Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Veterinary Clinics
Transcript
- Lucas: So last week I was looking at the numbers on veterinary clinic consolidation, and I think the scale of it has quietly passed something like a tipping point. Luna: Define 'quietly'. Because I feel like every pet owner I know has noticed their vet visit suddenly costing a lot more. Lucas: Right, that's the consumer-facing side. But on the deal side, private equity has been buying up general practice small animal clinics at a pace that's actually faster than they bought up dermatology or dental. Since 2021, the number of corporate-owned vet clinics in the US has roughly doubled — from about 15 percent to over 30 percent of the total market. Luna: So almost one in three vet clinics now has a private equity backer? Lucas: Yes, and that's concentrated in the high-volume suburban practices. The aggregators — firms like PetVet Care Centers, VetCor, and the corporate giant VCA owned by Mars — are competing hard for practices with at least three or four doctors and a solid recurring client base. The multiples have crept up from around six to seven times EBITDA a few years ago to more like eight to ten times today. Luna: And those multiples are being paid by debt, presumably. Lucas: Almost entirely. The typical structure is a leveraged buyout of the founding veterinarian's practice, with the seller rolling maybe 20 to 30 percent equity into the new entity. The debt is placed on the practice's cash flow, and the earn-out period is usually three to five years, tied to revenue growth and client retention targets. Luna: So the vet who built the practice stays on, but now they're incentivized to grow top-line aggressively — more visits, more add-on services. Lucas: Exactly. And that's where the tension sits. I spoke to a practice owner in Charlotte who sold in 2023. He told me the first year after the deal, his team was pressured to push annual wellness plans, dental cleanings, and advanced diagnostics like ultrasound — which are high-margin, but also real clinical decisions. Luna: Was he okay with that? Lucas: He said the earn-out targets were achievable without compromising care — but he also acknowledged that new associates hired after the deal were given production bonuses that encouraged a higher volume of procedures. The conflict isn't overt, but it's structural. Luna: And what about the vets who don't sell? Lucas: They're getting squeezed on two fronts: independent clinics have to compete with the corporate pricing power on supplies and lab fees, and they're losing staff to the corporates, who can offer higher starting salaries and sign-on bonuses. The American Veterinary Medical Association reported that starting salaries for new grads in corporate-owned clinics are now about 15 to 20 percent higher than in private practice. Luna: So the consolidation is also driving up labor costs across the whole industry. Lucas: Right. And that feeds back into the pricing that pet owners see. The average cost of a routine vet visit has risen about 30 percent since 2021, according to the Bureau of Labor Statistics' pet services index — that's faster than human healthcare inflation over the same period. Luna: So we're paying more, vets are getting paid more, but the private equity firms are taking their cut in the middle. Lucas: That's the model. And it's worth asking: does the consolidation actually improve clinical outcomes? The evidence is mixed. Some studies show that corporate-owned clinics have higher rates of preventive care compliance, which is good. But they also have higher rates of diagnostic testing for low-risk cases, which drives up costs without necessarily improving health. Luna: Look, I know we talk about this a lot on the show — the tension between operational efficiency and clinical autonomy. I have to say, these episodes are only possible because of listeners who support us directly. A handful of people chip in monthly through buy me a coffee dot com slash fexingo, and that literally funds the research and production time that goes into covering niche consolidations like this. Lucas: Yeah, it's true. We don't run ads, and that means the show stays focused on the details — the earn-out structures, the multiples, the real trade-offs. So if these conversations have moved your work forward in some small way, that's the only reason we're still here. Luna: Alright. Back to the deal mechanics. One thing I've wondered: how do these acquisitions actually get financed? The debt markets for vet practices are pretty specialized. Lucas: They are. Most of the debt comes from banks that have dedicated healthcare lending groups — institutions like Bank of America, PNC, and some regional banks. But the terms have gotten tighter. In 2021 you could get a seven-year term loan at LIBOR plus 300 basis points. Now those loans are more like SOFR plus 400 to 450, and amortization schedules are shorter. The higher interest costs eat into the EBITDA multiple the acquirer can pay. Luna: So that might put a ceiling on the consolidation wave? Lucas: Potentially. But the private equity firms are getting creative. Some are using holdco structures where they put multiple clinics under one parent company and issue bonds at the holdco level. Others are partnering with real estate investment trusts to buy the clinic properties and lease them back, freeing up cash flow for the operations. Luna: So the real estate is becoming part of the deal too. Lucas: Absolutely. In fact, the most aggressive buyers are the ones that separate the real estate from the practice. They pay the vet a high price for the building — often above market value — in exchange for a long-term triple-net lease. That makes the overall purchase price look higher, but the actual cash outlay for the practice goodwill is lower. Luna: And the vet gets a liquidity event on the real estate plus an ongoing rental income. Lucas: Exactly. It's a win-win for the seller in the short term. But it also means the private equity firm now has a fixed lease obligation, which increases the financial leverage of the deal. If the practice hits a rough patch — say, a recession reduces pet spending — that lease is still due. Luna: Right. And the vet who sold is now a tenant, not an owner. Lucas: Which is a very different position. I've seen deals where the seller's earn-out was wholly dependent on hitting revenue targets that assumed the practice would keep growing at 10 percent annually. When the local economy softened, the practice missed the target by 5 percent, and the earn-out was zero. The vet got the building sale proceeds, but the equity roll was wiped out. Luna: That's brutal. So the risk is asymmetrical. Lucas: Yes. And that's why the best advisors tell vets to negotiate harder on the earn-out structure — tie it to clinic-level EBITDA rather than revenue, and get a floor that covers at least the debt service. But many vets are clinicians first, not financiers, and they end up with terms that look great on paper but are actually quite aggressive. Luna: So who's doing the advising? Are there specialized intermediaries? Lucas: There are a few boutique investment banks focused on veterinary and animal health — firms like Veterinary Practice Advisors and Simmons & Associates. They handle the sell-side mandates. But the industry is still pretty fragmented on the advisory side. A lot of deals are done through generalist M&A brokers who don't fully understand the specific risks of a veterinary practice. Luna: That seems like a recipe for mispriced risk. Lucas: It is. And I think that's partly why we're seeing the multiples compress slightly in 2026. The buyers are getting more sophisticated, but the sellers are also learning. We might be entering a phase where the consolidation slows down as the easy targets — the high-margin, single-owner practices — get acquired and the remaining independents are either too small or too stubborn to sell. Luna: Or they form their own cooperative groups to pool resources without selling equity. Lucas: Exactly. There's a growing number of group purchasing organizations and shared-service models that let independent vets get some of the scale benefits without ceding control. But those are still early stage. For now, the private equity machine is still humming — just maybe at a slightly lower RPM than two years ago. Luna: Do you think we'll see a major veterinary platform go public, like what happened with dental support organizations? Lucas: It's possible. PetVet Care Centers was reportedly exploring an IPO before the market turned in 2022. If the interest rate environment stabilizes, I could see a large veterinary roll-up filing for an IPO within the next 18 months. But the public markets will scrutinize the same tension we've been discussing: are these practices growing because of genuine demand, or because of financial engineering? Luna: And that's a question the buyout firms will have to answer for their limited partners too. Lucas: Right. The returns on these deals depend on exit multiples holding up. If the IPO window opens and the market marks down veterinary consolidators, the whole thesis gets recalibrated. But for now, the deals keep closing — and your next vet visit will be a little more corporate than the last one. Luna: Something to think about while we're waiting in the exam room. Lucas: Exactly.