For the last 10 years, equine practitioners have watched as the companion animal sector of veterinary medicine has been increasingly occupied by corporate aggregators. These groups typically purchased successful practices with multiple doctors and high profitability for robust price points, rolled up 25-50 of them, then sold the group to another corporation for a higher price within a few years.
Corporate-owned veterinary practices have been around for more than three decades, and now corporate veterinary practice groups number more than 40.
The number of veterinary practices in the U.S. ranges from 28,000 to 32,000, according to the 2017 AVMA Report on the Market for Veterinary Services. Brakke Consulting tracks corporate purchases of veterinary clinics and estimates that about 3,500 are corporately owned. John Volk, an analyst with Brakke, said corporations own about 10 percent of general companion animal practices and 40-50 percent of referral companion animal practices.1
VCA Animal Hospitals acquired its first independently owned companion animal clinic in 1987, and over time purchased more than 800 practices in North America.
After the successful model initiated by VCA, Banfield Pet Hospital, Blue Pearl and Heartland Veterinary Partners were formed.
Just over a decade ago, Mars Petcare, a family-owned corporation better known for its candy business, bought Banfield Pet Hospital, with more than 900 offices in the United States. In 2015 it acquired Blue Pearl, a 53-hospital companion animal specialty and emergency care group. In 2016, Mars Petcare purchased Pet Partners, which added 60 general practices. In 2017, Mars announced its purchase of VCA Animal Hospitals’ 780 veterinary locations, along with 50 diagnostic laboratories.
Mars is now the owner of nearly 2,000 veterinary practices in North America, about two-thirds of all corporate-owned hospitals in the country. National Veterinary Associates (NVA) is second, with about 425 veterinary branches.
In the equine sector, corporate rollups began in 2016 with the formation of MAVANA (Mixed Animal Veterinary Associates North America), when 21 mixed, companion and equine practices merged into one entity. At MAVANA, 95% of the shareholders are still practicing veterinarians, and most have sold their practices for a portion of cash and a portion of equity in the new corporation. In January 2018, Hagyard Medical Institute, the oldest equine practice in the country, joined MAVANA.
NVA entered the equine market shortly afterward by purchasing its first equine practice, Fairfield Equine in Newtown, Connecticut, in late 2018. That was followed by the acquisition of Miller & Associates in May 2019.
Another new entry to the equine field is the Avanti group, which has amassed four equine practices thus far. According to Avanti’s CEO, Andrew Clark DVM, MBA, the corporate option “makes sense for baby boomers that are ready to retire.” This company envisions a model of hubs with spokes—in other words, referral practices surrounded by feeder practices.
Other corporate players are also looking carefully at the larger equine practices, seeing the potential for profitable acquisitions.
The traditional model for equine veterinary practice acquisition is for practice owners to sell some or all of the shares to one or more of their associate veterinarians. Occasionally, a veterinarian not employed by the clinic might buy an existing practice without first working as an associate, but that is fairly uncommon. This traditional model of practice sales is still much more common than a corporate buyout, because most equine practices are below the threshold that attracts the aggregators. However, for a certain-size practice that earns $1.5-$2.5 million, has a facility of some kind and employs at least three veterinarians, corporate consolidators will pay considerably more than the practice is worth when valued by traditional methods.
According to Dr. Mike Pownall in his December 2019 blog post,2 “purchase amounts seem to be exceptionally high and many veterinary practice owners wonder if they should jump in and be part of the free-for-all of the seemingly high valuations placed on practices. The reality is that the high numbers they throw around seem lucrative, but don’t necessarily lead to a pot of gold. In fact, we argue that unless you are needing to sell in the very near future because you are ready to retire, or just want out and don’t have anyone to buy your practice, selling now to private equity amounts to selling your practice at a discount.” Pownall went on to illustrate the folly of selling a practice early in one’s career.
Practice ownership is one of the best ways for a veterinarian to increase financial security and wealth. However, when associates do not have an ownership path, the practice owner’s outcome might be less positive.
Because corporate entities buy a controlling percentage (at least 51%, but in many cases 100%), associates will never have decision-making capabilities even if they have the opportunity to purchase shares in the venture. When associates have been promised future partnership for years by a practice owner, then are surprised by an acquisition, they are often angry. Many equine associates, if they are able to relocate outside of the boundaries of their contractual non-competes, simply open their own practices. The majority of equine practices (about 53%) have two or less full-time equivalent doctors, according to the 2016 AVMA AAEP Economic Survey.3
Two associates who worked in the equine division of a mixed practice and had no non-compete agreements described how they declined to sign contracts with a potential corporate buyer. Instead, they offered to purchase the equine portion of the practice for a fair value from the owner, but were turned down. Consequently, the corporate deal fell through for the practice owner. The associates resigned and opened their own practice in the area.
Sometimes acquisition by a corporate entity brings long-awaited ownership to associates waiting for an opportunity. Ryland Edwards, DVM, DACVS, described NVA’s purchase of a majority of Fairfield Equine in late 2018 as a positive development, because a long-anticipated shares purchase was fast-tracked by the corporation at the time of the transaction. He and another associate at the practice were pleased to each acquire 10% of the company, and they received skilled assistance in navigating paperwork, finding a lender and completing the deal quickly. “It’s really been a positive experience for us,” Edwards concluded.
The experience of being surprised by a corporate acquisition can be met with dismay, as communication of the changes can be poorly rolled out.
One associate in that type of situation described “a cavalier attitude that showed no respect for the change to the associates’ futures.”
Several associate veterinarians described being given a new contract after a purchase by the new corporate owner and told it must be signed within five days. They described feeling that they “had no choice but to sign or be left with no paycheck and no time to put together a viable plan.”
Many associates are bound by a contractual non-compete, have purchased houses, have spouses employed in the region, and/or have children enrolled in local schools. Picking up and starting again in a new location is not an easy task.
Darla Moser, DVM, DACVS, is an associate at a referral hospital outside of Las Vegas that was recently acquired by Avanti. She described a long “courtship” where both sides took the time to get to know each other so there were no surprises and no confusion. Although the introduction of new practice management software was challenging, the Avanti team made the process as painless as possible, she said. Moser concluded, “It was a very smooth transition, and I have seen nothing but positive changes—possibly because of experienced equine practice managers looking at the practice from an outside perspective.”
Funding for Acquisitions
Most corporate veterinary practice aggregators obtain capital from private equity firms. These enterprises manage assets for a variety of investors, including wealthy individuals. Private equity firms generally buy businesses in all types of industries, encourage growth in profit, then sell them in three to seven years. Some equity ventures simply aggregate practices, then promptly sell the group for a profit. Because a private equity firm’s objective is to exceed the average return of the stock market, which is historically about 8% annually, profits from veterinary hospitals can readily provide a much higher margin.
In the veterinary sector, equity firms expect to make a return on their investment that enables them to buy additional practices. Ultimately, after amassing a group of practices, the private equity owner sells the bundle for a substantially higher price than it paid to acquire them. Some consolidators get funds for investment by using specialty, non-bank lenders that offer loans with interest-only payments for a period of time. The aggregator then buys more practices with the principal, seeking to collect a sufficient number to up-sell them to another buyer, pay off the loan and have profit remaining.
Advantages to Corporate Ownership
There are advantages to corporate veterinary ownership compared to the traditional private practice model. Many veterinarian owners dislike the business management part of running a practice or simply lack the skills to effectively deal with staffing issues, hiring new employees, ensuring compliance with the myriad of regulatory issues, and other time-consuming business details.
With a corporate group in control, management is handled by the corporate office. That means veterinarians can focus their time exclusively on providing patient care, eliminating a source of stress.
In addition, if a veterinarian needs to move to a new part of the country because of a spouse’s job or a family issue, the veterinarian might be able to transfer to another of the corporate entity’s clinics across a wide geographic area. Sometimes associates in corporate practice work more standardized schedules, with fewer hours than what is typical for a doctor in other equine practices. Because they have many employee veterinarians, corporately owned practices can sometimes send a relief veterinarian to a practice in the case of an injury or due to maternity leave.
As an exit strategy for practice owners, selling to a corporate aggregator can allow an older veterinarian near retirement to gain a higher price than he or she could from an inside sale to an associate. The corporate practice might also keep existing staff members and have the practice owner continue working for several years as an employee as a condition of sale.
Because equity venture groups do not typically buy practice-associated real estate, the former practice owner might benefit in the long term by leasing the practice facility to the corporation.
Although members of the younger generation of equine practitioners understand the lure of a big payout, they lament the change in the industry. As one said, “I understand the concept of an owner who wants an exit plan that pays off in a big way, but it sacrifices the futures of the younger veterinarians coming behind.”
This long-term associate now thinks of his or her position as “just a job” and is investigating other options that could offer self-determination and the financial benefits of practice ownership.
Benefits for Younger Veterinarians
Both a positive as well as a negative aspect of corporate practices is their ability to offer higher salaries to new graduates. Having a higher salary helps with paying educational debt, but might cause these doctors to bypass privately- owned equine practices that rarely can compete aggressively with corporate clinic salaries. That could limit those veterinarians’ future ownership opportunities.
This strategic move by corporately owned practices to corner the market on the small numbers of new veterinarians entering the equine field, and making the positions attractive enough to retain them by utilizing equity funds, could drive some smaller practices out of the market if they cannot attract associates.
One of the disadvantages of corporate practices is the lack of an option for associates to have majority ownership, if they can purchase shares at all. In the equine market, giving associates a chance to purchase a small number of shares is fairly common, as this helps to “lock in” valuable producers for the practice. Although some buyouts include the opportunity for associates to own shares, they will never be in charge of their own destinies as minority shareholders.
Sometimes this limited decision-making ability extends to the medical realm, with pressure to follow “best practices” relating to pricing and treatment options. This lack of flexibility can be demoralizing. If equipment is needed or changes in policies are sought, there can be a lengthy approval process rather than a quick owner decision.
A significant drawback is the need for corporate practices to answer to their stockholders and maximize the bottom line short-term, while most veterinarians focus on long-term relationships with clients. Although every practice has to make a profit to be sustainable, some corporations have created pressure to up-sell clients to increase profit margins. The potential overemphasis on financial results is a common criticism of corporate medicine.
Economies of Scale
In most industries, gaining economies of scale is a cost-saving strategy achieved through having more business locations with a larger market share.
Shareholders then gain higher returns through lower costs, improved efficiency and introduction of technology. By using this approach, corporate consolidators have improved labor efficiency by eliminating duplicate services in marketing, accounting, inventory management and human resource management. When these services are performed at a centralized office, operating costs are lowered, increasing the profit margin.
These lowered costs could also be used to lower client prices to potentially gain a larger share of the available market for equine veterinary services, but this is rarely seen. In addition, corporate veterinary aggregators negotiate to purchase products and services at discounted prices.
Valuation of Practices
The valuation method that private equity investors use to determine the value of a veterinary practice is different from how the veterinary community, including banks that lend for associate acquisitions, figures the value of practices.
Independent veterinary practice owners generally utilize an income approach, including the Capitalization of Earnings/Cash Flow Method, the Discounted Earnings/Cash Flow Method or the Excess Earnings Method.
Banks generally will lend at five to 6ó times the annual EBITDA (earnings before interest, taxes, depreciation and amortization) of the practice being purchased, provided that it is well-managed. In contrast, aggregating investors focus on returns on investment (ROI) in an effort to exceed the stock market average return of 8% per year.
Currently, private equity firms are often willing to pay eight to 10 times an equine hospital’s EBITDA because even at that price, they can exceed their desired ROI of greater than 8%.
As an example, consider a practice bringing in $2 million in gross revenue that is generating 12% profit, or $240,000. Using the bank’s common multiple of five for a well-managed practice, this practice would be worth $1.2 million. Buying this practice at $1.2 million would yield to the purchaser an ROI of 12% ($240,000 earnings on a $1.2 million investment).
A corporate investor seeking to beat an 8% stock market return could increase the offered price to nearly $3 million. That’s because the practice’s annual profit of $240,000 is 8% of $3 million.
A purchase price of $3 million would be 12.5 times the practice’s annual earnings!
It is no wonder that owners of practices matching the target of consolidators are increasingly attracted to selling at these high prices.
It is important for younger owners to consider the financial aspects of these transactions very carefully before selling to an aggregator. Consider a 50-year-old practice owner planning to retire at 65 years of age, leaving 15 years of practice ownership yet to go. Even if the $2 million practice we considered previously did not grow in revenue, which is unlikely, that $240,000 in EBITDA x 15 years is $3.6 million. By selling at age 50, this doctor leaves $600,000 on the table and still has the opportunity to sell his or her practice at retirement, perhaps to an associate or perhaps to a corporate entity.
Even at a multiple of five, this is an additional $1.2 million.
While this doctor could theoretically invest his proceeds from an early sale, $3 million might not support a comfortable retirement of an extra 15 years in length, especially if there are economic shocks.
Private equity companies often buy individual practices at a multiple of EBITDA that is in the mid- to high-single digits. Then, when they have acquired enough practices, they can often sell the bundle for double the initial multiple. Because risk is diminished across a larger group of practices, the valuation and price paid is higher.
For practice owners ready to retire, sale to a corporate consolidator can mean more money for their final years and alleviate concerns about a sale to associates whose concern about high educational debt can minimize their enthusiasm for purchasing a practice.
For those owners who don’t want to sell to an aggregator, managing the practice for high performance and serving current clients exceptionally well can attract high-quality associates who might ultimately want to purchase shares. An “inside” sale to an associate can be structured a number of different ways to make it affordable while gaining the owner a fair return on his or her life’s work. While sums will not equal those available from an aggregator, a practice seller might have more confidence that the practice will remain a valued legacy in the equine community.
In summary, corporate consolidation of equine practices has begun, and it is likely to continue to change the market.
The target of most of these groups is the well-managed, profitable practice that has at least $2 million in revenue, three veterinarians and a facility of some type. The high prices that the aggregators can offer is a function of their primary goal of earning more than the average rate of return of the stock market and their abundant cash from investors that make the purchases possible.
While the sale of a practice to a consolidator might maximize the “take” for an owner at retirement age, younger owners will lose substantial value by transacting while there are still more than five to seven years left of their career trajectories.
For associates, corporate purchase of their place of employment can be a positive experience or a rude disruption of their career aspirations. There is no certainty of the future effects of consolidation on the equine veterinary industry, but it is a development that is our new reality.
1) “The Corporatization of Veterinary Medicine” Scott Nolen, AVMA NEWS, November 14, 2018
3) AVMA/AAEP Equine Report (AAEP Members Only section of AAEP.org)