The veterinary industry is experiencing some major consolidation or roll-ups as companies such as VCA and others continue to purchase veterinary practices. What is driving this activity?
For years, the veterinary industry has suffered from a lack of capital. By this, I mean that there was very little outside capital from non-veterinarians interested in owning veterinary practices. As a result, there was too little capital available for all aspects of our operations, such as improving core technologies, management practices, and other components of veterinary practice operations. As non-veterinary money sources gained interest in our market, the value of healthy veterinary practices has steadily increased. As the demand for practice ownership increases, and practice valuations continue to climb, the infusion of capital brings more resources to the industry to grow practices, to offer better medicine to our patients, to pay our people better, and in general to reap the rewards of increasing demand for practice ownership.
In years past, many veterinary practices had little or no opportunity to be sold or transitioned to new owners. Thus, many practices shut their doors and sold the equipment and real estate when the owner retired or passed on. To some extent, this situation still exists in many large animal and equine practices today. In companion practices, increasing demand for practice ownership and large management groups funded by those who manage money, has created a stronger market and opportunity for practice owners to realize significant value for their life’s work by selling their practice. These practices must be healthy and managed well, as they are only valuable if they can prove a track record of generating profits. They are valued for their profit-generating ability.
One might ask, “how do these larger companies afford to pay premium valuations for these practices?” It happens because we have publicly traded veterinary companies such as VCA, whose share price is valued at a level with a Price:Earnings ratio that typically ranges between 25 and 35. That means that for every dollar of earnings or profit that the company earns, the value goes up by $25 to $35. For example, if the practice earns $500,000 in profit, it would be valued on the public market at $500,000 times 25 (or whatever the PE ratio is) or $12.5 million. Now that isn’t what a public company is willing to pay for a practice, but it shows the value of that book of business to a public company, once it is acquired.
This concept of increasing value is known as accretive, or added value once the business is acquired and put into the larger entity. This accretion is what drives practice acquisitions and creates opportunities for practice owners to sell their practices at attractive valuations if they choose to do so.
The increase in available capital with interest in owning veterinary practices is good for the industry, as it helps create value for those who spend their lives building and growing practices. In the end, more capital availability will bring more opportunities to provide better care to more animals.
