First of all I would split what happens with the team into veterinarians versus support staff. Let’s talk about support staff first. Because I think it’s a little different. My experience has been a little bit different Beth than what you’re talking about.

I would never say never to anything that might happen in a corporate transaction anymore because they’re so variable. And I do think you’re right. I think some of this is changing because it has to, because it’s so hard to find staff these days.

Beth Daviodow
Dr. Beth Davidow

Right.

Karen Felsted
Dr. Karen Felsted

Most of the practice sales that I’ve been involved in, the staff has come out better. They’ve at least maintained their compensation. Benefits are often better. What I have seen though is if the practice honestly has too many staff, and it doesn’t run productively or efficiently, I’ve certainly seen a downsizing of staff, not necessarily firing people, but when they quit, they don’t get rehired. So the staff ends up having to work harder. But again, I think the situation can be very different in any individual sale with a particular consolidator. 

The veterinarian piece is harder these days. I think veterinarians are less likely just to go with the flow. They know what their worth is. They know that they can walk out of this practice today and have a job somewhere else in the community tomorrow at an equivalently good salary. 

And most of the time when I worked with practice sales, the veterinarians have stayed, but sometimes they don’t. Sometimes there’s just an inherent “I don’t want to work for corporate”.

And they can sometimes identify why and sometimes can’t. Sometimes they try and find it’s not as bad as they thought. Sometimes corporate does some just incredibly stupid things that drive people away. And you look at it sometimes and you go “How many times have you onboarded veterinarians?” What do you mean you can’t keep these people’s names straight or tell them accurately what their salaries are going to be?. Corporate screw up just like everybody screws up. With the veterinarian you could certainly not assume that they’re all going to stay. And they have a lot of power these days to keep a transaction on track or to derail it.

As an owner, as a seller, you want to make sure that as a part of your negotiations, you do what you can to make sure it’s still going to be a place that the veterinarians are going to want to work. And as a corporate group, I think you’ve got to work harder at it than you used to. 

Ivan-Zak
Dr. Ivan Zak

Yeah, I can’t agree more. Beth, go ahead.

Beth Daviodow
Dr. Beth Davidow

I was just going to say the other thing that is really interesting is people’s individual experience can be very much dependent on who’s your regional medical director, who’s your regional operations person. Again, all the corporations are different in terms of how these things happen, which parts they do well, which parts they don’t.

Certainly people who have lots of practices where there was almost no transition for years and then something else happens. I’ve talked to people from VCA who say “Well, this region is totally different from the rest of VCA”. And so really it depends a lot on that middle management level and what they’re like. It’s super hard to predict.

Karen Felsted
Dr. Karen Felsted

And as a seller you have to realize you can protect your people and whatever legacy and the culture of your practice to a point. But the farther away you get from the sale, the less say you have in that. And particularly once you leave, let’s say you’re going to stay two years or three years or whatever, once you go it’s not your practice anymore. I think that’s hard for people to accept. 

Beth Daviodow
Dr. Beth Davidow

I think what’s really important to remember is even if you are a partner in the larger group, it is not your practice anymore. That’s the biggest message to remember no matter if they tell you you’re still an owner.

If you are at retirement age and you are ready to go do something else, this is the perfect time to really look at it because of the multiples. But if this is still a labor of love for you and your profession, it is a really dicey market. And because there’s so much flux in so much turnover and how your life feels is really dependent on your regional medical director, who is in a hard position that sometimes changes every two to three years, that even if the money doesn’t change, who you report to or who your manager is might change enough that your life feels totally different. 

There’s no free lunch and so you have to realize that this money comes with strings and costs and they can’t just buy practices without getting some return. So there’s a cost to that. 

Ivan-Zak
Dr. Ivan Zak

Absolutely. It’s a huge topic. Three years ago, when we started VIS, that was what I was trying to get into. I thought that we are in that window of opportunity where not only that we should care about people because we are nice people and care about people, but it has a tremendous direct impact on the business. And the last two years showed that that scarcity of veterinarians is really driving this market today. It’s really not about the number of practices anymore. And I’m calling these acquisitions more and more with a term that they use a lot in the tech world – the acqui-hire. Because people traditionally think that you acquire a business, which is a list of clients, equipment, and your marketing, for example. But right now, when you’re acquiring a hospital and you think only of the seller and that that’s the benefactor, but then you have two more associates that are a part of that EBITDA. And if you’re losing a veterinarian today, it takes 10 months to replace one. They bring $600K a year. That’s half a million dollars to the bottom line out of the door. So this term, acqui-hire, is used a lot by Google when they’re buying new tech companies, not because of the tech itself, but the founding team and the entrepreneurs.

I think that that’s what we’re evolving to in the veterinarian domain. We’re buying businesses with people in it, and we need to do everything we can to preserve those people being happy in their workplace. And I think that now finally, it’s sort of clicking because there’s such a scarcity of veterinarians, which leads to a question about the younger veterinarian. We have a question from the audience about this: Do we think that the younger sellers are treated differently by the consolidators, then the more senior sellers and is it more attractive for younger veterinarians to participate in the corporate group because there’s a career ladder that could be not just in veterinary vertical, but also in management and pivot within it. Are there any considerations that people have when they’re thinking about their future? 

Karen Felsted
Dr. Karen Felsted

I don’t think I have a sense about whether younger veterinarians are treated differently. If you’re an owner veterinarian selling your practice at 40 versus 65, I don’t think I have a reason to think that they’re treated differently, but I have to say most of the sellers that I work with are closer to retirement age. I don’t see that many selling at age 40 or whatever.

If you’re a younger seller and have interest in whatever… That’s such an individual thing…If you really love the management side of it, which I don’t think that many practice owners really do, but some do and are amazing at it, you’re not going to have the freedom and flexibility as a part of a corporate group that you do on your own. Although I will say that if you’re doing well in the practice, I mean more power to you, you’ll have more freedom and flexibility than if your ideas are not making the practice thrive. There certainly are some opportunities to move up that corporate ladder. I heard VCA give a talk once before. And I think personally, they were getting tired of being beaten up by the profession for being a corporate group, but one of the things that they talked about is “Hey, look at all of these job opportunities that we’ve created”. And a lot of it, they were talking about non veterinarians. They have the regional manager positions and they have business acquisition types and stuff.

I actually thought it was a really interesting point. They did create some job roles that hadn’t been there before. So a lot of it depends on what individuals want. I mean, some people want to work as part of a larger group. They don’t want to be in charge of things 24/7. And that can work really well. So I’m not sure there’s an absolute answer to that. 

Beth Daviodow
Dr. Beth Davidow

I would agree. I do think that there are some really interesting opportunities within these groups. I worked as a medical director in my own practice and then actually worked as the director of patient safety for Blue Pearl for a period of time. And that’s certainly that sort of role is incredibly interesting and challenging. If you are an owner and you like running your own show, you are part of a corporate structure, you are working for somebody else. You know personality wise, can you deal with that or not? On a veterinary side or an owner side? If you’re an owner of a practice and you think I’d like to be a regional medical director, I’d like to do these things… One is, there’s not that many of those jobs. So you’re competing with other people for them. Two, do you really want to be middle management? So I think on the veterinary side, I would say those things.

On the staff side, it’s sort of similar, there are roles, but there aren’t as many roles as there are people working in these practices. And are those roles what you really want to do? There are some opportunities there. 

In terms of younger versus older sellers, you know, sort of hard for me to say for sure. I would say, and this is going to be hard for everybody to hear, but if you are a female versus male, there’s a difference in your experience when you sell your practice and what’s going to happen afterwards. And there’s also a difference about how well your voice is going to be heard.

Nobody wants to talk about that. Nobody actually realizes they’re doing it. I think there’s more implicit bias than true bias. But if you are a female seller and you think you’re going to have a big voice in a corporation where the entire C-suite is made up of male financial people, you won’t. Not in this market, not in this day and age yet.

Karen Felsted
Dr. Karen Felsted

I think if you’re a female, anything in any kind of an industry, right? Implicit bias is there.

Beth Daviodow
Dr. Beth Davidow

It’s just different and you don’t really realize it until you start bumping up against it. There are some weird things happening in the veterinary sphere with having male financial investors coming in, and a lot of the marketing that’s going on to younger female-veterinarians is “This is too hard for you. You don’t really want to do finance. I know it’s too much trouble for you to run your practice. You should just sell to me and I’ll take care of you”. That’s marketing, that’s out there. And I think it’s condescending and there’s no reason. As a mom who raised two kids, while running a practice, you can do it. You just hire a manager who runs your finances for you, but they work for you rather than you working for somebody else who takes control away. 

Karen Felsted
Dr. Karen Felsted

Generational issues are here, too. Because sometimes some of the upper-level management are older and just have zero understanding of how they come across to a younger generation who thinks differently and looks for different things. And it is about a corporation of any kind, not just veterinary medicine.

Beth Daviodow
Dr. Beth Davidow

Yes. I think this idea of what veterinary medicine needs to be for this next generation that is more female, actually more mission-driven if you look at statistics about millennials and Gen Z. This is a generation that really is about cause and purpose, but they’re also about free time and work-life balance. One of the reasons we’re seeing so much burnout is that we have a generation of people who are coming into practices that weren’t built or designed for them.

In order to have veterinary medicine be sustainable, I think we have to really think about it. What is it that these people want? What drives them? And I do think if we take away purpose and mission, we’re going to lose a lot of people in this generation. 

Ivan-Zak
Dr. Ivan Zak

I can’t agree more. This is such a big topic and I totally agree with you with generation differences right now. I think it’s the days when you’ve got your veterinary degree or law degree or medical degree, and that’s who you are when you retire and die, I don’t think that’s out there anymore. There’s more progressive thinking about it and the work-life balance is more important.

There’s one research that I’m doing sort of in parallel. I’m trying to think of ways to measure work-life balance because we all talk about it. But what is that really? How do you quantify it? How can I say I do have a good work-life balance and I don’t. So I interviewed a number of veterinarians. And a lot of it is really that it’s setting the barriers from what I’m hearing. And we don’t do that well. 

And since we were talking about women having children, that period of time in your life as a male is completely different as a female. And then how do we take care of more of the people that need more time with their kids. I can only talk about my experience, and what I felt. I was full on working as a veterinarian and then my son was born. So I know that subconsciously, I have to be there as well, but I’m so dedicated to work. And now I have these two competing priorities in my head and I get anxiety and just burn out from that. 

So, is there anything that consolidators or corporates can do to focus more on that period of time when we’re having kids? Especially if mainly women are in the profession these days, is there something that we can do better?

Beth Daviodow
Dr. Beth Davidow

Well, I mean, I think this is why women should own their own practices. My daughter was 10 months old when we opened my practice. I’ve definitely had people say “Well that was bad mothering to do that.” But my daughter came to the construction site every day with me. I had tons of quality time with her. She and I did our Costco runs together. We had this period of time where all the women in my practice had kids and they would all come to staff meetings and they’d all have their iPads. And they’d all sit together while we had our staff meeting, because it was okay to bring your kids to work, when we had a staff meeting. We set up Zoom or webinars for our staff meetings really early. So people could call in from home. We had people who worked half time, three quarter time, two thirds time, and a couple shifts a month. We were really flexible because that’s what women want. We all traded with each other. We had a lot of people working three twelves, because it’s easier to do that with kids. 

And when I talked to other moms, who’ve owned practices, they had “All my kids came to work with me all the time when I had to check on this or do other things”. Moms who made lots of choices… that weren’t necessarily work-life balance, but work-life integration. How do you make your life work so your kids see what you do, so your kids can be part of your business. 

And the corporations have these strict rules that your kid can’t come in. You can either work full-time or you can work half time, but we don’t do two thirds. I think we really have to make flexible working, so people can do both, not just so divided, but makes it an integrated whole. 

Karen Felsted
Dr. Karen Felsted

I don’t have children, so I can’t speak personally, but I’ve seen practices, Beth, exactly like you’re describing what you did with yours. And it’s been primarily made up though owners and most of the associates are women with children all at the same point in their life. And they’ve done amazing things to make it all very doable. There was one where they put together the kindergarten to six or whatever. They had daycare centers and all of these different kinds of things that made it very possible. I think that’s harder for corporate groups to get their arms around. I get it to some extent you get bigger, you’ve got to have a little bit more structure whatever. But if you’re a full-time veterinarian with a couple of kids, you can do amazing things owning your own practice. And there’s probably a ton of opportunity at the corporate level. I just think it’s harder for corporations to do it.

Beth Daviodow
Dr. Beth Davidow

Yes. If your C-suites are all male, they are not going to think about these things because it’s not what you’re dealing with. That’s where the generational diversity, the racial diversity, where the gender diversity inside a C-suites makes so much difference, because you don’t understand the lived experience, if you haven’t had to do it. 

Ivan-Zak
Dr. Ivan Zak

And it’s interesting that you mentioned the daycare. Again, with the short horizon of investment, nobody is going to pay attention to those kinds of things. But wouldn’t it be wonderful to have larger family offices? If now it’s so hard to source veterinarians and having kids nearby is a solution. So why not sponsor or participate in the daycare where they all can accommodate that part of their life.

And let’s switch to the question from the audience – we have two questions from Carson. Beth, this is to you. So if you could do something different about the sale of your practice, what would that be? What would you change in the transaction or post-transaction or how it was structured or what happened after… What would you want to be different? 

Beth Daviodow
Dr. Beth Davidow

It’s really hard to answer that question, because it’s hard to know where the world went or was going to. I think the things we did well in the transition is actually as part of the transition Blue Pearl did allow other people to be partners.

At the point we became part of Blue Pearl instead of being four owners, we were actually seven owners. And so there were several of my associates who actually became partners within the transition. And I think financially that was a very smart move for them and for us. There was a beautiful facility that came out of that – sale and we brought radiation treatment to the Seattle area and it was not here before, I couldn’t afford to do that. So I think those things were all very good. 

Personally I learned during the transition that I don’t really like working for other people. Unfortunately it’s really hard to know that until you do it. I also realized that my motivation for doing veterinary medicine is not financial. It’s all about patient care and quality and outcomes. And so I think one of the things I would tell people before you sell your practice is you have to take some moment and really think about why you do this. 

Then the thing I did not do well was the idea of a second sale didn’t come on my horizon. So I had a very good contract and a very good setup for the first sale and was totally flabbergasted by this second sale which gave me a non-compete that was really horrifying. I don’t know if I could have done something differently about negotiating that ahead of time. And I do think the non-compete thing I learned is a big deal, especially if you are not in your seventies and you want to continue to be a veterinarian.

Ivan-Zak
Dr. Ivan Zak

Very good advice. The interesting question that came through as well: The problem is the lack of business education for vets to better understand the financial side. Well, that’s why we are having people like Karen and Beth for living. The question is, do you think vet schools should also teach business? And as far as I know, Texas A&M and Colorado are the two that have MBA built in. So I think that’s a fantastic idea. 

Karen Felsted
Dr. Karen Felsted

Can I talk about this? Because when I was with NCBI, this was 15 years ago or so, and when NCBI was in existence even before I joined them, this was one of the things that they were heavily involved with and the schools were actively involved with. Because what had come out of a number of studies 20 years ago is this whole issue. I think the veterinary schools have gone through 20 years of trying to understand how best do we integrate business. And I think they started out by trying to integrate what we would actually think of as real business courses, a finance course. Here’s a balance sheet, here’s an income statement, HR, operations, that sort of thing. And I think what became clear early on was that vet students aren’t interested in what a balance sheet is at this point in their career and it’s not overly useful. And so over time a lot of the vet schools have evolved to teach more life skills. Let’s teach how to negotiate a contract. Let’s teach things like communication. Let’s teach them interviewing skills, things that are number one and have more interest in veterinary students at this time in their career. 

And then with the idea that when students are going to need, maybe more defined business skills, they can go out and they can get that education. The other thing that’s happened in the vet schools has been the veterinary business management association, the VBMA, which is an amazing group. So for the students that are interested in business at the beginning, they get involved with VBMA. They have a little business certificate that they offer for vet students and that sort of thing. Like you said, there are a couple of schools that do the joint MBA programs as well. 

So I think sometimes when people look at vet schools and they’re like “Well, why don’t you teach what a balance sheet is?” I don’t think they recognize that this is a topic that schools have actually spent a great deal of time on. I think the evolution to where we are now has probably been the right evolution. I mean, I’ve taught at a lot of veterinary schools and when I talk about a P&L, a profit and loss statement, I was told “There’s not a lot of interest”. What they were really worried about was ‘Am I going to pass my biochem test next week”? 

Does every school do it perfectly? Probably not. Nobody ever does anything perfectly, but I think we have to recognize there’s probably a limit to how much responsibility events school has for teaching HR, law, finance. And maybe their role is better spent on these life skills and then the true business training comes later for those that are going to need it. 

Beth Daviodow
Dr. Beth Davidow

I couldn’t agree more, Karen. I do think the biggest thing veterinary schools could do right now is help young veterinarians understand and negotiate contracts well. Because I think the one thing to remember is if you are a young veterinarian negotiating a contract with a corporation, those contracts are written by attorneys. And if you don’t have them reviewed by an attorney or you don’t understand what you’re reading, you can get yourself into big trouble. I do think that we would do better off on a veterinary college level, really emphasizing that. I will say when I graduated from vet school, I had no idea I was going to own a business and I wasn’t that interested. And there are lots and lots of resources. If you then decide four to five years later, or even 10 years later “I don’t want to work for anybody anymore, I want to start my own practice”… Bank of America’s veterinary group has lots of good advisors and lots of resources to help you. They just designed a very nice four part accounting and practice sense finance course. There are lots of really good business consultants out there to help you, e.g. veterinary accountants and other sorts of people.

And again, what we did for our practices, we knew we were going to be a 24/7 practice. We knew we did not want to do QuickBooks and Payroll, and we hired a practice manager. And there’s no reason why you as a veterinarian can’t hire a good practice manager. You set the direction, you set the vision and somebody works for you. That is the other thing we need to teach people –  it’s okay to hire people to work for you, to help you do these things. And that will make you happier in the long run. 

Ivan-Zak
Dr. Ivan Zak

Absolutely. So we’re at the top of the hour in a very interesting conversation. One thing that I wanted to mention about. On one side this is great to have business, but Karen, you’re absolutely right. When I was a vet, I wanted to be an emergency vet. And I worked the nights in the emergency hospital and I loved that. 

What I wanted to mention is we are doing a lot of research on burnout. We’re trying to understand the problem. At VIS we are spending a lot of money to focus on doing that. One of the things that is a hypothesis that we have floating around right now, we don’t know how to prove it yet, but we’re working on it, is that the long-term goal setting is something that the veterinarians are excellent at, because they dream to be a veterinarian when they are eight or 10 and become when they’re in their mid twenties closer to 30. But when they graduate they cannot go to this complete stop when they start practice, unless they advance their career in either academic or another board certification. So if you set a goal that seems to keep you happier. And this is my opinion, but I think that teaching veterinarians that the vet school when it ends, it’s not the end of your goal setting. You need to think about what’s next. Is that the practice ownership? Is that board certification? Think of the next goal, because when you arrive after 20 years chasing one thing and you stop, that’s where I think people also burn out.

We’re sending a survey and I want to make that announcement. For anybody who will see it on LinkedIn, we’re sponsoring a lot of ads to go out and Facebook and LinkedIn, we’re doing another survey that we did last year. We collected 1500 participants with the questionnaire on burnout, work-life balance and this goal setting theory. We want to get a slice and see where we are at as an industry: https://vetintegrations.com/insights/burnout-2021/.  

So anybody who is listening, who is a practicing vet, or has experience with it, managers, vet technicians and basically everybody in the industry. You could participate and you guys as well. It would be great to get that slice cause we’ll write a report and it’s going to be totally externalized in a white paper written on it. 

With that I appreciate your time. I know you guys are really busy. Thank you very much for your participation and thank you for joining me here for this webinar. 

Beth Daviodow
Dr. Beth Davidow

Thanks Ivan. It was fun to work with you, Karen.

Karen Felsted
Dr. Karen Felsted

I enjoyed it a lot. Thank you Ivan, thank you Beth.