Consolidation in the veterinary profession

Introduction

In many parts of the world, the current phenomenon of consolidation within the veterinary profession is a major trend, and one which may change the rules of the game for independent veterinarians (i.e., veterinary surgeons who own and run their own practice). This article reviews the development of corporate groups over the last few years and also considers the place of independent veterinarians in the current marketplace.

25 years of change

Veterinary corporatization began in the mid-1990s in the United States, specifically in 1994 when Mars Petcare acquired a stake in Banfield Pet Hospitals. On the other side of the Atlantic, the CVS group began consolidation of UK veterinary clinics at the end of the 1990s, but it was not until 2010 that corporate groups started to develop in other parts of the world. Interestingly, the two groups that now have a global influence – Mars Petcare and National Veterinary Associates (NVA) – both started in the USA, and today, 25 years after consolidation began, approximately 35% of US small animal veterinarians work for companies that employ more than 500 clinicians. By 2020 Mars Petcare had 6 divisions that between them owned more than 2,300 clinics and veterinary hospitals across 17 countries, employing more than 14,000 veterinarians (Figure 1a) (Figure 1b). NVA also has an international presence, with a total of 950 veterinary care establishments in North America, Australia, New Zealand and Singapore. The Australian and New Zealand market is not only home to NVA (which has some 250 clinics), but also to two national players, both listed on the stock exchange: Greencross (with 200 clinics) and Apiam Animal Health, which has around 50 clinics and also has a stake in some farm animal practices.

In Europe the current situation is rather different. On the one hand Sweden, the UK, Finland, Norway, Denmark and the Netherlands are all at an advanced stage of the consolidation process: in these countries between one quarter and more than half of small animal veterinarians work in groups. On the other hand, Spain, France, Germany, Austria, Ireland, Switzerland, Belgium and Portugal are still just beginning the process, with groups employing less than 10% of small animal veterinarians. In Asia the Chinese market became strongly consolidated within a few years; there are now two main companies in the country, one of which owns more than 1,000 clinics and is currently planning a public listing.

Overall, consolidation of the veterinary market has generally been very rapid. For example, between 2017 and 2019, IVC-Evidensia (the European leader in terms of clinics owned and veterinarians employed) went from 500 to more than 1,200 practices and from 2,000 to more than 4,000 veterinarians. Figure 2 shows the major events that have taken place between 2016 and 2020 in the veterinary world.

As in most consolidation situations, rapid growth is the rule and not the exception. This may pose the question; is there still room in the market for the independent veterinarian? Veterinary consolidation is an irreversible trend: the clinics that are owned by groups today will not return to being independent again. On the contrary, the trend for consolidation is set to spread to most of the world's markets and will intensify where it is already present. However, this does not mean that there will no longer be a future for independent veterinary clinics; in fact, quite the opposite is true.

Group ownership of veterinary practices

How are corporate groups funded?

Depending on their stage of development, corporate groups will differ in their financial structure. Traditionally, a veterinary practice will be owned by one or more veterinarians. However, when a corporate group is formed it is initially financed by bank borrowing. If and as soon as it begins to grow quickly, it becomes necessary to finance the group with equity, usually by bringing in a private equity fund to provide capital. The aim at this stage is for quick external growth (i.e., by increasing the number of clinics owned by the group) in order to increase the value of the company over a relatively short period of time, generally between 3 and 7 years. It is commonplace for a private equity fund to take profits after a few years and for another fund to take its place. After several investment cycles, the corporate group may become part of a multinational group (as when Nestle took a stake in IVC-Evidensia) or be listed on the stock markets. From this point, rapid external growth is no longer the sole priority; acquisition of new sites is still important, but internal growth by increasing revenue and profit from each of the group’s clinics becomes a major objective.#

This funding variation explains the difference between a group like IVC-Evidensia, which has shown spectacular external growth, and a group like VCA (a subsidiary of Mars Petcare) which continues to develop rapidly but where a large part of the growth is achieved at a consistent rate by developing existing sites.

Can a single brand for several hundred clinics recruit more clients?

Not all groups will adopt the same brand strategy. For example, in Europe Anicura, a subsidiary of Mars Petcare, puts its name on the facades of all its clinics, while the CVS group (which is listed on the London Stock Exchange) retains the historical identity of each clinic and does not have a national – let alone European – brand known outside the financial markets. Whilst certain groups have a clear strategy, others – for example, BluePearl in the USA – have a variable approach, and will adapt the branding for each clinic on a case-by-case basis according to what is best for a particular site. From the consumer’s point of view, a pet owner will usually attend only one first-opinion practice. It is therefore important to have a strong, well-known and unambiguous brand at a local level, but (at first glance at least) it would seem that having a national or even an international brand image brings very little competitive advantage to the market providing each practice or pool of practices have strong local brands.

What about recruitment?

There does seem to be a genuine shortage of veterinary manpower in many countries at the present time, and this is an area where companies may have a distinct advantage over independent practices. All the major veterinary companies have developed recruitment, integration and training programs – involving substantial input and resources – and these can be shared by a large number of their clinics at a country-wide, or even an international level. Independent owners can rarely afford the time or the money required to develop such schemes.

Why do groups value veterinary businesses more than independent veterinarians?

In order to grow quickly, groups will purchase veterinary establishments, generally paying a premium (sometimes two or three times more) than a traditional professional (i.e., a veterinary surgeon) purchaser would offer. The value of a practice is usually determined by applying a multiplier to the net profit, which is based on EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization). This multiple will be based on the anticipated future growth in EBITDA; the greater the opportunity to achieve rapid growth, the better the price offered.

Valuation of a veterinary practice

When valuing a traditional practice, the total cost of all purchases for the clinic (usually comprising medicines, laboratory supplies and clinical waste – often referred to as “cost of sales”) are subtracted from the annual revenue to derive the gross margin (or gross profit) (Figure 3). The gross margin in a business must cover all operating costs (including wages, other purchases and external charges), taxes and duties, as well as delivering a profit (EBITDA) for the owners. Note that the wage costs do not include the cost of the partners' clinical work, and the calculated EBITDA basically enables remuneration of the partners and reinvestment in the practice. The implicit management objective of a privately owned practice is to ensure a good financial return for the owners or partners, taking into account their working time, their aspirations, etc. Any increase in profitability improves the partners' reward, but once a comfortable level of remuneration is reached the incentive to marginally increase profit is less, mainly because of the extra government taxes that are incurred (and which are often progressive in nature – i.e., the higher the profit, the higher the tax imposed). This is often referred to as “the law of diminishing returns” – i.e., the increased profit may seem too small to justify the effort required to obtain it. When valuing a veterinary business for a professional (i.e., veterinary) purchaser the method is typically based on applying a small multiplier (1 to 2 in most cases) to the EBITDA.

However, a corporate group will value a veterinary business by using a financial analysis model that includes remuneration of the partner's work within the fixed charges (Figure 4). The resulting EBITDA is then a good approximation of the profit available to the shareholders, and therefore of the company's overall value. If this profit increases, even marginally, it is good news for shareholders — despite the imposition of corporation tax, which is proportional and not progressive. It is still in their interest to continue to improve the profitability of the company.

With this analysis, a company’s EBITDA represents a narrower base than with the traditional model. However, if a buyer believes that profits can be increased quickly, they will be prepared to apply a higher multiple (usually 5 to 12, sometimes more) to determine the price they are prepared to pay. Corporate groups therefore pay more than traditional purchasers because they are reasonably confident in their ability to quickly increase the EBITDA, and thus the value of the business, whereas independent clinics primarily aim to deliver a good return for the partners, with the value of the business based on this remuneration.

Strategies for independent veterinarians

In the face of competition from corporate groups, how should an independent veterinarian plan their development strategy? Undertaking a financial review of the business and budgeting for the future is not in itself sufficient, but it is nevertheless essential. This review should also consider if the current veterinarian or partners are the best owners of their company. Since the value of a veterinary clinic is based on the practice’s recurring profit, the best owner – or the best buyer – is therefore the one who can maximize and sustain this performance. The succession plans of the owner or partners must also be considered. Anticipating significant changes, such as an owner wanting to retire or sell his share of the business, is a major factor for planning ahead and when looking to maximize the value of a practice.

Can a one-site model work?

A veterinary clinic established on a single site, assuming it is in an optimal location and within a sufficient population pool, is an interesting and common business model. The main advantage is that it is relatively simple to manage, and with all activity taking place in the same location an owner or manager can monitor the progress of the company using simple management tools. However, as it develops, there is a risk that business expansion will be restricted by the clinic’s geographical proximity to the population base, limiting the acquisition of new clients. Development is therefore based mainly on increasing sales per client; this can allow sustained and steady progression over many years, although there may be major variations in the degree of growth depending on various factors, including the location of the practice.

What about multi-site models?

In order to overcome the geographical limitations of a single-site development, a business may choose to operate several clinics, often on a “hub-and-spoke” model, with each site typically more than 15 minutes (but less than 30 minutes) drive from a primary central base (Figure 5), where all the concentrated “back office” functions such as payroll and other management tasks are performed. The peripheral clinics should not be regarded as “secondary” sites, because all front-line services and aspects – including opening hours, reception area, consultation rooms, practice staff, first-level diagnostic resources – can be provided on the same level as the main site. Identifying synergies between the sites is at the heart of this model: for example, all surgical procedures – including the simplest of operations – can be undertaken at the main site. This model therefore allows management resources to be shared but also permits the underlying core services and the major items of equipment at the main site to be utilized better without the potential problems associated with the geographical locations of the peripheral sites. The company's development is therefore achieved both by increasing the revenue per client ratio, and by the acquisition of more patients, particularly when new peripheral sites are opened. Overseeing this model is more complex than a single site, because it requires a competent manager to be installed at each premises, and it is essential that factors such as working methods and market positioning are standardized across all sites. Nevertheless, this is possible because all the clinics are relatively close to one another.

Can multiple independent clinics be structured as a group?

This requires a different type of growth; essentially the hub-and-spoke system described above is duplicated in a location at some distance from the original territory, resulting in the establishment of a regional (or even, depending on the distances involved, a national) group. Such a model is usually created progressively, and here there will be relatively few – or indeed no – synergies between each multi-site business. However, there is a major difficulty with this model: remote multi-site organization requires a professional approach to management, and therefore the establishment of a central team. To ensure the costs of this team can be recouped within a reasonable period of time, rapid growth to achieve a significant number of sites (several dozen or even several hundred) is necessary. However, this is an unusual model for the veterinary market and is rarely seen, because the complexities of effectively managing multiple geographically distant sites are numerous.

What about selling to a corporate owner?

The final stage of independent development is often (although not always) transferring (i.e., selling) the company to a group. Although not all practices will be suitable or attractive to a corporate buyer, the emergence of corporate groups now offers more strategic possibilities for many independent veterinarians who are looking at exit options: the latter can sell if and when they decide to. This stage can therefore appear at different times in the life of a veterinary business; it could be once a single-site clinic has developed and matured, after a pool of clinics has been established, or after the formation of a regional or national group.

The most important thing for the owner is to sell the business at the right time and at a good price. It is important to emphasize that selling one's business is not a failure; rather, it can be seen as an acknowledgement of the business’s success. On the other hand, it is essential not to regard selling to a group as the default, for example because it is the only option when succession planning has been poor or absent.

Whether or not the owner(s) of a veterinary practice wish to sell to a group, it is vital to ensure that long-term management of the business is done in a way that optimizes its value. As this is always linked to future profitability, it is essential to generate a recurring profit which is comparable to that which a corporate group could obtain. Whatever the development strategy of an independent veterinary company, the most important thing to remember is to manage the clinic as if it was to be sold tomorrow – even if it will never be sold.

Maximizing profitability

How can profitability be increased?

In order to rapidly increase a company's EBITDA, three main tools can be exploited.

• The first is to increase revenue. It is possible to do this simply by raising prices, but in fact the first priority is to implement thorough invoicing for all work done. Correct invoicing is essential in any case, but even more so if a fee increase is planned, because if the team does not already invoice everything that is done, it will be even more difficult to do so with higher prices. When the fees charged by the practice are not in line with the local marketplace and the positioning of the business, then raising prices to increase revenue is appropriate. However, the essential factor for increasing revenue ultimately lies in developing what the clinic offers its clients, primarily in terms of services but also in terms of products. Keep in mind that it is important to start by analyzing market penetration; before creating new services, make sure that clients are already using the existing services.
• The second is to optimize purchases; this means ensuring that the business is getting the best discounts from its suppliers in order to reduce the cost of purchases, thus increasing the gross margin. In some countries this approach is already widely used by veterinarians, but in others there is still the opportunity to negotiate better margins for purchases.
• Thirdly, it is fundamental to control establishment costs and, most importantly, wages. This may necessitate adjusting the team structure to optimize the ratio between the number of veterinarians and the number of support staff. This is based on productivity, with the clinicians concentrating on all the value-added duties that require their technical skills, whilst using support staff for all tasks that do not need direct veterinary input. This will also help if there is a shortage of veterinary manpower, which is the current situation in some countries.

How can the service offered be strengthened?

In addition to telemedicine, new technologies offer other possibilities for the veterinary market. In many countries the development of E-commerce has been – at least partly – detrimental to veterinary businesses, so when available, it is important to use suitable tools to remain competitive in the face of challenges like the online pharmacies available in countries such as the UK and USA, or the Click-and-Collect services currently offered in France. The ongoing digital revolution provides veterinarians with new tools, not only with things such as telemedicine or E-commerce, but also – and above all – in terms of communication. The ability to create a “community” of owners around the clinic through social media platforms can strengthen and extend the relationship between the veterinary practice and both current and potential clients. In addition, other options, such as offering online appointment systems or sharing medical records, can also benefit the business. It is safe to say that the full potential of new technologies has yet to be fully exploited and will continue to develop and offer opportunities in the years ahead.

Corporatization of the veterinary marketplace is here to stay, and the groups now offer independent veterinary surgeons a useful exit strategy, often paying considerably above traditional levels to purchase profitable practices. Although independent practices may currently struggle to recruit veterinarians in a market where there is a shortage of young graduates, it can still be argued that independent veterinarians can generally contend with groups, in that they still have the economic, financial and organizational abilities to remain competitive, provided they have the desire, skills and time required to enable good business management.