Dr. G, the owner of a three-doctor general practice — let’s call it Animal Care Oasis — came into work early one day. He opened his email and saw three new letters. “Are you ready to sell your practice, Dr. G?” one subject line read. “Let’s explore a win-win opportunity,” suggested the next one. “We have five prospective buyers for Animal Care Oasis,” announced the third. Dr. G sighed and glanced at the wall calendar. It was March 2022, and his thriving hospital was an acquisition target for every deep corporate pocket on the market.
Dr. G was among many independent practice owners bombarded with lavish purchase offers. Consolidation was in full swing, with headlines buzzing about veterinary groups securing more investments, snapping up practices and even acquiring other consolidators. One of the offers Dr. G considered promised an attractive 18 times multiple. Dr. G was in his 50s and thinking about retirement, but he still had time to play in the field. Little did he know that in just a few months, most M&A activity would come to a halt, and the occasional inquiries he received would now, at most, offer a modest eight times valuation. The consolidation bubble had burst.
What Happened?
According to Idexx data, the acquisition of independent practices declined by 68% — from 1,550 in 2021 to an estimated 500 in 2023. The stagnation in market activity can be attributed to two main factors:
- The failure of several large consolidators to recapitalize.
- Macroeconomic trends.
First, the Federal Reserve began raising interest rates to a 22-year high to combat inflation. As servicing existing debt became more expensive, consolidators and their investors were less inclined to make acquisitions at higher borrowing costs. Compounded with reduced capital in the broader market, practice valuations and buyer demand for veterinary hospitals fell. Additionally, as veterinary visits reverted to pre-COVID numbers, hospitals faced a decline in revenue that further impacted their value.
Second, National Veterinary Associates, the largest U.S. veterinary group, abandoned its plans for an initial public offering, and the Federal Trade Commission delayed NVA’s acquisition of Ethos Veterinary Health. As a result, practice valuations declined as NVA pulled back on its bullish multiples. Lower valuations for each practice led to decreased EBITDA multiples at a corporate level. This, in turn, left corporate groups that had been capitalizing on arbitrage opportunities holding a portfolio of practices purchased for more than their companies’ entire value.
What’s Next?
In his November 2023 column for The Fountain Report, Rich Lester, the co-CEO of Ackerman Group, a veterinary practice brokerage, anticipated that 2023 will mark the low point in market activity for deals, with the prospect of increased transaction volume in 2024. Encouraging signs of recovery are already emerging, exemplified by EQT’s recent acquisition of VetPartners from JAB and NVA, alongside successful funding rounds for Petfolk, GoodVets and Bond Vet.
The primary driver behind the industry’s growth is the rise of de-novo (new build) models, with groups exploring innovative approaches through smaller clinics and reduced initial costs, all while expanding their national presence. The next pivotal factor shaping the industry’s trajectory hinges on the possibility of an IPO from key players like NVA or Thrive, or a substantial acquisition of one of these groups by a massive private equity firm with hundreds of billions of dollars under management. While these maneuvers might still appear as games between multibillionaires and multimillionaires, it is a positive sign for the hibernating smaller players that could redefine industry standards and alleviate concerns within the field.
If 2024 doesn’t see an IPO or a buyout involving a group with over 200 practices, the industry will likely maintain a climate of uncertainty. In the event of an IPO, market participants will closely monitor the company’s valuation multiple and stock performance to determine its strategic direction. Should a substantial buyout transpire, we’ll see people whispering in the corners of every veterinary conference, trying to figure out the true details of the deal.
What Does It Mean for Consolidators?
Today, the biggest challenge for consolidators is the commitments they made in 2021. Back then, everything seemed smooth sailing. The arbitrage strategy yielded the expected return on investment, and groups didn’t feel the need to enhance or tweak veterinary practices for increased value. Following the sobering experience of the past years, many groups found themselves burdened with huge corporate teams, inflated overhead costs and portfolios that had shrunk by millions of dollars.
In response to this new reality, the key lies in redirecting efforts toward improving existing assets and establishing self-sustainable businesses capable of growth and acquisitions, even without external capital. To achieve the objective, consolidators must place a strong emphasis on identifying margin expansion opportunities that are in sync with the practitioners’ commitment to patient care. Transparency will be pivotal in repairing fragile relationships with their hospital teams and potential acquisition targets. This entails pinpointing margin-expanding avenues that resonate with practitioners’ objectives, such as dental services, wellness plans, DNA testing and telehealth.
Leveraging data resources will be paramount. The wealth of data scattered across veterinary groups represents a valuable asset that demands consolidation and utilization to uncover concealed revenue streams and operational efficiencies. The unification of data will empower groups to make more informed business decisions, fine-tune pricing strategies and workflows, and maximize the lifetime value of their clients.
In the long run, the most successful groups will be those designed to expand and sustain themselves independently, with private equity investments boosting an already sturdy operation.
Such a consolidator of the future might already exist, operating within three or four distinct groups. It combines Petfolk’s strategy for generating multiple revenue streams through brick-and-mortar hospitals, telemedicine and mobile services. It incorporates PetVet365’s It ownership model, with industry-leading DVMs at the helm of each region. It adopts Modern Animal’s membership approach and provides clear post-acquisition plans, similar to VCA. The funding for a new group like this would come from former practice owners who sold their clinics to NVA at peak prices and have waited out their non-competes. The goal is to construct a self-sustaining structure where the generated revenues cover the costs of future practice acquisitions or developments.
What Does This Mean for Private Practice Owners?
Now that practice valuations have returned to pre-COVID figures, it is time to realize that 18 times EBITDA multiples were a momentary surge and are reverting to their typical range of eight to 13 times. As the market levels out, now is a prime moment for independent practice owners to look under their businesses’ hood and identify improvement areas. This move could involve:
- Upgrading equipment or transitioning to a cloud-based practice information management system. Both appeal to a potential buyer because of their seamless integration capabilities.
- Making the most of inventory management and optimizing the cost of goods sold to improve profit margins.
- Introducing additional services or tapping into high-revenue sources, such as dental care and wellness plans.
By making such enhancements, practice owners will fetch the maximum value when potential buyers come knocking again.