Not long ago Skittles, a guinea pig owned by Scott Mitchell and his family, came down with a bad eye infection. After a trip to the veterinarian, Skittles’ owners faced two basic choices: Euthanasia, to prevent suffering, or removal of the eye, says Mitchell, the managing director at SDR Ventures LLC, a middle-market investment bank in Greenwood Village, Colo. His family chose surgery, and after the almost $1,000 procedure Skittles was back home and happy.
“We now have a one-eyed guinea pig,” Mitchell quipped. His kids were simply too attached to Skittles so surgery was a given, he says.
According to the American Pet Products Association, 70 percent of U.S. households own a pet. And it goes without saying that these are not just pets: Most are loving companions and designated family members, with their own food, beds, apparel, supplements, shampoos and often insurance. When a pet needs medical attention, owners often rush them to the vet for the best possible care. This “humanization” of pets — made stronger due to Covid-19 since people have been isolated — has created a backlog at veterinary clinics, a crowd of exhausted veterinarians trying to keep up, and a pool of industry consolidators who are scouring the market to snap up smaller businesses from tired owners ready to exit or ready for help.
By all accounts 2021 was a banner M&A year for most sectors, including the veterinary practice space. But while valuations may have since dipped slightly in the sector, dealmaking remains vibrant this year, as buyers see opportunities in the United States and elsewhere. Recently, investor-backed National Veterinary Associates, a community of more than 1,500 animal hospitals and pet resorts, completed its acquisition of Ethos Veterinary Health, a provider of emergency and specialty medicine. In July, Veritas Veterinary Partners, a network of over 100 specialty and emergency animal care providers, acquired both the Pet Emergency & Specialty Center of Marin and Colorado’s Wheat Ridge Animal Hospital.
Portland, Maine-based Rarebreed Veterinary Partners, a growing cluster of animal hospitals and an industry consolidator, has been notably acquisitive, completing numerous deals since its inception in 2018. In one of its latest deals this year, Rarebreed purchased Vet’s Best Friend, a Massachusetts-based collection of veterinary practices. That deal added 47 locations to Rarebreed’s community.
“Acquisition is a core part of our business model, so we’re always looking and trying to buy practices that have good cultures, and that understand what we do and that value our people and our clients,” says Dan Espinal, Rarebreed’s co-founder and CEO. Espinal previously spent years at IDEXX Laboratories Inc., a provider of veterinary diagnostic and software products, managing its strategic planning process and leading some of its global acquisitions. He co-founded Rarebreed with the idea that a larger company could streamline processes at acquired veterinary clinics and in turn, provide more value to clients.
Like many consolidators, Rarebreed has been backed by numerous investors, including Revelstoke Capital Partners, a private equity firm in Denver focused largely on healthcare services companies. In July, Revelstoke completed fundraising for its Revelstoke EPIC Fund III to support the expansion of Rarebreed, largely through acquisitions and by opening new locations or adding supplemental service lines. Revelstoke was also an investor in Vet’s Best Friend.
“We want to make sure Rarebreed has significant capital for continued investment and continued growth,” says Simon Bachleda, Revelstoke’s co-founder and managing partner. “The market is fragmented and we would expect to see meaningful opportunity for tuck-in acquisitions.”
Market on Fire
Why is the veterinary market sector sizzling? “The bottom line is there are still over 20,000 independent veterinarians in the United States, and we have identified 40 buyers of veterinary practices, most of them private equity backed,” says Tom Elliott, managing director of Capstone Partners, a middle-market investment bank in Tampa, Fla. (In June, Capstone itself was acquired by Huntington Bancshares Inc.). “All of the investors who have gotten into the [animal care] space have done very well,” he notes. “And as a result, it has attracted more and more investors into this space and has created some real competition.”
The market is so hot that Capstone is expanding its veterinary practices team, so it can help more practice owners navigate the M&A waters, he says.
In its March 2022 report on the pet and animal care sector, Capstone reported that “buying a veterinary clinic is considered a low-risk, high-reward investment.” The sector has proven to be virtually recession-proof, since people spend money on their pets’ health and well-being, despite the economy — creating a steady stream of recurring revenue for veterinary clinics and making them attractive M&A targets. “We believe that consolidation will continue, so we’re putting our money where our mouth is,” Elliott says.
What’s more, “veterinary services is an attractive sector for investment because you have multiple avenues for growth,” with a “significant opportunity to innovate in animal health, to bring it into parity of what we see on the human side,” Bachleda notes.
Competition among buyers should continue to drive up valuations in the pet care space, at least for awhile. That’s exactly what happened with Four Paws Animal Clinic in Columbia, S.C. After receiving an unsolicited offer from a large veterinary group, Four Paws hired SDR Ventures to help advise them through a sale. SDR held a targeted search and identified several qualified buyers. About six months later, in September 2021, Pathway Vet Alliance (now Thrive Pet Healthcare), which operates acute, primary and specialty practices in over 400 locations, acquired Four Paws for a much higher valuation compared to its initial unsolicited bid. Pathway is owned by TSG Consumer Partners, a private equity firm focused on the branded consumer and retail sectors.
“We were able to increase their valuation by about 85 percent, by marketing the business to some of the other consolidators,” SDR’s Mitchell says about Four Paws.
How long will valuations remain high? Experts can only speculate. SDR, in its “Veterinary M&A Market Update”, released in May, reported it has seen some downward pricing pressure across smaller deals and believes the window for some vet systems to take advantage of peak valuations could close “by the end of the year.” Only time will tell.
Why Vets Opt to Sell
Veterinarians often start their own practices because they want to help pets in need. But with that comes challenges. For starters, clinics are often short-staffed and there’s a burgeoning dearth of young vets entering the field, all while the pet population continues to grow. According to a recent study by Mars Veterinary Health, even with new veterinary school graduates entering the field, the United States will see a shortage of nearly 15,000 veterinarians by 2030.
“Finding and attracting and training vets has almost become a full-time job in and of itself,” Mitchell acknowledges. “If you’re a practice owner, but you’ve got enough business where you need three or four more vets on staff, having someone that can recruit nationally and that may offer better incentives or better benefits can be very attractive.”
In addition, doing bookwork and managing a busy business can be less desirable for veterinarians than practicing high-quality care, Bachleda says. This double-duty workload can contribute to burnout and stress.
Thus, it’s no surprise that veterinary entrepreneurs may see plenty of upsides — besides money — if their practice joins a larger platform. They will get help with back-office and management functions along with better buying power and access to superior technology. And then there’s the obvious reason to sell: retirement. Many aging veterinarians are ready to step down and let someone new take the reins.
No matter the reason M&A activity remains robust, one thing is certain: Pets will continue to be an important part of people’s lives. The story of Skittles the guinea pig, was simply “an illustration of the fact that people are willing to spend money on their pets,” Mitchell says.