Unless you are Rip Van Winkle and have been asleep the past 5 years, you likely have noticed that corporations are calling more frequently now than ever before to buy your practice. Corporate consolidation has reached a point of inevitability given the 20+ private equity backed players and the prices these groups are willing to pay.
How did we get here?
VCA started buying practices in the late 1980s but the industry buying did not start in earnest until after the great recession and has reached a fever pitch in the past 24-36 months. The consolidation is driven by a number of factors including:
- Steady and stable growth in veterinary services due to the growing importance of pets in people’s lives and the human-animal bond continues to get stronger
- Younger veterinarians burdened with huge amounts of student loan debt and seeking better work/life balance creating less interest in ownership among those under 45 than prior generations.
- Veterinary care has proven to be recession resistant, people continue to spend on their care even when the economy is doing poorly
- An abundance of investment capital for private equity to invest combined with 8+ years of really low interest rates
Strong industry fundamentals, changing demographics and abundant availability of low interest lending are driving forces behind driving consolidation. These factors have led to many new companies – an alphabet soup of acronyms – to vie for your practice. There is VCA, NVA, CVP, VPP, VetCor, PetVet, Pathway, Blue River and many more. In 2017 and 2018 even more corporate groups have thrown their hats in the ring! With only 4,000 clinics owned by corporations (almost 2,000 of which are controlled by Mars through VCA, Banfield, BluePearl, and Pet Partners) and over 27,000 clinics – it feels like the consolidation could last forever.
In addition, valuations of practices in the past 24-36 months have risen to levels not seen before by veterinarians. The valuations are good for practice owners that are nearing retirement. It is not good for younger DVMs that want to buy a practice. The younger veterinarians are not likely able to buy a 3 DVM practice or bigger but rather they need to look at 1-2 DVM practices that they believe can be grown.
Where is it going?
It is doubtful that the high prices will come back to earth anytime soon. We believe pricing would lower if either:
- Interest rates go up materially – which will happen if the economy stays strong
- There is a recession and industry growth slows, which is also a possibility
Corporations, for the most part, have targeted practices with 3 DVMs or more and $1.3 million in revenue bringing the true market down from 27,000 hospital to around 10,000. With this math, some could argue that 40% of the market is currently consolidated, with around ~400 hospitals on pace to sell to corporate groups each year. It is likely 6-8 years before the pace of consolidation slows because there are not enough private practices left.
So when does the pace of consolidation slow? The inevitable ‘end’ of the consolidation starts to happen when the corporations start buying each other. Mars has bought a handful of businesses but when the number of individual clinics available to buy starts to narrow, you will see consolidation of the corporations (just like we have seen with the drug manufacturers).
We believe the market will likely see 5-7 longer term ‘survivors’ after the consolidators buy each other with Mars, NVA and a few other likely left. We feel strongly that VPP’s unique business model of co-owning clinics with DVMs positions us nicely to be one of the few left standing.