The new era of corporate practice

IN APRIL, PRIVATE EQUITY AND venture capital firm Summit Partners invested $128 million in National Veterinary Associates (NVA), the largest private owner of freestanding veterinary hospitals in the nation, with 99 clinics in 29 states. In May, the publicly owned VCA Antech Inc. bought Healthy Pet Corp. for $152.9 million, adding Healthy Pet's 44 hospitals to its stable of more than 450 clinics nationwide. So, what does this mean for you?

The veterinary landscape is changing. Single-doctor practices are becoming a thing of the past. Associates will never be able to compete with corporate buyers for clinics. Corporations and private investors will control veterinary medicine nationwide.

Not so fast, Chicken Little. Yes, investors are attracted to the veterinary market, and there is some consolidation going on in corporate practice. Buyers see something in you that's red-hot with opportunity. But things are moving more slowly than they might seem. Consider that VCA Antech has been in business for more than 20 years and has roughly 450 hospitals in a field of more than 31,000 practices. That's a lot of room to grow and a lot of room for you to grow your own business model—or sell your practice later to a corporate buyer.

We asked corporate heads and private investors what they thought about the financial opportunities in veterinary healthcare. Their answers may give you quite the ego boost. After all, they like you—they really, really like you.

What's not to like?

Veterinary practice is financially attractive for most of the reasons human healthcare is not, says Ryan Daniels, a principal analyst at the investment firm William Blair & Co. Daniels follows the veterinary healthcare field for investors and evaluates publicly traded stocks such as IDEXX and VCA Antech. William Blair has helped veterinary companies navigate the initial public offering process, and its bankers represented NVA in the Summit Partners investment deal.

According to Daniels, investors are hot to get into the veterinary field because you get paid at the time of service, whereas physicians have to wait for reimbursement from health insurance companies and Medicare. Veterinary malpractice insurance is also significantly lower. And even if pets' legal status changes in the future, emotional damages rewarded to plaintiffs are liable to run into the tens of thousands—not the tens of millions.

Daniels also notes that the veterinary healthcare industry has seen steady growth for more than 40 years, including during five recessions. "That means it's noncyclical, and investors like that," Daniels says.

The bottom line

But don't expect a big corporate takeover in the profession anytime soon. Veterinary practice is still fragmented, and investors benefit from improved infrastructure only after a lot of consolidation. Daniels figures that an investor would need to buy one hospital a month for several years before reaching that magic number—about 50 hospitals—when a larger infrastructure starts to help the bottom line.

More and better

Because economies of scale come with owning many practices, Summit Partners invested in the proven commodity NVA rather than building its own group from scratch—it wanted several hundred hospitals to start with. Summit Partners' general partner Craig Frances, MD, now sits on the NVA board. He says the investment company plans to help NVA grow further and improve infrastructure but will essentially let the hospitals run themselves.

Quick facts

"We treat the individual clinics as clients and find out what we can do to help them grow," Frances says. He sees nothing but upside in investing in veterinary practice, thanks to consistent growth, the strong human-animal bond, and a market fairly free of major corporate competitors.

Dr. Stanley Creighton, ACVIM, founder, chairman, and CEO of NVA, says Summit Partners' investment will go toward acquiring new practices and improving information technology infrastructure for client communication and compliance. Another issue facing NVA is hospital leadership. Doctors who sell to NVA are asked to stick around for a while, but eventually they retire. NVA will be spending more money to recruit doctors to direct NVA hospitals once original owners retire. (See "Looking for Leaders,".)

Another option for a corporation when looking for practices and doctors is a "tuck-in," says Neil Tauber, senior vice president of VCA Antech, which recently bought up the 44 Healthy Pet hospitals. "We can take a $2 million hospital with room to grow and fold in clients from a $700,000 hospital with an owner who's tired of single-doctor practice," Tauber says. Tuck-ins happen in only a few purchases, but they accentuate the company's ability to get maximum efficiency and increased profitability out of clinics, he says. An underused facility can maximize its space, while rent and much of the expenses of a second facility disappear.

The largest corporate player, Banfield, The Pet Hospital, does something similar. Banfield sometimes negotiates with practices near a Banfield practice using the "synergy model," buying the client records and moving the owner doctor into the Banfield practice either as a franchise owner or as an associate. "The owner would sell the equipment and real estate separately," says Simon Broad, VP of business development.

The inside track

If you're a practice owner, Broad says you might choose this path if you're in a rundown facility and don't want to remodel, if you're tired of managing and want Banfield's help with that part of the business, or if you're looking for an exit strategy. "The idea is that we contribute our management expertise and resources and the doctor's medical abilities to build a stronger practice together," Broad says.

This relatively new initiative has resulted in about six of these transactions, and Broad sees the potential for more.

Why sell to a corporate practice?

So, what determines whether an owner should sell to an associate, find a buyer through an ad, or offer the practice to a corporate buyer? Here are a few factors that might influence your decision:

• Good price. If you're like most owners, the decision comes down to money. The practice can be a big part of your nest egg and you need to maximize your profit. Because corporate buyers often see ways to improve fee structures and efficiencies, they're willing to pay more than an associate. And sometimes associates don't want to own yet—or ever. According to a Veterinary Economics survey, 59 percent of female and 48 percent of male associates don't ever plan to own a practice.

Veterinary Economics Editorial Advisory Board member Gary I. Glassman, CPA, has helped a number of practice owners evaluate a possible sale to a corporate buyer. One doctor received an offer that was twice what Glassman figured the practice was worth. However, analyst Daniels says the biggest buyer and the only one with public records, VCA Antech, remains a very disciplined buyer, generally paying no more than one-times revenue for its buys. The difference is in the valuation process—different valuators arrive at different conclusions—but Glassman says it's clear that corporate practices are paying top dollar.

Associate know-how

Another bonus of selling to corporate practice is how fast the deal gets done. An associate buy-in may take place over three to five years or more. With a corporate sale, you can get your money fast. But the transition can be difficult, Glassman says. By the time an associate takes over, you and your team have most likely worked with that doctor for years. It's different with corporate purchases. "I've had doctors call me after selling to corporate buyers, and they don't know what happens next," he says. "They ask me, 'Who do I order my next shipment of heartworm medication from?' 'How do we make a bank deposit today?'"

Glassman advises that you talk to others who've sold to a particular corporate practice and get their unvarnished opinion before you jump. "This is not a decision you want to make hastily," he says.

• Fewer management headaches. Veterinary Economics Editorial Advisory Board member Dr. Jeff Rothstein, MBA, who owns nine hospitals as The Progressive Pet Animal Hospitals and Management Group in Michigan, came out of veterinary school intending to eventually own multiple practices. "I figured, if you're going to build one perfect practice with all the best forms and procedures, why not copy it in more than one practice?" he says. But he's pretty sure he's the exception in thinking this way.

"Some doctors don't want to worry about the business. They want to make a decent living and let those interested in the business side take care of that aspect," Dr. Rothstein says. "Many corporate buyers let the previous owners keep the clinics the way they like them." The focus is, instead, on better delegation, sharing best practices, improving client compliance, and capturing fees.

Glassman, however, warns that selling to a corporate practice is not necessarily a quick fix to make business headaches disappear. Most corporate buyers will want you to stay on as "medical director" and keep the hospital running smoothly. "If you were short a veterinarian before you sold, or you were burnt out on management, that issue will still be there the day after you sell—and maybe for years after," Glassman says. "Corporate practices will usually bring in a practice manager to help, but you're still going to have complaining clients and staffing issues."

• More capital. As veterinary healthcare gets more sophisticated and needs more expensive technology, many corporate practices have the capital to spend on upgrades. Selling to a corporate practice is no guarantee you'll get the latest and greatest, but when you do get new technology, it won't be your money you're sinking into it.

• Benefiting the profession. Some practitioners involved in corporate practice are excited by the prospect of sharing best practices and collecting data to share with researchers and other veterinarians. A new corporate player, BrightHeart Veterinary Centers, plans to compile information on medical treatments in its specialty hospitals and share the information and results with the profession. (Go to vetecon.com and click on Web Exclusives for more on BrightHeart.)

Another example is the database developed by Banfield, The Pet Hospital, in cooperation with Purdue University. Every Banfield practice uses the same software and follows the same medical protocols, so the nationwide practice can track trends in pet health, emerging diseases, common presenting complaints, and more. Banfield's goal is to share the information with the public, as it did during the pet food recall regarding feline kidney problems at Banfield hospitals.

The experts agree that corporate buying will continue to be hot as a generation of owners finds not enough veterinarians with not enough money to buy their practices. So it behooves all practitioners to keep a finger to the wind. The sky isn't falling, they say, but the weather is changing.