Over the past several decades, the ownership structures of veterinary practices have evolved. Driven by the participation of an increased set of stakeholders, including an active veterinarian community, the scaling of consolidators and corporates, engaged private equity fund investors, and the emergence of veterinary focused financiers, the ways in which veterinary practices are owned has changed tremendously.
Throughout this time, veterinarians have also adjusted the way they interact with the veterinary practices where they work, from being a source of employment to being a more sizeable long-term investment, which contributes a significant amount to their net worth.
These factors result in an interesting set of ownership options that vary by degree of partner involvement, risk tolerance, veterinarian income upside, work-life balance potential, capital requirement, and, ultimately, span across a unique set of potential independent ownership and partnership paths.
Independent ownership
The most frequently explored starting point for practice ownership is independent ownership or owning a practice outright as a sole owner or majority owner. This option usually gets thought of as the riskiest option given that as an independent owner, the veterinarian will need to take on all of the risks associated with the practice, including financial, operational, and staffing, in addition to clinic risks.
As with any business, there are different ways by which a veterinarian can obtain ownership of a practice. This typically includes either acquiring an existing practice or starting from scratch.
In acquiring a practice, a veterinarian must be mindful of the increased valuation multiples at which practices are currently trading, especially if the target acquisition has two or more full-time practicing DVMs. In this market, typical existing practices might trade between 8x-13x EBITDA (earnings before interest, taxes, depreciation, and amortization) in competitive geographies. The advantage of an acquisition is the business is established and potential demand for services can be more easily forecasted because the practice has historical performance.
Alternatively, a new owner may choose to start a practice from the ground up. Under a start-up scenario, it is not uncommon for a practice to take eight to 12 months from the start through opening day, depending on the degree to which construction or refurbishment are needed, the availability of support staff in the area who will work at the practice, and other factors.
During this pre-practice launch phase, it is on the practice owner to fund the construction or refurbishment (and any associated budget variances), equipment, support staff (to hold them in-place until launch day), marketing expenses, and everything else involved in a new practice launch.
Understandably, this is an expensive and time-consuming process and, when done in a geography where there was not an existing practice to rely on for historical pet parent demand figures for veterinary services, can be viewed as being a higher risk option.
If a veterinarian has confidence acquiring or starting a practice which is financially viable in the geography they are targeting, there are funding mechanisms which are tailored to independent ownership. Over the course of time, a veterinarian’s independent ownership of a clinic has increasingly been viewed by lending institutions as a relatively safe model as compared to other kinds of businesses. Many banks have taken notice and have developed veterinarian-focused lending products to help support independent vet owners. Banks have developed products and internal lending teams who specialize in supporting veterinarians on the journey of independent practice ownership.
While the business risk still ultimately falls to the practice owner to be profitable enough to support any loan payments, access to capital to pursue independent ownership has made this path easier and worth exploring.
To diversify that financial risk, owners may also consider partnering with a broader, non-corporate affiliated group of veterinarians who each own a portion of the equity in a practice. This option takes the collective experience of that group, which may include a mix of business and clinic expertise, and leverages that experience to run a co-owned practice. In some cases, no one veterinarian has majority ownership of the practice.
The downside here is finding one-off practices looking to add a new equity partner may take some effort. Additionally, as with any partnership, such structures can present normal partner operating issues. For example, some partners may work harder than others, which may be complicated by uneven equity splits among the partners based on tenure or capital invested, as well as other complications that can come with partnering.
Lastly, veterinarians should consider their own skillset when assessing the path they might take across the spectrum of independent ownership options. As a practice owner, a veterinarian will be thrust into being a “practice CEO” overnight—needing to tackle both clinical work and normal operational challenges, such as paying taxes, keeping organized financial statements, scheduling staff, and other non-clinical work.
Corporate partnership model
As being the majority owner of a practice can expose a veterinarian to higher risks and pull their focus into the challenges associated with operating a business, corporate partnership models offer a variety of popular alternative ownership approaches.
Corporate partnership usually involves the owner forming an employment and non-controlling equity ownership alliance with a veterinary practice consolidator. Across each of the largest consolidators, there are two pervasive practice ownership models: the joint venture model, where a veterinarian owns a non-controlling portion of equity in a practice at which they work; and sharing in equity ownership across the broader consolidator platform, which encompasses many practices.
The joint venture model is where a veterinarian, who is either currently practicing at a clinic or is looking to transfer to another one, is provided a non-controlling equity stake in a specific practice. If the veterinarian is practicing at the clinic already, the consolidator will typically purchase most of the equity from the existing DVM equity holders, leaving the veterinarian with a non-controlling portion of the equity post-acquisition. Following the transaction, DVM equity ownership can range from five to 25 percent. While the range can go higher in one-off circumstances for highly productive vet groups, it is ideal for consolidators to keep it within 49 percent to maintain a majority interest in the clinic.
Partnership models can also include a veterinarian owning a non-controlling interest in the broader consolidator platform itself (as opposed to having equity in a specific practice). Partnership models are usually either-or, meaning, a consolidator will either offer a veterinarian a non-controlling interest in a specific practice as part of a joint venture; or offer an interest in the broader consolidator platform.
While the equity ownership percentage at the platform level would inherently be lower than owning a percentage of a specific clinic, there is some additional safety in owning equity at the platform-level given that the platform would include a collection of clinics as opposed to an individual clinic. Many veterinarians provide feedback that such platform-level ownership stakes make it hard for them to see the direct results of their production in their compensation as any equity-based performance results may be based on a larger pool at the platform-level.
The benefit for a veterinarian in partnering with a consolidator is most of the business-related tasks are managed through the consolidator and its corporate office support team (a team which is already in-place and a veterinarian will not need to hire or manage separately), meaning, the veterinarian can focus on clinical work as opposed to also being pulled into managing business tasks. Veterinarians interviewed on practice ownership have also stated this model can lead to an increase in their work-life balance as they are not pulled into business management tasks as frequently.
The flip side is the veterinarian is ultimately an employee of the consolidator and is no longer truly “the owner,” and must respect the goals and objectives of whichever consolidator they choose to partner. It should be stated that not all consolidators are created equal. As the mandates of consolidators are usually driven by their own equity investors, typically private equity investors, the pace at which a veterinarian or a practice will be required to achieve those goals and objectives is a consideration before making a partnership decision (e.g. production requirements, cost controls, scheduling minimums, etc.).
Conclusion
While there is no single practice ownership model which is the default, preferred option for veterinarians, there are many factors to consider before making an ownership decision. We usually see veterinarians graduate from veterinary school, spend a few years practicing with the direction of a more experienced veterinarian under an arrangement which covers them for their first job out of school, and then make an informed decision on which path they take over the remainder of their careers. Researching potential partners and assessing your own skill sets will be key in making the right ownership decision.
Eric Lewandowski is a partner and practice leader of the Transaction Strategy & Transformation practice at SAX LLP. His experience includes veterinary practice transactions and value creation initiatives, along with being the co-founder of the Veterinary Investors and M&A Conference series. You can reach him at elewandowski@saxllp.com.