My December 2020 article “Mercenaries and Missionaries” described the then-current state of veterinary practice consolidation [go.navc.com/mm-TVB]. It proved to be one of the most read of my columns. More than four years have passed since that story, and veterinary consolidation continues to evolve. Let’s revisit the topic.
The Current Landscape
The Census Bureau estimates the number of U.S. veterinary establishments at 32,634. The Antelligence Veterinary Enterprise Practice Database lists 9,500 corporate practices. At the time of this writing, corporations own an estimated 30% of general practices, accounting for 50% of primary care revenue, and they operate 75% of specialty and emergency practices. That’s today’s practice consolidation landscape.
Consolidation is not limited to veterinary practices. It’s active with manufacturers, distributors, pet health insurers, pharmaceutical companies, and many vendors utilized daily by independent and corporate practices. The trend toward corporate practice ownership has raised concerns about its potential impacts on the profession, including access to services, the cost of care and practice autonomy.
Let’s dig deeper into the investor community and consolidation.
The Buyers
Investors figured out what those inside the profession have known for decades: The veterinary profession is a wonderful place to be. Pet numbers are up, pet spending is up, pet lifespans are up, euthanasia is down, the bond between pets and families has never been stronger, and aging veterinary practice owners are looking for an exit.
Investors have a simple thesis. They see a fragmented, recession-resistant, unregulated profession growing at a rate well above the gross domestic product and free of many of the complications inherent in human medicine. Society’s love of pets is not going away. Eighty-seven million U.S. households keep a pet today — 66% now compared with 56% in 1988. The United States has 90 million dogs and 74 million cats. That’s more four-legged pets than two-legged children. It’s an excellent recipe for investment.
Who are these investors? They are primarily in private equity, and they invest in shares of companies that are not publicly traded. They include pension funds, teacher unions, university endowments, large institutions and accredited investors.
The Sellers
Consolidation is possible only when willing sellers exist. A generation of successful independent practice owners has gained well-deserved financial freedom by choosing to sell to the investor community. These owners have built a new path — an attractive exit option — for current independent owners.
The Consolidation Cycle
Consolidation is a normal part of the economy. It tends to occur in any thriving, fragmented, profitable industry that will benefit from investment and continued growth. If we look at the veterinary consolidation cycle like a baseball game, it has three phases.
- Early innings: This is the land-grab phase, where investors buy as many properties as they can as fast as possible. The objective is to purchase individual hospitals for 1X and then bundle and sell a group of them for 2X (arbitrage). Land-grab investors seek to get in and out of the market within three to five years. When deciding whether to buy a hospital, they look primarily at revenue and EBIDTA (a fancy measure of profitability). They invest as little as possible in the acquisition and flip it to the next buyer at a premium before moving on to another interest, perhaps in another industry. These are the flip-and-forget mercenaries that dominated the veterinary landscape 10 years ago. Thankfully, our profession is at the end of the land-grab phase of the consolidation cycle. The good news during a land grab is that sellers (practice owners) receive record prices. The not-so-good news is that the investors are unlikely to reinvest money into the hospitals.
- Middle innings: New investors buy a group of practices from the short-termers. They pay more for the group as the risk declines across a diversified portfolio of hospitals. Middle-inning investors take a longer-term view and are more willing to invest in their hospitals. They better understand the value of investing in recruiting, culture, back-office support, brand, equipment and training. For the most part, our profession is in the later middle innings of the consolidation cycle.
- Late innings: This phase involves strategic consolidators who are in it for the long haul. To date, only two big U.S. strategic players have emerged: Mars (the owner of Banfield, VCA and BluePearl) and JAB (Compassion First and National Veterinary Associates). Both made substantial investments in our space and appear to be here to stay.
Comparing Both Models
In theory, consolidators should have advantages in scale, leverage, employee benefits, career pathing, service expansions, managerial expertise and access to capital. Their potential disadvantages include compromising medical autonomy and prioritizing profit over people and pets. Independent practices, conversely, have ultimate autonomy and flexibility, less bureaucracy, and the intangible advantage that comes from owner-operators.
When all is said and done, there are good and not-so-good corporate practices and good and not-so-good independent practices. Fortunately, the vast majority of both are good.
Regardless of who signs their paychecks, veterinary employees want the same things:
- Be fulfilled professionally.
- Enjoy the work and those they work with.
- Make a difference in the lives of patients and clients.
What’s Next?
The investment pace slowed as interest rates rose. During declining interest rates, well-run, middle-size practice groups draw more investor interest. No significant-sized veterinary practices have been available on the public markets since VCA sold to Mars in 2017. Look for that to change.
Does independent ownership have a future? Definitely! Our profession’s growth enables opportunities for all, including the chance to build de novo practices, purchase clinics from retiring baby boomers, develop innovative new practice models, form partnerships, offer franchise opportunities and enter joint equity ventures.
Good Medicine Equals Good Business
Investors and independent practice owners must make money (profits) to offer the care that pets require. The narrative pitting one against the other is too common and frequently unproductive.
Fortunately, in most cases, good medicine and good business go hand in hand, thus aligning incentives between veterinary professionals, investors and consumers. Likewise, successful independent and corporate practices recognize that taking good care of employees and consumers results in good business outcomes. Call me naïve, but in my experience, that holds.
Like it or not, the investor community is here to stay. For all to succeed, strong veterinary leaders are needed at every level of independent and corporate practices. Whether we’re talking corporate or independent, our future is bright.
INSIDE INTELLIGENCE
Antelligence also publishes The Fountain Report, Pet Care Weekly and Veterinary Student Insider. Learn more at bit.ly/3X4uDrs.