Piece of the Pie: Incentivizing Veterinarians Through Partnership: Webinar Recording and Transcript

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.

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.

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.

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.

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. 

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. 

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. 

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. 

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?

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. 

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? 

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?

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.

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.

Right.

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

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. 

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? 

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.

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. 

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. 

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. 

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. 

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.

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. 

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. 

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