Veterinarians retain stake but focus exclusively on patient care.
Getty ImagesPennsylvania veterinarian Bob Sarsfield, DVM, apologizes. He can't talk right now because he has an animal under anesthesia. Like most veterinarians, Sarsfield faces life-and-death decisions every day.
But he used to face other tough decisions-decisions about how to manage his business, Animal Hospital of Dauphin County. Today he focuses on his patients and leaves the administrative headaches to someone else.
Sarsfield is part of an emerging model for veterinary practice ownership. Six years ago he sold 80 percent of his practice to Veterinary Practice Partners, replacing his retiring colleague with a corporate group that would hold the majority interest.
This new model looks something like this: A corporate partner buys less than 100 percent of a practice. Ideally, this partner handles all business management tasks, while the veterinarian manages the medicine. The clinic name doesn't change, and the veterinarian continues to benefit from practice growth to the tune of his or her stake in the company. The partners even negotiate an exit strategy in the purchase agreement.
For this article, dvm360 interviewed principals in three corporate groups pioneering the new model-Veterinary Practice Partners, Community Veterinary Partners and Pathway Partners Holdings. All three groups own stakes in 17 to 21 practices each. And their “perfect candidates” also look similar. These companies look for practices with more than two veterinarians and an owner who wants to continue practicing. The physical plant should be in good shape. “And there needs to be a quality reputation,” says Daniel Eisenstadt, chairman of Community Veterinary Partners.
Source: dvm360 State of the Profession Survey, 2015Typically, the practice owner is looking for help managing the business. “This is someone who doesn't want to work his or her whole life away,” says Shawn McVey of Pathway Partners, “but still wants some skin in the game.”
Money, skills and opportunity
What's driving this trend? Money, and lots of it, in the form of venture capital. U.S. industry experts suggest that venture capitalists invested more than $48 billion in 2014, a 61 percent increase over the previous year. Many of those funds supported Internet- or software-based companies. But some trickled down to more mainstream businesses. Venture capital is “parked everywhere,” McVey says, and venture capitalists have discovered the resilience of veterinary medicine-even in the midst of an economic recession.
Community Veterinary Partners originated in the venture capital arena. “We wanted to build a culture and a business around partnering with veterinarians,” Eisenstadt says. “We went to the first couple of practices who were looking at partnering and said, ‘Look, why don't you keep whatever percentage you think makes sense-20 percent, 30 percent-and we'll buy the rest of the practice and be your partners?'”
But these corporate partners contribute a different skill set: business acumen. Veterinarians have long complained about the chasm between skills necessary to save lives in the surgery room and those needed to keep books and manage employees. As veterinary practices have grown larger and more complex, business management pressures have pulled veterinarians away from patient care, the reason they went into practice in the first place. So the idea of a business-savvy partner who can help eliminate long hours spent managing inventory or training staff is appealing to some.
This ownership model also provides economies of scale for negotiating drug and supply costs, providing health insurance and other employee benefits, and offering staff members greater mobility. The same, of course, is true in traditional corporate practice. But here the original owner maintains a stake in the business, continues to be the face of the practice and keeps the practice name. For veterinarians who are tired of management but can't bring themselves to sell to a corporation, these partnership plans offer an interesting opportunity.
Growth = complexity
When Douglas Aspros, DVM, graduated in 1975 from Cornell University, he joined a practice in Westchester County, New York. It was considered big because it employed four veterinarians, covered emergencies and was open seven days a week.
“Since then, the situation has changed radically,” says Aspros, who now serves as an advisor for Veterinary Practice Partners. (Aspros is also former president of the American Veterinary Medical Association-yes, that Doug Aspros.) “Veterinary practices have become much more complex organizations. They have to keep pace with the rest of the retail environment. In the past, running a mom-and-pop operation didn't require a lot of business savvy.”
But with four-veterinarian practices becoming the rule rather than the exception, Aspros says the current generation is facing more competition and needs greater business proficiency. “When you partner with a group that offers business expertise, you're getting someone with a different skill set, someone who understands human resources, who understands finance and marketing and is focused on making the business successful-because that's what they do.”
Veterinary Practice Partners also provides its co-owners with a high level of analytical data culled from its 17 practices, and later, the eight additional practices the company hopes to join this year. Aspros likens the company's data to the analytics used in professional baseball, identifying undervalued resources and opportunities.
The man behind these numbers is Win Lippincott, vice president for marketing and technology at Veterinary Practice Partners. Lippincott, who has worked on Wall Street, harnesses data for the company's practices to engineer responsive reminder systems that help drive growth. His analysis shows that up to 90 percent of revenue is provided by existing clients. “That means healthy practices are not a revolving door,” he says. He cites one practice that grew 21 percent in the first 12 months with his organization in large part by boosting reminders.
Meshing the corporate with the care
Eisenstadt and his partners began to acquire veterinary practices six years ago as Community Veterinary Partners. The first practice they bought into was in Harrisburg, Pennsylvania. New to veterinary medicine, Eisenstadt and the other partners worked the first 60 days in the practice cleaning kennels and manning the front desk. It was a crash course in the complex nature of veterinary practice, and it held some surprises for the venture capitalists.
Attorney: Is this model stacked against the seller?
Christopher Allen, DVM, JD, sees this emerging ownership model as an attempt to solve two familiar problems in veterinary practice.
First, practice owners worry about converting a life's work into retirement income when they hang up the stethoscope. “Basically, I see it as a delayed buyout rather than a current buyout,” explains Allen, who serves on dvm360's editorial advisory board. However, he worries that the arrangement stacks the cards against the seller.
“This is great for the company,” he says, “because they've got the seller as a captive audience. You've got to sweat while you wait to see if everything pans out great. To me, it's just a system for the acquiring corporation to keep the seller enthusiastic.”
Allen argues that this is particularly necessary when venture capitalists buy veterinary practices. Veterinary care, he says, is difficult for buyers to commoditize because it depends on the “love and attention” of the veterinarian. People feel differently about their pets than they do about their glasses or their gyms, other businesses targeted by venture capitalists.
“You've got money from private equity and you have love and attention from the seller who's got a contract saying for the next 10 years, if you want to get money out of this contract, you'll give love and attention,” he says.
Second, many veterinarians are wrestling with how they feel about corporations. “I wonder if this model helps to mollify a seller who promised himself he would never sell out,” he speculates. “Somehow, this lets you have your cake and eat it, too.”
“One of the surprises for anyone outside the veterinary sector who spends enough time in hospitals is just how much staff members and doctors deal with life-and-death issues, and the emotional stress of that,” Eisenstadt says. “It's significant. Much more than I would have guessed.”
The second surprise was veterinarians' aversion to marketing. “I understood they wouldn't want a slick-looking campaign, something overly commercial,” he explains. “But I think we were surprised about how much effort it takes to get veterinarians excited about a new client promotion. In fact, anything to do with the marketing seems to be hard.” And when business and medical decisions collide, Eisenstadt says, intense and regular communication is necessary.
The group's first practice in Harrisburg was co-owned by Bob Sarsfield, DVM, and a partner who wanted to retire. The venture capitalists and Sarsfield spent eight months discussing the prospect, beginning with a breakfast meeting where they simply explored the financial challenges of practice ownership. Sarsfield had recently borrowed money to buy out his third partner, and now the second partner wanted to cash in and retire. The situation, Eisenstadt says, was complicated because the retiring partner had always dominated the business side of the operation.
“So we said, ‘You keep 20 percent, and we'll give you a little bit of cash so you can clear all your debt,'” Eisenstadt recalls. “That relationship has been wonderful. The practice has grown from $1.7 million to $3 million. It was the first partnership we did in veterinary medicine, and it's always good when the first one works.”
Sarsfield says he doesn't think that six years later any of his clients know the practice has changed hands. Partnering with Eisenstadt's group, he says, “was one of the best business decisions I've ever made.”
Sarsfield particularly likes the division of labor. He has four children, and he wants to have a personal life in addition to a work life. So he's happy to let someone else manage the five-veterinarian practice. “My only management responsibility is keeping the veterinarians in order,” he says. “I'm just dedicated to practicing good medicine. If you give a veterinarian time to focus exclusively on the medicine, I don't see how a practice won't grow.”
Based in Philadelphia, Community Veterinary Partners is building a regional collection of practices. Originally they held to a 100-mile radius, then they increased to 200 miles, and now 400 miles. They expect to add four more practices this year in the same territory. “If there's an issue, we can often jump in the car and be there in the same day,” Eisenstadt says. “But if not, we're a quick flight away.”
Embracing the future
A veterinary consultant and management speaker for 20 years, Shawn McVey is finally a practice owner. Well, he doesn't own a practice-he owns 19. McVey is one of three executive directors of Pathway Partners Holdings, an Austin, Texas–based firm that manages 21 practices and owns, through partnership, 19 of them. McVey, whose specialty is veterinary practice management, particularly the human side of management, was never able to own a practice because he wasn't a veterinarian. This new arrangement made ownership possible.
McVey partnered with the company's founder, Jasen Trautwein, DVM, in 2011. Pathway Partners owned four practices at the time. “I said, ‘Between your DVM resources and my expertise with people, we should be able to grow a fairly large company,'” McVey says. In 2011 he closed out his consulting firm with the intention of spending the last decade of his career building the new company.
McVey says Pathway plans to add three practices this year under the owner-partner model. The 19 existing practices are a far-flung group, including hospitals in Texas, Philadelphia, New Jersey, New York, Washington, D.C., Maryland, Kansas, Arizona, California and two recently added in Hawaii. Pathway, he says, is also looking actively for practices in the south Florida area. With that travel schedule and management responsibility, it's no wonder McVey is conducting phone interviews from his car and racking up frequent flyer miles.
All of this growth is fueled by venture capital. And the long-term strategy is to open enough practices in each area to support a regional infrastructure. “That's what's happening,” he says. “There is so much money out there. You know, what they say about the last 15 years is true. The ‘one percent' have gotten richer, and they are bullish on veterinary medicine because even in an economic downturn, people proved that they would continue to care for their pets. Animals-even in recession-are a good investment.”
The other reason venture capitalists are bullish on veterinary practice? “Because there are 26,000 veterinary hospitals in the United States, only 3,000 of them are corporately owned, and the vast majority underperform,” McVey says. “The venture capitalists are literally lining up looking for an opportunity to come into the marketplace.”
John Lofflin is a freelance writer and journalism professor based in Parkville, Missouri.