Ask almost any equine veterinarian to describe the least favorite aspect of his or her practice, and right up in the top responses will be “emergency on-call.” For solo practitioners and veterinarians in smaller ambulatory practices, lack of control over “free” time can be one of the main motivations to change an employment or practice situation. Financial considerations are clearly another.
Practice expansion is often the means toward that end—whether by internal growth, merger, acquisition, or even a less formal arrangement among small practices: simply sharing emergency duty. According to Dr. Mike Pownall, co-owner of McKee-Pownall Equine Services, a practice that has grown through the acquisition of five equine practices and one companion animal practice in the Toronto metropolitan area, “The more vets who can share an emergency schedule, the better the quality of life is for everyone.”
On the merger/acquisition front, equine practice has lagged substantially behind companion animal practice. Over the last few decades, we have seen considerable activity in the small animal sphere, with the acquisition of hundreds of practices by VCA Antech. Even today, VCA advertises on its website for companion animal practices with three or more veterinarians on staff and revenues in excess of $1 million, boasting that “VCA hospital acquisition transactions are paid in cash.”
Internal growth has fueled the rocket expansion of Banfield Pet Hospital, owned by the privately held candy-and-pet-food manufacturing giant Mars, Inc. and found most often sharing space with Petsmart stores. Banfield has added more than 500 hospitals in 10 years for a total of 770 locations in North America, Mexico and the United Kingdom.
Interestingly enough, Mars has substantial connections with the equine world, counting Buckeye Nutrition among its Mars Horsecare US, Inc. holdings. Members of the Mars family are also well-known for their sponsorship of the elite levels of equestrian sport. Are equine medical centers in their future?
Another model is offered by Companion Animal Practice, North America (CAPNA), a consolidation of 17 existing companion animal practices across the country, with an emphasis on “home rule” and independent operation of each of its member practices. CAPNA would like to double in size and grow to approximately $150 million in gross revenue, according to press reports. Owners of the original practices that joined to form CAPNA retained an equity share in the umbrella organization.
Simmons and Associates, a firm specializing in veterinary sales and appraisal, recommends that individual practices with less than $300,000 in gross income consider partnering with another small, compatible practice, especially if an eventual sale of the practice is a goal. Simmons asserts that practices with gross income exceeding $600,000 per year are significantly more profitable than smaller practices, and that larger practices are far easier to sell and for a more substantial price.
Equine practices differ significantly from most companion animal practices in that two-thirds of equine practitioners operate ambulatory businesses, while nearly half of them are solo practitioners, according to the American Veterinary Medical Association. Equine practitioners also have a not-unwarranted reputation for fierce independence, which may present challenges when looking at combining existing practices.
Pownall provides some interesting insights with his own practice expansion model. McKee-Pownall was founded in 2002, and since that time has grown into a 13-veterinarian equine practice with five separate locations. Arrayed within a reasonable radius around Toronto, the practices centralize their purchasing and certain administrative functions, and also use the same practice management software. There is no plan for a centralized or shared hospital facility.
Pownall points out that one of the most important factors to evaluate when considering the acquisition of a new practice is to “make sure the culture of the new practice is similar to your own. Transitioning to a new culture is the hardest thing for people to do.” As he explains, “Situations take a lot of work to get the staff and doctors on board, and the clients as well. Make sure that you can speak one-on-one with the vets and staff of the practice to be purchased to get a sense of their happiness. This is essential. You don’t want to buy the practice and have the vets and staff leave.”
The Contributing Factors
Profitability in equine practices has actually declined in recent years as expenses have escalated and revenues have not increased proportionately. Individual practitioners carry several burdens, from veterinary school debt to the inability to finance new technology to make their practices more competitive.
Indeed, the debt load has increased so significantly for early career equine practitioners that the picture is bleak. In 2010, 2 percent of graduates reported entering equine-exclusive clinical practice, while nearly 50 percent reported entering some sort of post-graduate training.
The average debt carried by 2010 veterinary school graduates averaged nearly $134,000 and corresponded with an average starting salary in equine practice of $38,468, according to AVMA statistics. Note that first-year salary figures are somewhat skewed in equine practice because many view this as an unofficial internship year, and salaries do catch up within the first five years of practice life.
Salary data is further mixed, according to the 2005 AVMA-Pfizer Business Practices survey conducted by Brakke Consulting, in that equine practitioners enjoy the highest mean income in the veterinary profession, even though 33 percent earned less than $52,000 in 2003. The opportunity for substantial remuneration exists, though maybe not for all practitioners.
Further complicating the profitability equation is that fact that charges for veterinary services may not be keeping pace with the actual cost of providing those services. On the positive side, demand for equine medical services and willingness to tolerate price increases has been found to be a bit more resilient among horse owners than their companion animal-owning counterparts, although fee increases are not generally recommended as the sole strategy for increasing profits.
According to a horse industry analysis conducted by the University of Virginia’s Terance Rephann for the Virginia Horse Industry Board and published in 2011, more than $69.5 million is spent on veterinarians and equine health, averaging $1,696 per operation per year or $323 per horse. Veterinary care ranks only behind feed, equipment and horse purchase expenditures. Various studies have also shown that between 60 and 78 percent of horse expenditures take place in the county in which the owner resides.
Someone Else’s Job
It’s a fact: Veterinarians don’t learn how to manage the business side of their practices in vet school. Neal Wasserman examined data collected by the National Commission on Veterinary Economic Issues and reported that “practices with a more active administrative staff have higher revenues. The results show a very strong positive correlation ... on average, clinics see an additional $119 for every hour a practice manager works.” Conversely, data analyzed by Wasserman demonstrates that veterinary practice owners lose money by attempting to manage their own practices. As he notes, “Veterinary owners essentially lose $122 for every managerial hour less spent on medicine.” Further, solo practitioners “spent 38 percent more time with administrative obligations than did veterinarians from two-person practices ... our data suggests that veterinarians from single veterinary practices lose $168 per hour they spend on administrative work.”
Andrew Clark, DVM, MBA, echoed this sentiment in his blog, reporting on the results of Bayer Animal Health and Advanstar Communications Research Services’ annual Equine Veterinarian Economic Survey. “I found one of the results absolutely amazing,” he commented. “Ninety-two percent of respondents neither belong to a practice management group nor consult with a practice management professional. They apparently receive no business coaching. Since the response rate is the same over a two-year period, the 92 percent who don’t receive business coaching seem to be comfortable with their decision.”
Additionally, practices should make good use of technicians and assistants. According to the KPMG study for AVMA, practices that use technicians and assistants hold a higher probability of being financially healthy than those that don’t use them.
The Bottom Line
These missing dollars really add up. A solo practitioner may spend 45 to 55 percent of his or her working time on administrative duties—costing time away from revenue-producing activities. Consolidation into a larger practice structure affords the opportunity to spread the cost of administrative personnel across several income-producing veterinarians. In turn, practice managers may provide a much-needed injection of business acumen into the equine practice environment, more than offsetting the costs of their compensation. Technicians and assistants may free veterinarians from routine medical tasks and enable them to concentrate on direct patient diagnosis and treatment.
Clearly the message is that veterinarians should concentrate on providing veterinary services and developing the client relationships that will deepen their client bases. Improved client service and expanded veterinary expertise within the practice is another feature touted by fans of practice consolidation. Pownall calls it “Group mentoring and/or consultation. Instead of forging ahead and trying to figure out a difficult case on one’s own, there is group of vets with varying experience that can offer advice.” Veterinarians may also have the opportunity to develop individual practice interests and specialized expertise to a greater extent in a group environment than in a solo practice. More sophisticated, expensive equipment also becomes possible when the expense is compared against a bigger bottom line. Clients may find their needs better served due to a greater availability of veterinary personnel at peak times.
Changing demographics and the aging of veterinary practice owners may contribute to a push toward consolidation and acquisition of existing practices. In the April issue of Veterinary Economics, CPA Tom McFerson predicted that in the next five years, “we’ll see a rush of practice owners cashing out.” He attributes this to a number of factors. First, the baby-boomer generation began hitting age 65 in 2011. Each day, 10,000 more boomers reach that typical retirement milestone, although according to AARP, in 2009, more than 30 percent of people aged 65-69 continued to work.
The recent poor economy has also played a major factor. McFerson cites three “devastating” factors: the decline of investment portfolios by 20 to 40 percent during the stock market correction in 2008-2009; the burst bubble of the real estate market, which has cut property values between 10 and 30 percent; and the general effect of the recession on practice income, which reduced business values. As a consequence, many practice owners simply delayed retirement until the economic forecast improved, which many believe will now happen. A substantial portion of the 28,000 privately owned veterinary practices do not have an exit or transition plan, and may be simply offered for sale when their owners wish to retire. Sales of these practices may offer excellent financial opportunities to veterinarians who are at earlier stages of their practice careers.
On the practical side, once a decision has been made to purchase a practice or to merge, a framework should be followed to increase chances for success. In their guide “Mergers and Acquisitions Involving Equine Veterinary Practices,” (published in the journal Veterinary Clinics of North America: Equine Practice, December 2009) Brad Jackman, DVM, and Owen McCafferty, CPA, offer the following structure:
Establish compatibility SWOT analysis (strengths, weaknesses, opportunities and threats)
Leadership and structure corporate structure, management structure and individual responsibilities, including time-frames and implementation
System integration common practice and financial management, benchmarking, uniform coding and reporting
Use of outside consultants and professionals accounting professionals to value the practices involved and to structure the new entity, and legal professionals to draft documents and assure that relevant laws are followed.
All the practical preparation is useless, however, without a close examination of practice culture, as Pownall notes earlier. “Synergy” is one of the best attributes evident with a successful merger or acquisition.
Financing continues to be a major concern. Many sources report that lenders still consider veterinarians good risks, so that practitioners who have relatively clean histories and do not carry substantial debt should not have problems obtaining financing for expansion or acquisition.
All experts agree that one of the most important elements in the practice management of any type of veterinary practice is to plan the exit—in writing. This may include retirement strategies, buy-sell agreements, or even a way out if significant incompatibilities develop along the merger path.
Practice location will obviously be a significant factor in any decision to combine. The 2005 Pfizer-AVMA study found that “practicing in an area with a high-mean household income was even more critical to the incomes of equine and mixed animal veterinarians than to those of companion animal veterinarians.” The density of the equine population in a given area will also impose practical limitations on the radius that an ambulatory equine practice can serve without a central facility to which patients can travel (see map, p. 20). For practical purposes, it would probably be unlikely to have a large number of cooperating practices that share facilities and staff outside of a fairly well-populated area.
Relatively wealthy areas with large horse populations may be fertile grounds for specialty practices and technologically advanced hospitals that can feed from a network of related or unrelated satellite ambulatory practices. Development of multimillion-dollar practices of this type is evident in horse-racing meccas such as Kentucky, sport-horse centers such as the Virginia Piedmont and southern California, and stock-horse concentrations like Texas and Oklahoma. Veterinary medical education and research hospitals also play a role in advanced equine medical care.
According to the Bureau of Labor Statistics, fewer future veterinarians will be self-employed. Approximately 6 percent of the profession overall is engaged exclusively in equine practice.
Client demands and veterinary practice offerings are becoming more sophisticated, especially as diagnostic, imaging and therapeutic technologies offer options that were unheard of two decades ago. The incredible costs of these new generations of equipment will mandate that they be spread across the earning potential of multiple veterinarians. Factors are converging to make mergers, acquisitions and other combinations of equine practice more common on the equine veterinary practice landscape in coming years. Like a marriage, the more information that is known before entering the arrangement, the more likely the coupling is to succeed.
Keys to Financial Success
- Business & Financial Management
- Employee Management
- Client Relations
From AVMA-Pfizer Study, Brakke Consulting, 2005
Factors Influencing the Value of a Veterinary Practice
(adapted from Jim Stephenson, DVM, and VetPartners Veterinary Valuations Resource Council)
- Competitive Environment
- Revenue Growth
- Management Systems
- Staff Quality
- Marketability & Desirability
- Transfer of Goodwill
- Practice Stability