John Volk understands the allure of being approached by someone who wants to buy your business. Before becoming a consultant, he owned an ad agency in Chicago in the 1990s, one he’d built from scratch into a thriving business. Volk had no intention of selling until a company offered him an “unbelievable” amount. He sees similarities in what veterinarians have to decide in today’s market, especially older veterinarians.
“If you’re a veterinarian who’s 55 to 65 years old, you’ve spent the last several decades building up a good practice, and people come along and want to pay more than you ever in your wildest imagination dreamed that the practice would be worth. It’s really hard to turn down,” said Volk, a senior consultant with Brakke Consulting.
Indeed, independent veterinarians selling to larger corporations is a trend that’s accelerated over the past few years, said Dan Eisenstadt, the CEO of Terravet Real Estate Solutions.
“According to industry sources, it’s estimated that more than 1,000 practices were sold to corporate groups in 2021,” he said. “Some practices are setting record-high sale prices, selling for more than twice the amount that the same practice would have sold for five years ago. Some industry sources estimate that approximately 50% of veterinary practice revenue comes from practices operated by corporate groups.”
A Watershed Moment
When it comes to veterinary practices being acquired, 2021 was a watershed year, Volk said.
“We saw values just explode,” he said.
Before 2021, consolidation was trending up at a steady rate. The earliest consolidations by companies like VCA Animal Hospitals were for five to six times the veterinary practices’ earnings before interest, taxes and amortization (EBITA). Those values gradually climbed to eight to 10 times. But in 2021, consortium consolidators paid as much as 20 times EBITA for healthy, large general practices, said Volk. For good, specialty referral practices, it was even more.
What’s behind the trend? First, more investors see the resiliency and worth of veterinarians. During the pandemic, most veterinary practices stayed open as essential services.
“The resilience and performance of these practices during the shutdown, when even human health care practices were closed, reinforced interest from institutional investors,” Eisenstadt said. “As we climbed out of the pandemic, veterinary practices continued to demonstrate strong growth, resulting in even more M&A activity by newer corporate groups and ultimately leading many corporate groups to increase their valuations in order to continue to grow through acquisition.”
Volk said another reason for the rising rate of acquisitions is many consolidators “felt that maybe they were going to be running out of runway before too long, and so, they wanted to get as many practices in their portfolio as possible.”
Some consolidators might have been going through recapitalization, which meant they were owned by an investment firm and were looking for a new investor. Volk said they wanted as much revenue in their portfolio as possible and were willing to bid up the prices.
While consolidations rose in 2021, the number of consolidators might be shrinking through mergers. For example, National Veterinary Associates acquired two smaller owners of specialty referral practices: SAGE Veterinary Centers for a reported $1.25 billion and Ethos Veterinary Health for $1.65 billion. In 2020, PetVet Care Centers bought MAVANA, a group of about 35 equine practices, for an undisclosed price.
“Acquisitions by the larger consolidators of some of the smaller ones (has been) going on periodically,” Volk said. “We think there are somewhere between 45 to 50 companies trying to acquire practices.”
This year has seen a little more de novo activity, where some consolidators are starting practices.
“That has not been common in the past,” Volk said. “Most of the large consolidators’ business model is to buy and operate practices, not start new ones, which is a whole different skill set.”
From Acquisitions to Operations
Consolidators can make money in two ways, Volk said. One is through arbitrage. When VCA started buying practices and could get one at four or five times EBITA, he said, the practice was worth more than twice as much once in the VCA portfolio.
When the prices get up to 20 to 24 times EBITA, that arbitrage opportunity goes away fast because it requires one of two things:
- Find another investor willing to buy your now larger consolidation company at a substantial premium.
- Make an initial public offering and hope it goes well.
The other way consolidators make money is by operating their acquired practices well. Some are better at it than others, Volk said.
Consolidators improve profitability at veterinary hospitals in various ways, including:
- They strip out owner expenses. “Their business vacations and family cars, those kinds of things that a small business often claims as a business expense,” Volk said.
- They’re good at purchasing. “They can get better deals from suppliers for everything they buy,” Volk said. “If you own 100 practices, you get better prices than if you own one practice.”
- They add services. Many corporate veterinary groups offer their own wellness plans, which are more profitable. “And they do a better job of marketing and telemarketing and forward-booking,” Volk said.
Down the Road
According to Volk, consolidators are approaching close to 50% of the total pet care market.
“They don’t own 50% of practices; they probably own somewhere between 25% and 30% of general practices and 75% of specialty referral practices,” he said. “But their practices, on average, are larger because they don’t typically buy one- or two-doctor practices … so they have a disproportionate share of the total pet care volume.”
The market has shown signs of slowing, but the industry may see more instances of larger consolidators acquiring smaller ones in the near future, Volk said.
“That’ll be a good way for the smaller consolidators to capitalize on the 15 to 50 practices that they own, because they will get paid well for having accumulated those,” he said.
Volk thinks the pace of individual practice acquisitions will slow, too. Not many specialty referral clinics are acquirable because, for example:
- Some don’t want to sell.
- Some have too many financial warts.
- Some have an ownership structure that doesn’t lend itself to an acquisition.
“A lot of these special referral practices may have six specialties … but every specialist owns his own business,” Volk said. “So if you’re going to buy it, you have to talk a majority of the individual owners into selling in order to have the larger special referral practice, and those things just become incredibly complex to buy.”
The independent veterinary practice owner will not become a thing of the past. New practices open every day, so consolidators will never own 100% of the market. And not every owner wants to sell.
“A number of individual veterinarians are very good entrepreneurs and make a lot of money and may own a dozen practices,” Volk said. “Most of those are all within the same community, same general metro area. They don’t need the money, and they like owning the practices.” ‘
DID YOU KNOW?
California-based National Veterinary Associates consists of more than 1,500 general practice clinics, emergency hospitals, equine practices, specialty hospitals and pet resorts.