Over the last decade, the number of veterinary corporations has absolutely skyrocketed. Depending on where we cut off the definition of “corporate”, by our count there are at least 60+ veterinary corporations operating in the US, and more are cropping up. Just this week while scrolling through LinkedIn, I came across two new veterinary groups that I hadn’t previously heard of.
This begs the question: Why the heck are there so many veterinary corporations?
“Consolidation” driven by large private equity firms is happening in nearly all industries right now, but private equity firms seem to prefer investing in veterinary medicine.
Let’s first break down what consolidation means. “Consolidation” or “rollup” companies purchase ownership of small companies within the same industry with the intent to combine them into a single, larger business which can then benefit from economies of scale, professional leadership and management, and ultimately is valued by other investors as being more valuable than the sum of its original smaller parts.
This immediate growth of the external valuation of small businesses that join a larger company is called multiple arbitrage, and it is a major financial motivation for private equity investors to build rollup companies like veterinary corporations.
As I discussed in a previous blog post, veterinary practices are typically valued on a methodology called “multiple of EBITDA”, where EBITDA is a financial metric which is meant to measure the profitability of a business from an investor’s vantage point. In recent years, sizable veterinary groups have been valued at multiples of EBITDA that are as much as two to three times larger than those independently owned veterinary practices are valued at. This means that private equity firms can realize significant gains on their investment in buying veterinary hospitals even without having made any operational improvements to them.
Traditional private equity firms look to buy or build “rollup” companies to grow and then sell them to another buyer, often a larger private equity firm who will continue the cycle of grow-and-flip, in a very short timeframe such as 3-5 years.
This narrow timeline of ownership can incentivize bad behavior, as it rewards short-sighted decision making that is aimed at maximizing near term profitability rather than building sustainable, healthy businesses. Any decisions that will cause big problems further down the road are just thought of as the next owner private equity firm’s issue to solve.
Private equity firms like investing in veterinary hospitals because the veterinary industry is fragmented, there aren’t enough individual buyers for veterinary practices in recent years, the veterinary industry has been growing rapidly with strong tailwinds to support future growth, and it is relatively recession resistant.
What do those all mean?
Fragmented market: A fragmented market is one that consists of lots of small businesses. The opposite of a fragmented market is a consolidated market, where most of the market is dominated by a few very large companies. For a consolidation company, a fragmented market presents an opportunity to continue to grow.
Too few individual buyers: For a variety of reasons, including excessive student loan debt and burnout/mental health concerns, the current wave of retirement-aged veterinarians is struggling to find young veterinarians who are interested in buying a veterinary practice. That gap of too many sellers and not enough buyers translates into demand, a demand that veterinary corporations have been happy to fill.
Growing rapidly with strong tailwinds for future growth: With each successive generation, Americans continue to own more pets and seek more care for those pets than ever before. “The dog” has turned into “my doggo furbaby”, and that shift in cultural values has flooded veterinary hospitals with more demand than they can reasonably keep up with.
Relatively recession resistant: No business is recession proof. However, veterinary medicine has historically weathered economic downturns much better than other industries, especially in recent decades.
Putting this all together into a summary:
1. Traditional private equity firms are currently seeing veterinary medicine as a land grab, trying to gobble up as much ownership in the industry as they can as quickly as possible.
2. The underlying financial forces behind “consolidation” allow them to arrive at large financial rewards even without improving the businesses that they buy. This often leads to patchwork operational strategies, as focusing on growing quickly is more lucrative for private equity-backed veterinary corporations than being good stewards of the practices they buy.
3. Their short investment timelines often incentivize short-sighted strategies such as aggressive price increases, austere expense management, and large “trap” signing bonuses for employees attached to multi-year contracts which get “clawed back” if the employee quits early (i.e., before the private equity firm has a chance to sell the company). Traditional private equity firms don’t plan on owning businesses for long periods of time, so they are solely motivated by a need to maximize profitability today rather than pursuing sustainable success into the future.
4. The gap between the number of veterinary practices for sale and the number of veterinarians willing and able to buy them has created an environment where veterinary practice owners feel that selling to a large corporation is their only viable option for retirement, even despite the mismatch in ethics and values that they often feel with those corporations.
Ugh. As a veterinarian, that hurts just to type. This isn’t where we want to be as a profession, and it certainly doesn’t paint a bright picture for the future.
At Associated Veterinary Partners, we’re doing our part to push back.
Associated Veterinary Partners is veterinarian-founded, veterinarian-operated, and (unlike most veterinary groups) not backed by a private equity firm.
Dzmitry and I founded AVP with the belief that it is possible to build a veterinary practice group centered on the values of the veterinary profession and focused on sustainable, healthy growth.
We didn’t set out to “save” veterinary medicine, as we realize that much of the damage is already done: thousands of veterinary hospitals already fall under the umbrella of ownership by large, traditional veterinary corporations and hundreds more practices join those corporations every year.
Our goal is to carve out an island of sanity in veterinary medicine’s future where like-minded, values-oriented practice owners and veterinary teams can enjoy a third option that sits in the space between “independent” and “corporate” and draws from the best of both of those worlds:
We combine the autonomy and values that make locally owned veterinary practices great with the resources and shared knowledge of the AVP network.
All our partner practices are locally co-owned, and our operational approach is anchored on empowering those local leaders to be true decision makers rather than having a “top-down” leadership approach like traditional veterinary corporations.
If you’re interested in learning more about joining AVP as a partner, please reach out to me at bill@associatedveterinary.com or if you’re interested in becoming a team member at one of our partner practices, please reach out to our Director of People & Success, Tedd Trabert, at tedd@associatedveterinary.com.
Dr. Bill
#yourvetpartner