Veterinary Consolidation Outlook: Pushing Beyond Your Current Plateau

Thank you. I’ve been with Brakke Consulting since 1994 and have been following industry consolidation, kind of monitoring it, for probably the last 20 years. And I have participated in about a dozen recapitalization events for consolidators as a consultant over the last eight to 10 years. So a very, very interesting topic. And I’m glad to be here this morning.

Yeah, thanks for having me, Ivan. Kurt Phillips, City Way Animal Clinics in Indianapolis, Indiana. Graduated from Purdue University school of veterinary medicine in 1996 and was fortunate enough to be able to purchase my first practice, I was associated at in 1999 to the early 2000. So a young entrepreneur at 29 and a half years of age who didn’t know much and was thrust into the entrepreneurship of business ownership of veterinary business ownership and have just really enjoyed the ride ever since.

Thanks. So I think a little history is good for perspective. You know VCA veterinary centers of America was established in 1986 and really started the consolidation of veterinary practices. It deployed by technique that was used in many other industries, which is rolling up small, locally owned businesses. And then over the BC, I guess started then over the years over a number of companies that kind of copied what VCA did, and many of us were acquired by VCA after they had 20 or 30 practices. One of the things I find interesting is during much of the 1990s and early 2000s, the percentages of practices owned by consolidators was pretty steady at about five to six percent. The reason for that was that even though consolidators were buying practices, the number of practices in the industry was growing.

So when VCA started, there were about 16,000 small animal clinics, and now they’re roughly 30,000. The size of the industry has doubled. Following the great recession when the financial community saw that there was a great deal of resilience in the veterinary field, down the health field in general, that investment in consolidation really took off. Next slide.
So you can see here, this is chose the trend. 10 years ago, there were about 24,000 practices. About six percent were owned by consolidators. And today we’re up to about 30,000 practices. And about 20% of those. The number of practices has grown. The penetration of consolidation has outpaced that. Next slide.

2020 was a banner year for consolidation. We calculate that about a thousand practices in the U. S. were acquired by consolidators. Certainly like everything else in the U. S. things shut down in March and April as we came to grips with the COVID-19 pandemic, but then, starting in late April early May, things really started ramping up and fourth quarter consolidation activity was just intense.

We think it’s possible that consolidator purchases even overtook independent transactions for the first time last year. And if you look at the current status about 70% of specialty practices are owned by consolidators and more than 20% of general practices. What’s interesting though, is because consolidators tend to acquire the larger practices, the share of pet care done by consolidators, we estimate it is now in the neighborhood of 35 to 40% of total pet care. Next.

So why was activity so intense in 2020? I think there are a number of reasons. One is that 2020 was a banner year for many practices. Their income was up, which meant that their value was up. Many practices had revenues 20% or more over 2019. There’s also a lot of demands. So the low interest rates made money cheap for the private equity firms that finance consolidation. And we now have about 50 or more consolidators that are competing for practices when they become available.

I think another very important thing is that practices are much more widely shopped than they used to be. It was not uncommon a few years ago when a practice came up for sale, that there might be four or five prospective buyers, maybe a couple of associates or neighboring veterinarian plus maybe one or two consolidators.

But now we know that when the bigger practices go on the market, they’re often shocked. 30 to 50 consolidators, which has led to values really going up. So the value of good general practices have increased to eight to 10 times EBITDA up from seven to eight times just a year or so ago in specialty practices have really ramped up in value to about 12 to 15 times EBITDA up from about 10 to 12.

And we’ve even heard of values beyond that. And then there are a couple of environmental factors that we think are contributing to consolidation. One is that with these high valuations, we think a lot of owners want to make sure that they get in on it before maybe it slows down. So there’s a kind of a fear of missing out. Type of a thing where they want to go ahead and sell when the selling is good. And then with the election last November, people anticipated that if there was a change in administration, there may be a change in, in tax loss. So wanting to get in on the most favorable tax environment that they could.

So we think all those really contributing to a banner year for consolidation last year.

I think honestly right now, the number one reason why I stay owner-operator is the profit. I mean when practices are profiting 20% of their gross revenue year after year after year it’s nice just to keep that profit in my pocket for a while.

I’m not upset about running a practice. I enjoy the leadership opportunities. I enjoy being an entrepreneur. I enjoy creating structure and I enjoy watching people grow professionally and personally. So at this point in my life I’m really happy with where I am based on the fact that I’m totally in charge of my own culture and my practices. I’m totally in charge of every day-to-day decision. I have a great leadership team that helps me make all those decisions and we’re able to make them organically, as you said also locally. So we run all of our decisions through our paradigms of our values and our vision and our planning and we get to make those decisions on our own with a group of people that I completely trust.

Profit keeps me, leadership allows me to be happy and if I’m going to sell in the future, it’s going to have to be to the right company that allows me to, to use my strengths where they were needed or I’m going to have to have a different plan in my life. And I’m only 52. So I guess my age is the third category that keeps me plugging along.

Alright, thanks. In January of 2021 we conducted a survey of around 300 veterinarian practices. And one of the questions we ask is that they were ‘likely to sell’ in 2021 and there were 143 that answered that question. And eight percent of them said yes, that they were likely to sell. Another 15% said that they may sell. But I think eight percent is probably the better number. And then we asked them if they were likely to sell their consolidator and that chart is on the right here. And on the one hand it looks like many of them were not planning to sell to consolidators. But there are two things I want to point out here: the first one is that we’re dealing with a relatively small number of responses. We can’t take this data to the bank by any means. It’s not projectable. The second one is when we look at who answered this question.The practices that were in the ‘somewhat’ or ‘highly likely’ to sell were the big practices and the ones that were in the ‘not very likely’ or ‘not at all likely’ to sell were much smaller in size.

So even in this data we see that bigger practices are much more interested in selling to consolidators. And of course, consolidators want the big practices, right? They’re less interested in the one or two doctor practices.

Yeah, interesting. So there are a number of factors. One is a reputation. Some consolidators have been added a lot longer than others and they’ve become better known than the newer ones.

Size matters as well. The bigger consolidators have more people in the field that are out prospecting and calling them practices. They’re more likely to show up in exhibiting at veterinarian conferences, at trade shows. They just have had an opportunity to establish their reputations.

I think we see a number of smaller consolidators that are trying to get into the market. And I think one of the challenges for those newer consolidators is to differentiate themselves and to bring some new ideas or new concepts to the prospects. Because it is a competition as we pointed out earlier with the extent to which practices are shopped. Each of the potential bidders is going to have to make a pretty strong case for why they should be the prevailing buyer.

I think there’s a difference between recruitment and retention in our talents. And I truly believe that the consolidators have it over us every single day when it comes to recruitment, their abilities to pass out a message nationally and to offer higher salaries. Honestly, I couldn’t meet their salaries, but what I can often do is meet their benefits packages with pet employee discounts, health insurance, and other types of things. Their premiums are lower just because of their size.

So recruitment has always been a challenge for us. At City Way Animal Clinics we’ve really spent the last year, just beefing up our recruitment department and trying to get out there and get in front of these talents that are coming out that are graduating, new techs, new nurses, new veterinarians. When it comes to an advantage for us, it’s in the retention. I think we find over and over again that once someone comes to join our team, it’s a family of local people who all know each other and work well with each other. We build a great culture and we put a lot of pride in our values and our decisions that we make locally.

That’s where we’ve found an advantage in keeping people. I talk to people every day who have been working at a large corporation practice. And they’re thinking about making a move because they just don’t get the support they need from their regional managers.
The salaries and the benefits are there, but the happiness, maybe, isn’t there. And we just try to tell them all the time, think about joining a smaller team. Someone who you have access to not every single day but they can call me, they can talk to me, they can text me, we can get answers to them pretty quickly. And that is definitely an advantage for us.

That’s great. I have a follow-up question to that. What we see in the UK right now, there’s a total sort of frenzy in what has been happening for the last four or five years. I remember I went to one conference, to the London Vet Show. There were 40% corporate and 60% independent. And then I went to the next one. It was the other way around: 60% corporate and then 40% private.

Do you think that s can be compared to geography, a kind of plateau, when we get to north of 60+ percent?

That makes sense. And with that the groups need to differentiate themselves and they also need to be future-proof. I mean,I love the fact that veterinary medicine survived a COVID and proven to be immune to this virus. And that’s why we have so many pets and then the industry’s growing. But what is the future-proof consolidator? We have seen different management styles. We work at VIS with multiple consolidators and there are some groups that had a platform developed within it. And some of them adopted other platforms, so for example I know that Pathway adopted the framework that occurred you are operating your business with. And it’s an entrepreneurial operating system or a Traction by Gino Wickman.

Can you elaborate a little bit more on that and this methodology and how it helped you to apply to your business and to scale.

That’s excellent. I love ‘Traction’. We applied it for probably every business in the last eight years I worked in.There were guys at MedSource, who suggested that to me a number of years ago. Then I adopted it for SmartFlow and then we applied it at IDEXX at the software division.I think it’s excellent. And that’s why we chose it at the core of the consolidator operating framework that we created for consolidators.

We try to create a cookbook for consolidations. If anybody’s interested, you can visit vetintegrations.com to get familiar with it.There’s no silver bullet for everything, but it’s sort of a guide that may help you to think ‘Oh, I didn’t think about that’.

With that any methodology is really created to outline the processes, make them scalable, set the goals and achieve them, just like you’ve described Kurt. But with the scarcity of veterinarians and with the abundance of pets, we’re really reaching that point where the demand is much higher than supply. And that’s really dangerous over the profession. It seems like we’re still very linear in the approach that we add more people, we can see more appointments, therefore we can produce more revenue. And my personal hypothesis is that we really need to think outside of the box and rediscover the more scalable workflows and more scalable operational tactics that can help us to do more with less.We are not hiring veterinarians and pushing them to do more, because we also have an issue of burnout and then pushing that to the limit. It is really about discovering new processes, new workflows and new revenue elements.

John, do you see any trends in that direction? How to do more with less in our industry?

That makes complete sense. So currently in your experience the same question: how do we deal with the shortage of vets now? I know it’s hard to hire and you mentioned there are different ways to attract and retain. But are there ways to scale the processes so you can do more with less human capital?

I totally agree with you. More and more I hear this is interesting about saying no and being actually selective about your customers. When I graduated, the customer was always right and you did everything for the customer. But I love what you are talking about: first of all, think about the patient, not just the customer, because the customer is annoyed or he has to wait or whatever it is.

Very often when you call, it’s a two weeks wait time for spay or dental, or anything like that. The demand is definitely overwhelming. I was just talking to a colleague of mine in the UK and they are talking about the burnout angle of this. They said that we are becoming very selective about our customers. There is better adoption in Europe, so in the UK, I think, there is about a 20% adoption rate for insurance by the owners. But in some clinics they actually started differentiating. If you don’t think that a wellness plan, that covers things that should be covered, is a part of how much you want to care after your pet, then you are probably not the best customer for us. So they actually are being quite straightforward with the customers that, you know, if you’re not a very good customer, then maybe we don’t need you. It’s interesting how this is changing these days. Because the revenues are shrinking, because of the online pharmacies and now the Amazon and things like that. Is there anything else creative that clinics are doing right now? And that is the question to both of you guys. A new revenue streams, diversification into doing more, spa services – I know, Kurt, you have been working with that… New workflows in pharma. I know there are a couple of startups that are doing an alternative route to online pharmacy that is like your own pharmacy, but still delivered home.

So are there new sorts of revenue diversification for the better word that you guys can comment on?

Certainly in our data we have seen the growth of the home delivery market and online ordering for veterinarians. Now we see like 70% of practices have that service and they’re working through companies like VetSource, Kurt mentioned, or MyVetStore and I think there are a couple of others that are smaller.

I live in downtown Chicago and one of the things I see is veterinary practices offering ancillary services. There is one practice, I see their van where they offer pickup and delivery of pets for either appointments or for their daycare. We also see onsite grooming vans, so vans will go to home and do the gig, the other pad of shampoo, do the grooming on the pet owners site. There are also some neighborhoods with high rise buildings with many pet owners and we see some veterinarians offering in-home services there.

So those are ways that veterinarians are expanding their footprint. I also remember talking to a veterinarian in Dallas, Texas, probably about three years ago. But they got into the vaccine service business where they go to an HEB grocery store or whatever, and set up on a Saturday. And they weren’t using it as a competition with their regular practice. They were using it to identify pet owners that didn’t have a regular bedroom practice. They were doing a preliminary exam on a pet and using that to bring pets into the practice.

I’m not sure how many practices these days are looking for new ways of generating business. But certainly those things can be.

The veterinarians that are selling to the consolidators or you are saying once they are consolidated, how can they recruit other veterinarians?

Yeah. Well, like I said earlier, they’re offering higher salaries and they’re giving better benefits. I think that what they need to do is to work on mentorship and leadership growth, potential for their people. Actually also identifying during the interview process if that is what the candidate wants or desires. I’m going to go a little off topic here, but where I’m frustrated that I don’t know that we’re looking for those types of candidates when we’re matriculating them from undergrad to veterinary school now, I wish veterinary schools would do a little bit better job of seeking out the type of candidates who are interested in clinical practice and interested in business ownership and business management and leadership stylings. Because when we continue to admit students who have very little desire to practice clinical veterinarian medicine in the future, then we wonder why we have a shortage of veterinarians 10 years later. I feel like that rides on the veterinary schools.

So consolidators could do the same. I know that’s one of the things that we put everyone of our new graduates, any new hire, through a mentorship program. The support staff does their own version, the CSR’s do their own version on, the veterinarians have their own version. And we talk a lot about professional growth and leadership and mentorship and how to communicate. That’s what we are doing. I think that the consolidators could mimic what I do better, perhaps.

Absolutely. I agree with both of you guys. Yesterday we had a pretty advanced conversation about this. If you look at our profession, veterinary technicians are not going beyond 30 years old. So that means that our profession can not offer enough pay for adult life. You can’t sustain with the technician salary.So it is important to provide better material compensation for staff technicians that do most of the work in my opinion. And then basically what you said, Kurt, I really liked – finding out what people want.

And we’ve been talking a lot about this in several webinars by VIS, but it’s really understanding the intrinsic motivation of the person, because it’s always different for different people. Everybody gets a job to get paid, but what is it that drives you to come to work and actually one to stay here for long-term. I think it’s extremely important to have the series of webinars that we are doing, which is called ‘Leading with purpose’. If your purpose and if your goal of the organization is aligned with the intrinsic motivation of the person, that’s the key to having happy people working for you and sharing your purpose.

But if your purpose is to recap in two years, that’s not the purpose that they have. So unfortunately there is a very little buy-in to that and then people can leave. You sure you can throw money at them for a certain period of time, but after you have 75 K and over the statistics show that we are not very much motivated because that meets the basic needs.

There’s another interesting question here. A slightly different angle on the lab services. So the question is from Rachel: I’ve seen a lot of practices under utilized their laboratory services. Are consolidators considering leveraging the lab?Just jump in guys.

I think a lot of that comes back to just how they are measuring their work. Do you have someone on your leadership team who is looking at data and deciding that ‘Hey, it seems like we are doing the right amount of diagnostics. It seems like we are doing enough blood work and taking enough x-rays, doing enough ultrasounds’. But when you start to look at the actual data, you’ll see that your margins as far as compared to gross revenue. Perhaps your radiology is down in the two or three percent category and it should really be four to six percent of your gross revenue.

And when you identify that, it’s a simple fix either. You’re not charging enough for your x-rays or your ultrasounds, or you’re not doing enough of them. So take that opportunity to look at that data and have a healthy discussion with your doctoral staff, all in one. It was my suggestion, meet regularly. Our doctors have a monthly meeting where they can share their ideas.

And there is a little bit of data crunching that happens there. Just say ‘Hey guys, it appears that one of our practices is not doing enough radiology. Is that because you don’t like the machine? Is that because of the caseload? What is it? Because as compared to another one, which is two miles away, it’s quite vastly different numbers. So that has been helpful to us. And those are things I didn’t do in the first 10 years of owning a practice. It was just whatever came across on the appointment schedule, we just did it. And that was it. But we didn’t actually plan for things.

I’d like to circle back just briefly on something Kurt said, about data sharing. I have worked in the business for a long time and I’ve seen a lot of companies. And to me one of the things that really differentiates companies is how much information they give their employees. Most of the really good well-managed companies that I’ve worked with, are companies that tell their employees everything. They are very open about how the business is doing, how they are measuring their progress. And it’s not always about revenue. It can be how they measure up on employee benefits? What are their policies and how those generate data? Or the number of days lost to sickness. Those kinds of things.

The more information that employees have about the operation business at the practice level and how they impact those numbers, the more they can see themselves in the practice.

I tell people every day when I recruit that you have the opportunity to be a part of this company going forward. But I have a very clear 10 year plan that I have placed in place mainly for myself and for my family of retirement and leaving this company and getting paid for what I have built.

And I tell them with the right group of people, they don’t have to all be veterinarians. You can structure it in such a way that non veterinary professionals can have a piece of the pie. And I think we should be heralding that more often. I have a chief operating officer who has been with me for upwards nine years. He started as a kennel kid 11 years ago. And now he is my second in command and he is extremely valuable to me. He is very important to our company. I hope and pray that someday he will have a bigger piece of the pie that he has right now. That is something that we, as private owners, can offer comparative to going door work for VCA or Banfield tomorrow. You are never going to be a leader or an owner there. And if you think you are, that is not going to happen.

Maybe I misspoke about the Banfield opportunity – they have some ownership opportunities, but you are not gonna be able to own a VCA. That’s where we are. That’s it. That’s how we recruit. That’s how we stand apart. And if you have good books, if we are profiting as well as we are profiting, banks will loan the money to the people who need it. For sure.

Absolutely. I think that’s an important factor and I love what you are doing, Kurt, creating your organization. I think that the inclusion of the veterinary staff is sort of the destiny where the consolidation is going to, because we will have shortage of those as well. Especially if we have such a short window of people that are getting into that profession and qualified. And then they retire from this profession, because they can’t sustain their spending on this. So I think that the business models that will include everybody into sharing the pie, I think this is what we are seeing in the near future.

We have another question. I think maybe that is for both of you guys. So rapid consolidation, frothy environment, the multiples are high. If something can slow down the consolidation of clinics, what is it?

Thank you. Kurt, do you have any to go back to?

Absolutely. The quality of the students that we have both from a business perspective, as well as the professional skills, it’s changing. Especially on skills like surgery. That is a big challenge, I think, we are graduating veterinarians that are not there. And I think it’s also related tof the generation. I’ve been talking about this in some other webinars. And I think the majority of veterinarians right now are from the millennial time frame. They just care more about work-life balance and there is a different ethic to work.They are valuing.

So well, with that I want to thank you gentlemen for participation. This has been great. Thank you for your time and thank you for your expertise added to this webinar.

Thank you.