Arguably the most notable disrupter in veterinary medicine, corporate veterinary medicine is establishing a firm foothold in Canada and appears to be gaining momentum. Every year there are more veterinary hospitals selling to corporate consolidators, and every year there are more corporations coming into the market. The corporations hold their cards close to their chests, but at the same time they are very candid about their intentions to grow and their desire to improve the veterinary community. This article answers some questions veterinarians have about corporate medicine.
How big is corporate veterinary medicine?
Corporate veterinary medicine controls > 20% of veterinary hospitals in Canada (Table 1) and probably 40% of veterinarians. The term “probably” is used for the number of veterinarians because there is a record of corporate practices in Canada, but no record of veterinarians working in corporate practice.
Table 1.
Corporate-owned and total veterinary practices in Canada.
| Corporation | Number of hospitals owned | |
|---|---|---|
| VetStrategy | 367 | |
| VCA | 168 | |
| NVA | 141 | |
| P3 | 55 | |
| VetCare | 47 | |
| VetCora | 3 | |
| Total corporate practices | 781 | 20.4% |
| Total practices in Canada | 3825 |
VetCor owns 770 practices in the USA.
The percentage of veterinarians working for corporate practices is higher than the percentage of practices that are corporate because corporations only buy larger-than-average practices. To minimize their risk and keep acquisition costs down, corporate players are more interested in practices with revenues of $1.5 million or more and that have 2 or more veterinarians. The percentage of specialty and emergency hospitals in Canada owned by corporations is estimated to be higher than 50%.
When does veterinary capitalism become veterinary corporatism?
What is the difference between a veterinarian who owns multiple practices and a corporate veterinarian? Externally, there are not a lot of differences. Both share brand names between hospitals. One of the big corporate players brands all their hospitals. Similarly, many non-corporate multiple practice groups also brand all their hospitals. The concept of branding hospitals is not new to veterinary medicine, and smaller veterinary hospitals have been branding their main and satellite clinics for a long time.
There are several internal similarities between corporate and multiple practice groups as well. Both multi-practice owners and corporations are run by veterinarians or others with extensive experience in the veterinary industry. In the tug of war between clinical and financial concerns, clinical wins out in both camps. Even in corporate veterinary practice, veterinarians and staff will not let the corporation compromise their standard of care. It is veterinary medicine first and money second.
Financially, both corporate and multiple practice groups try to exploit economies of scale with bundled purchasing to get better rebates from suppliers and share staff between hospitals to maintain productivity and keep expenses down. Corporate medicine is often criticized by veterinarians as being too rigid with their purchasing restrictions by limiting veterinarians to single brands of antibiotics and vaccines, but even single-doctor practices streamline brands of food, antibiotics, and vaccines.
The big difference between multi-practice and corporations is venture capital. Multiple practice groups rely on banks and personal savings to finance expansion. Banks are very friendly to veterinarians, but there are limits. A veterinarian can approach almost any Canadian bank and receive 100% financing (no money down) at prime to purchase a veterinary practice. They can do this twice, and they might even be able to get the bank to give them the same deal for 3 practices — but after that, the bank views them not as a veterinary practice owner but as a veterinary investor. When a veterinarian goes to the bank as an investor, the experience is different: They will need to come up with a 25% down payment, the lending rate will be higher, and the term of the loan will be shorter. For this reason, it is difficult for an individual or group to grow beyond 3 practices.
Corporate veterinary groups have venture capital behind them, fueling new purchases. Venture capitalists get their money from wealthy individuals, pension funds, and investment banks, and they provide money in return for an ownership stake and an expectation of a large return down the road. With venture capital behind them, there is no limit to the number of veterinary practices a corporation can buy.
How can a corporation own a veterinary practice in a province that requires a veterinarian to be the owner?
According to the College of Veterinarians of Ontario (CVO), in order to own a veterinary hospital, you must be a CVO-licensed veterinarian. So how does a corporation own a veterinary hospital in Ontario or other provinces that require the owner to be a veterinarian? If you search the provincial register for a corporate veterinary hospital, you will find a licensed veterinarian listed as the facility director. Some have the same veterinarian listed for all the hospitals; others have different veterinarians listed. As long as a licensed veterinarian applies for the certificate of accreditation for a veterinary facility, it is within the rules. What arrangement the facility director makes with a management corporation behind the scenes is private between them. As long as the facility director maintains independence from the management corporation, it is of no concern to the regulators. If there is a complaint against a corporate veterinary hospital, the College deals with the facility director and the practice owner.
How big do you have to be to sell to corporate?
Corporate veterinary groups buy larger hospitals to minimize acquisition costs and risk. Consider 2 options: Option 1 is buying 5 veterinary practices, each with 1 doctor. Option 2 is to buy a single, 5-doctor practice. The first option leaves you with 5 legal bills, 5 accounting bills, and 5 separate negotiations. Making 1 purchase is much cheaper. In the second scenario, the potential savings in legal and accounting fees can be well in excess of $100 000.
Another reason why corporate players want larger veterinary hospitals is to limit their risk. When a multi-doctor practice loses 1 veterinarian, the remaining veterinarians can step up and absorb the workload until a new veterinarian is found. A 1-doctor practice losing its only veterinarian is a big deal.
There are always exceptions to the size limits. For example, if a small town has a 1-doctor practice and a large corporate practice, the corporation may have interest in the smaller practice because of proximity. Since it is already established in that town, the corporate group may be interested in buying the smaller practice because, if they lose the veterinarian or key staff from the smaller hospital, they can use staff and doctors from their larger hospital to fill the gaps.
How big is the corporate offer?
Corporations pay more for practices than private deals. This can be a blessing if you are selling a practice, and a curse if you are an associate trying to compete with a corporate offer. Veterinary practices are valued based on their ability to generate a profit. A valuator examines the revenue, expenses (including the replacement salary for an owner-operator), and net income, and comes up with a figure called Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). The value of practice is determined by multiplying the EBITDA by a figure that represents the current value of future EBITDA, adjusting for factors such as risk and potential growth.
In the days before corporate veterinary medicine, the highest amount a veterinarian could typically sell their practice for was 5 times EBITDA. The limit was 5 because Canadian banks would lend veterinarians a maximum of 5 times EBITDA to purchase a practice. This pattern is not unique to veterinarians, as banks have been using the 5 times limit in healthcare for decades. Dentists, physicians, and chiropractors were limited with the same 5 times multiple. Stuck with a ceiling lending limit of 5 times meant that the most a veterinarian could borrow was 5 times EBITDA, and the most a practice would sell for was 5 times EBITDA.
Veterinary corporations do not get their money from banks; rather, they get it from venture capital, so they are not limited to 5 times EBITDA when they make an offer. The venture capitalists who supply the money allow corporate purchasers to pay well in excess of 5 times. The result is corporate offers that were (for a short period) paying upwards of 20 times EBITDA. Of course, those large offers came with restrictions: the veterinarian who was selling might only get a portion of the proceeds up front, they had to stay on for 2 or 3 years, and they had to hit future revenue targets to earn the rest of their money.
How can corporate afford to pay more?
Once corporations buy enough hospitals, they can benefit from pooling their purchasing to negotiate better pricing from their suppliers. Food and pharmaceutical manufacturers, equipment providers, and laboratories provide better pricing with higher volumes. This is not limited to corporations: any private veterinarian can benefit from better pricing if their purchasing volume increases. The difference with corporations comes with the sheer size difference. Consider the pricing a single veterinarian would get if they increased their order from 1 microscope to 50 microscopes, or their vaccine purchases from 4000 doses to 40 000 doses. The discounts that big corporate players get help to reduce their costs and improve their bottom line. Total discounts from supplies can amount to a savings equivalent to 3% of gross revenue. For the average veterinary hospital, that figure represents $45 000 per year.
Corporations also achieve cost savings by pooling their internal resources. They can have 1 accountant shared across 50 hospitals, coordinate all advertising through a head office, offer their own continuing education conference, share management staff across several hospitals, and shuttle staff among hospitals to make better use of key staff. The associated savings can amount to another 3%, or $45 000, in savings for the average hospital.
Do you have to sell it all at once?
When veterinary corporations first came into Canada, a sale to a corporation meant selling 100% of the practice. A few years ago, veterinary corporations started offering joint ventures or partnership opportunities to veterinarians selling their practices. Now most veterinary corporations will purchase a portion of your practice, but their share must be more than 51% so that they assume control of the management decisions.
Joint ventures are popular with veterinary corporations because a practice owner who retains an ownership stake in the practice is still invested (both literally and figuratively) in the practice. Even as a minority shareholder, the previous owner continues to do what owners do: they stay late without asking, solve problems for other people, accommodate the double-booked client, and motivate the rest of the staff. In contrast, when a practice owner sells everything and works as an associate, what was once a passion can turn into a job. The owner/operator workhorse who was once the go-to problem solver can find themselves less charitable with their time when the sole beneficiary is the corporation.
What about mixed and food animal practices?
Corporations will purchase mixed and food animal practices. Most corporate practices are exclusively companion animal hospitals, but in the last few years, mixed and food animal practices in Canada have sold to corporate groups. The total number of mixed and food animal practices in Canada is not great, but the collective volume of revenue is large enough to make it appealing to corporate purchasers.
Can you buy in?
With more and more corporate consolidators coming into Canada every year, newer corporate players are coming up with new business models to try and distinguish themselves. The latest trend in corporate veterinary medicine is a model in which practice owners can swap their shares in their veterinary hospital for shares in the corporate giant. Swapping shares provides selling veterinarians an opportunity to keep their investment in veterinary medicine without the requirement of physically working in a practice. The swap deals are a win for the corporations because they provide corporations with more money to go out and buy practices.
Another opportunity to buy into a corporate practice is offered to associates working in practices that get sold to a corporation. In an effort to keep the associates interested in working at the practice, some corporations are offering associates an opportunity to purchase shares in the practice at a discounted rate. For example, if a corporation purchases a practice for 12 times EBITDA, they may offer a key associate a 15% stake in the practice at a discounted rate of 9 times EBITDA. The corporation may co-sign for financing because it is over the 5 times rate, or may even finance the whole deal.
What will corporate veterinary medicine look like in 10 years?
As long as there is access to venture capital, corporate veterinary medicine will continue to grow. If the economy pulls back or the stock market takes a dive, then much of that capital will dry up — and without venture capital, corporations cannot grow. They will not go away but they will stop growing.
The Roman Empire fell because it grew too big and could not maintain supply routes. As corporate practices get bigger and bigger, they risk suffering the same fate. As more players come into the market, they are working with a diluted talent pool for veterinarians and qualified managers and will be forced to hire less-than-stellar candidates. In the United States, where corporations are much larger than in Canada, veterinarians and managers talk about how, “they used to be great and then they got too big and started hiring the wrong people.”
Another concern is that corporations could become victims of their own success. As more and more corporations set up in Ontario, competition will drive up the price for practices. Although the veterinarians selling their practices are benefiting like never before, corporations will be forced to work harder to pay off the ever-mounting cost of acquiring practices. At some point, the model has to stop working.
One factor that could contribute to the future success of corporate veterinary practices is their size. Some of the larger players have taken advantage of their size to bring in staff training programs and technology that would be too expensive for smaller hospitals. Corporate practices are the biggest users of myVETstore. They are also the early adopters of client communication software, centralized call centers, and wellness plans. If the momentum it has built up over the last 10 years is an indication of the next 10, corporate veterinary medicine will continue to be a key player in the industry.
Footnotes
This article is provided as part of the CVMA Business Management Program, which is co-sponsored by IDEXX Laboratories, Petsecure Pet Health Insurance, Merck Animal Health, and Scotiabank.
Use of this article is limited to a single copy for personal study. Anyone interested in obtaining reprints should contact the CVMA office (hbroughton@cvma-acmv.org) for additional copies or permission to use this material elsewhere.