I will never forget my first staff meeting as the new owner of a rural mixed-animal, one-doctor practice. To this day, I can still feel my nervousness and excitement. I vividly recall walking into the hospital’s small reception area after leaving the title office, the recently signed loan on my mind and the hospital and real estate purchase agreements in my possession. I’d rehearsed what I wanted to say to the team members countless times. I wanted to share my joy, affirm my commitment to them and the hospital’s mission and clients, celebrate the practice’s history and success, and impart my passion for moving from good to great.
About halfway through a genuine, heart-felt speech, one in which I had hoped to establish myself as a trusted leader, the clinic’s most seasoned technician stood up, arms crossed and her facial expressions leaving no doubt about how she felt. “Son,” she said, “I’ve been doing this for longer than you’ve been alive. I don’t like change and don’t plan to change.” After I picked my jaw off the floor, I remember thinking, “What have I gotten myself into?”
Upon reflection, and as uncomfortable as the experience was, I learned an invaluable lesson that I believe has served me well at that hospital and at another one I’m about to tell you about. That is, while one should read, study and prepare to become a practice owner, there is no classroom like the real world.
I often teach, speak and write about private practice ownership. I do my best to disclose my failures, successes and lessons with veterinary students and colleagues across the country. While I hope sharing my experiences will serve others, I recognize that knowledge, theory and lessons remain abstract until we’re tested as practice leaders and owners.
My goal here is to present a real-world case study in the hope that it helps make what can be abstract information more applicable. I’ll review a hospital my business partner and I purchased, discuss its origins, then explore it post-purchase. With no holds barred, we’ll investigate the changes in the hospital’s financial health, culture and patient care. More importantly, I’ll examine the actions and decisions that helped drive the results, good and bad.
2018
Fast-forward a few years to the second hospital. Out of respect for the sellers, I’ll keep the geography a bit broad. The practice (80% small animal, 20% beef and equine) is nestled between two ranges of the Rocky Mountains in a town of about 70,000 people. Here’s the breakdown at the time of the 2018 sale:
Staff
- Seven veterinarians (four full-time equivalents)
- One practice manager
- Nine technical staff (technicians and assistants)
- Four client service representatives
- Four kennel assistants
Facilities
- Six exam rooms
- One surgery suite with two tables
- A treatment area with two tables
- Haul-in facilities for large animals, with stocks, stalls, chutes and two surgery suites
2017 Financial Health
- Gross revenue: $1.76 million
- DVM production: $372,645 per full-time equivalent
- Payroll as a percentage of gross revenue: 51%
- Cost of goods sold as a percentage of gross revenue: 28%
- Adjusted net income after fair-market DVM owner compensation: negative $2,675
Another important metric, but one with limited data points, was culture. Due to no one individual’s fault, the team had become complacent. The level of medicine and client service had plateaued as measured through thoroughness-of-care metrics, client surveys and post-purchase team feedback. The hospital touted, and its mission statement reinforced, a desire to be the highest-quality veterinary facility in that part of the state. But, in reality, and according to the previous owners, they and their teams had stopped striving for greatness.
When teaching veterinary students about practice ownership and management, I’m occasionally asked whether improving a hospital is similar to flipping it, as seen on TV real estate shows. My answer is that while you can do that, I believe that private owners are obligated to do more than “put lipstick on a pig.” Instead, my focus is on sustainable, ethical changes resulting in a healthy hospital.
Success in practice ownership can be defined in several ways, but when I talk about it, I focus on these four pillars:
- Culture: An engaged team of highly skilled, leveraged, self-accountable leaders having fun, working hard and accomplishing the hospital’s mission.
- High-quality medicine: Consistently offered and delivered.
- Client experience: Positive, memorable and revolving around a sense of partnership.
- Profitability: Sustainable, ethical and allowing consistent reinvestment in the hospital and a competitive return on investment for the owners.
TWO YEARS LATER
With all that in mind and understanding that laying or rebuilding an appropriate foundation takes time, let’s fast-forward two years from the 2018 purchase.
Staff
- Four full-time veterinarians
- One hospital administrator promoted from within
- One office manager promoted from within
- 13 technical staff
- Five full-time-equivalent client service representatives
- Four full-time-equivalent kennel assistants
Facilities
- No significant changes
2020 Financial Health
- Gross revenue: $3.49 million
- DVM production: About $700,000 per veterinarian
- Payroll as a percentage of gross revenue: 41%
- Cost of goods sold as a percentage of gross revenue: 24%
- Adjusted net income as a percentage of gross revenue and including fair-market DVM owner compensation: 17%
My partner and I celebrated the following highlights with the team:
- Culture: Voluntary employee turnover decreased substantially, and client satisfaction scores increased. Team surveys showed that our employees thought they had the opportunity to do what they loved, were trained and supported when doing so, and were making a difference professionally.
- Gross revenue: Though we employed fewer veterinarians but the same number of full-time equivalents, gross revenue nearly doubled ($21,000 short).
- Payroll: As a percentage of gross revenue, it dropped by 10 points, even as the number of support staff members and their wages and benefits increased.
- Cost of goods sold: While not as low as in 2022, it dropped by 4 percentage points.
- Adjusted net income: Comparing apples to apples in terms of EBITDA, the hospital went from a loss to a 17% profit margin.
Pretty cool, huh? Don’t get me wrong, there’s always room for improvement, and we’re certainly not in a position to get comfortable and coast, but it’s not hard to feel incredible pride in the practice team. What’s more, our hospital is not an anomaly. I could have picked from dozens of examples to illustrate my point. Results like ours are attainable given the right leaders, teams and commitment.
How can your practice generate similar results? Hospitals like mine tend to follow a similar game plan.
Drawing on my definition of a healthy hospital, let’s focus on the four pillars mentioned earlier.
1. Culture
Definition of success: An engaged team of highly skilled, leveraged, self-accountable leaders having fun, working hard and accomplishing the hospital’s mission.
How the team, my partner and I accomplished it: Upon purchasing the hospital, my partner and I used a publicly available tool, 360 Review, to help us better understand and eventually leverage the team. The tool can be called upon whether you’re taking hold of a newly purchased hospital or you’re a seasoned owner with long-time staff.
I use two documents when I conduct 360 evaluations, whether at my hospitals or as a consultant to others. First, team members complete a self-assessment. Then they assess their co-workers individually, the owners included. Such an exercise won’t work without confidentiality, so I ask everyone to place their 360s in sealed envelopes and deliver them to the manager or me, or separate them so I don’t see the reports on me and the manager doesn’t see hers.
At this point, I recommend reading the evaluations and watching for trends. For example, is a particular team member consistently praised? If so, why? If someone is frequently criticized, why? I’m also trying to understand better what motivates each team member and identify untapped potential or interests that could benefit the hospital.
After reviewing the 360s, sit down privately with each team member. While I would never share the evaluations, I summarize the trends and use the documents as an opportunity to praise, coach and set goals.
In our case-study hospital, the process:
- Provided a platform for building a community where everyone was, and continues to be, heard.
- Gave insight that my partner and I, especially as new owners, might have taken months to learn.
- Encouraged mutual respect between team members and between the team and leadership.
- Identified actionable opportunities for improvement and coaching.
Understanding your team members and ensuring they’re in the right seat on the bus is paramount to creating an environment conducive to team-based medicine, with each person performing at capacity. Within a week of conducting the evaluations and follow-up conversations, we moved some people to seats that better aligned with their skills and interests, elevated a few others for leadership positions, and had crucial conversations with those who didn’t appear aligned with the hospital’s mission.
I believe in the power of a hospital’s common “why.” When team members understand their roles and how their performance supports what they care about, they work harder, produce better results and have more fun.
After we conducted the 360s, we held a series of staff meetings. One of the topics revisited and further defined the hospital’s “why.” As we brainstormed, we asked everyone to differentiate between what the hospital does — “Offer progressive, cutting-edge medicine,” for example — and why we do it. Determining your why and obtaining team buy-in influences how everyone treats each other, the level of patient care, the client experience and everything in between.
2. Quality of Care
Definition of success: High-quality medicine (defined by the owner’s why and the hospital’s mission) that is consistently offered and delivered. It’s not one size fits all.
How the team, my partner and I accomplished it: From my experience, many new practice owners struggle to drive change because they’re uncomfortable having tough conversations. Before its purchase, my hospital’s quality of care had plateaued because no one was pushing. According to its original mission statement, the hospital wanted to be the best in the region. However, while the practice was by no means a “bad” hospital, it wasn’t living its mission. Each doctor had a personal philosophy of best medicine, which varied based on their mood that day, and unfortunately, the technical staff didn’t do much client education.
The disparity in philosophies, exacerbated by the lack of a true hospital administrator when it came to operations and staffing, had a substantial impact on the practice’s financial health. In this case, gross revenue did not reflect what a seven-doctor (four FTE) hospital should achieve ($500,000 to $600,000 each, according to benchmarks).
My partner and I didn’t come in and jack up prices or even center our communication on money. Instead, we sat down with the doctor team. As a group, we examined who we wanted to be (the mission statement) and compared it to who we were. The process led us not to create cookie-cutter protocols but to define what best medicine meant and renew our commitment to it. As a result, we lost, by our choice or theirs, a few veterinarians. While the fear of doctor turnover can paralyze new practice owners, I submit to you that turnover is not always bad. If someone is on the wrong bus, helping the person realize the need to get off is one of the best gifts we can give them and to the remaining team members committed to the future.
The commitment to best medicine is not a one-time effort. To this day, weekly meetings examine how we measure up against our mission and vision. We discuss cases, protocols, staff numbers and leverage, culture, and the client experience. The most successful hospital owners I know got there because they became students of the process.
3. Client Experience
Definition of success: Positive, memorable and revolving around a sense of partnership.
How the team, my partner and I accomplished it: I share with veterinary students that one of the best ways to disappoint the largest number of clients and staff members is to try to be everything to everyone. In the hospitality industry, for example, most people who stay at an Econo Lodge don’t consider a nearby Hyatt. That is because the two brands serve different clients, and everything from customer service, facilities and the overall experience is designed to appeal to a specific client base.
Our hospital’s struggle with its identity related to medicine was primarily driven by the desire to be everything to every pet owner. The practice wanted to be cheap in cost but high in quality. It wanted dependable, well-trained staff, but the average prices meant average wages. The team wanted state-of-the-art facilities and equipment, but the owners weren’t proactive about ensuring profitability.
Within a week of owning the hospital, my partner and I began the gradual, calculated process of identifying gaps in the client experience. First, we worked with each department to determine where we excelled and where we weren’t living up to our mission. Then, as we analyzed each client touch point, we asked team members to help define success and how we could measure it. We looked at everything from on-hold phone time to how long a pet owner waited to be escorted to an exam room to post-visit client surveys. All that sounds simple, and it was, but it hadn’t been done before at our hospital. The exercise helped us define and deliver the client experience we wanted to be associated with our hospital.
4. Financial Health
Definition of success: Sustainable, ethical and practice profitability allowing consistent reinvestment in the hospital and a competitive return on investment ROI for the owners.
How the team, my partner and I accomplished it: Without financial health, we’d have an unsustainable business model that would eventually fail us and everyone we served. I am particularly proud of my hospital’s financial results not because of the numbers after the dollar signs but because of the team’s growth, willingness to adapt and ownership of success.
I highlighted a few financial metrics earlier and would like to briefly explain how we influenced them.
Cost of Goods Sold
When we purchased the hospital, the lack of a genuine inventory management system was reflected in a COGS number of 28% of gross revenue. Dropping COGS to 24% added roughly $60,000 to our net income, which we repurposed for staff bonuses and outfitting two new exam rooms.
To realize the gain, we started by educating the team about why inventory management is important. From there, and with the help of the 360 reviews, we identified a technician interested in learning about inventory management. We gave her the time, resources and coaching to champion the position and worked alongside her to create a system.
You’ll find many great articles about inventory management, so I’ll just hit the highlights briefly using the SMARTER acronym. As important as the steps below are, practice owners must select and train the right inventory manager and then stay out of the way. Here’s the checklist:
- Strategize: Establish appropriate inventory roles and oversight. Then, prioritize, organize and develop a budget.
- Minimize: Manage product turnover, reasonable quantities and reordering.
- Accountability: Use practice management software and other tools.
- Replenish: Optimize replenishment steps such as purchasing, receiving and returning.
- Track: Maintain accurate numbers of what’s in the clinic, and conduct proper cycle counts.
- Engage: The entire clinic team should buy into inventory management.
- Retail: Understand markups, margins, pricing and merchandising.
Payroll
I was on a mentoring call with a dual MBA/DVM student at Colorado State University who asked why I tracked payroll and what to do if it was out of line. I responded with a similar question, and his answer was as I had hoped. That is, payroll, tracked as a percentage of gross revenue, helps measure how effectively we leverage veterinary team members, their level of training and, ultimately, patient care. With a payroll at 51% of gross revenue at the time of purchase, we saw an opportunity to align it with the averages of what the industry defines as “well-managed hospitals” — closer to 40%.
When someone talks about reducing the payroll percentage, minds often race to negative levers: cutting staff, slashing hours, and shaving wages or benefits. While those are options, I don’t recommend them, especially if you’re trying to win over a new team.
The reason I look at payroll as a percentage of gross is that the other big lever for reducing the rate is increasing gross revenue. That’s exactly what my partner and I did. If you recall the staffing numbers at the time of sale and two years later, the number of FTE veterinarians stayed the same. However, the management and technical staff increased.
One of my favorite initiatives besides hiring more people was my partner’s brainchild, an idea we called “Expect more, earn more.” The mantra was the rallying cry for a higher minimum wage for all new hires. Under the initiative, any existing employee earning below the new wage met with management to discuss a customized development plan leading to a raise. All in all, the support staff payroll increased by almost $20,000 annually in one sweeping move. Given that we own a private practice, it’s important to note that the extra money didn’t come from private equity or outside sources. Instead, we took a leap of faith that the the hospital and team would perform.
To stack the deck for success, we followed up the “Earn more, expect more” meeting by strategizing with department leaders to build a system that allowed every team member to focus most of their time on what they were most qualified to do. That didn’t mean team members couldn’t be cross-trained or pitch in as needed. It meant that job descriptions, patient flow, support staff leverage and the doctor-to-technician ratio were designed to optimize individual skill sets and interests. Ultimately, that approach changed how our veterinarians and technical staff supported each other and interacted with clients and patients. And it meant that team members were expected to do more. Given the appropriate support, training and resources, most people rose to the challenge. Some did not. Earning more means expecting more.
Adjusted Net Income
Moving from a negative number at the time of sale to 17% speaks for itself. In a hospital our size, the commitment to a sustainable, ethical and profitable business meant hundreds of thousands of dollars a year in reinvestment.
Speaking with our practice manager, I learned that in 2022, we were on track to spend well over $20,000 on food to sustain the team during internal continuing education meetings, staff parties and busy days. I share the number not to brag — I’m sure other hospitals spend way more — but to emphasize that profitability is critical in growing, recognizing and supporting a hospital’s mission.
Brighter Days Are Ahead
It’s been almost a decade since I walked into the first clinic and was dressed down by the seasoned technician.
Ten years and a few hospitals later, I still ask myself the same question on rare days: “What have I gotten myself into?”
I don’t want to leave you with the impression that private practice ownership will always be perfect or that we, as owners and leaders, will always make the right decisions. We don’t, and that’s OK. I hope you gleaned real-world, actionable strategies that can help make the good days far outweigh the bad. Change, whether you’re a new or veteran practice owner, isn’t easy, but I invite you to embrace it and watch your team, hospital and those you serve exceed your imagination.
A TOP-DOWN APPROACH
Most veterinary practices exclude the entire team from contributing to goal-setting. The Veterinary Hospital Managers Association asked its members, “What staff members are involved in the strategic planning process?” The top answers:
- Practice owner and management (39%)
- Practice owner, management and key team members (26%)
- All team members (9%)
- Management only (7%)
- Practice owner only (7%)
AS EASY AS 1, 2, 3, 4
Good inventory management is critical to maintaining or improving a veterinary practice’s profitability. Check out these Today’s Veterinary Business articles:
- “Take Better Control of Your Inventory,” by Mark Opperman, bit.ly/inventory1-tvb
- “You Can Count on It,” by Sandy Walsh, bit.ly/inventory2-tvb
- “Made to Order,” by Dr. Natalie Marks, bit.ly/inventory3-tvb
- “Pick a Winner,” by Brian Conrad, bit.ly/inventory4-tvb