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How to Create Scalable Joint Venture Models

Show Notes Of Podcast

Shownotes

00.00- Introduction

1.19.54- Background

2.46.11- Attractiveness of the Vet Industry

5.24.83- Joint Venture Consolidation Strategy

8.03.24- How to Create a JV model at Scale

9.41.21- Difference From Traditional M&A

11.27.68- Legal Entities Under JV

14.03.50- Concerns from Clinic Owners

14.31.74- Integration Model of JV

16.12.03- Challenges When Building a JV Model 

17.07.04- Managing Your M&A Team

19.57.52- Evolution of JV process

22.39.85 - Average Equity Retained by Owners

23.07.49- Learning From Every Deal

25.52.63- Handling Different Responsibilities

28.16.47- Diligence Surprises

30.32.56- Fair Deals is Important in JV Consolidation

32.28.90- Other Industries That Needs Consolidating

33.52.92- Clayton’s Advice for First-Timers

36.38.44- Craziest Thing in M&A

“It does me no good to pay less than the market price and get a great deal if I’m going to have an upset partner post-closing.”

Joint Venture Consolidation Strategies

On this episode of M&A Science, Kison interviews Clayton Stanley, Vice President, Head of Corporate Development at Amerivet Partners Management, about the organization's unique approach to joint ventures.

Instead of buying veterinary clinics outright, their strategy is to buy a majority portion of the clinics, 51% at minimum, and let the company owner retain equity in their own clinics. They also don't turn veterinarians into employees; they become partners, which helps them align their goals and drive growth into their clinics.

The key to scaling this model is uniformity, especially with regards to the legal and operating agreements. You don't want to end up having 85 different clinics and having 85 other structures.

This way, it makes your organization more manageable and more attractive if you plan on exiting down the road.

Communication is also crucial when you're doing this at scale. Clayton has many deals under LOI, all at the same time, and constant communication between the law firms, accounting firms, and different integration teams is vital to keep everything moving forward. 

One of the early challenges in doing these types of deals is making sure that the buyer has a detailed understanding of the deal. In their case, the sellers are doctors who are not familiar with these kinds of deals, so sitting down with them and explaining the complexities of the deal is crucial.

A big part of their operations relies on referrals from acquired clinics, so having a happy partner is in their best interest. 

“It does me no good to pay less than the market price and get a great deal if I’m going to have an upset partner post-closing.”

Joint Venture Consolidation Strategies

On this episode of M&A Science, Kison interviews Clayton Stanley, Vice President, Head of Corporate Development at Amerivet Partners Management, about the organization's unique approach to joint ventures.

Instead of buying veterinary clinics outright, their strategy is to buy a majority portion of the clinics, 51% at minimum, and let the company owner retain equity in their own clinics. They also don't turn veterinarians into employees; they become partners, which helps them align their goals and drive growth into their clinics.

The key to scaling this model is uniformity, especially with regards to the legal and operating agreements. You don't want to end up having 85 different clinics and having 85 other structures.

This way, it makes your organization more manageable and more attractive if you plan on exiting down the road.

Communication is also crucial when you're doing this at scale. Clayton has many deals under LOI, all at the same time, and constant communication between the law firms, accounting firms, and different integration teams is vital to keep everything moving forward. 

One of the early challenges in doing these types of deals is making sure that the buyer has a detailed understanding of the deal. In their case, the sellers are doctors who are not familiar with these kinds of deals, so sitting down with them and explaining the complexities of the deal is crucial.

A big part of their operations relies on referrals from acquired clinics, so having a happy partner is in their best interest. 

Shownotes

00.00- Introduction

1.19.54- Background

2.46.11- Attractiveness of the Vet Industry

5.24.83- Joint Venture Consolidation Strategy

8.03.24- How to Create a JV model at Scale

9.41.21- Difference From Traditional M&A

11.27.68- Legal Entities Under JV

14.03.50- Concerns from Clinic Owners

14.31.74- Integration Model of JV

16.12.03- Challenges When Building a JV Model 

17.07.04- Managing Your M&A Team

19.57.52- Evolution of JV process

22.39.85 - Average Equity Retained by Owners

23.07.49- Learning From Every Deal

25.52.63- Handling Different Responsibilities

28.16.47- Diligence Surprises

30.32.56- Fair Deals is Important in JV Consolidation

32.28.90- Other Industries That Needs Consolidating

33.52.92- Clayton’s Advice for First-Timers

36.38.44- Craziest Thing in M&A

Text version of interview

Clayton to kick us off, can you tell us a little bit about your role and organization? 

I work for AmeriVet Veterinary Partners, a private equity-backed. That clinic consolidator headquartered in San Antonio, Texas. Westarted in 2017 in Canada because our financial backer is a private equity firm out of Canada called Imperial capital. 

I came on board in August of 19 as the head of corporate development. Today, we're about 85 clinics, probably around 120 by the end of this year. So we have pretty aggressive targets and a lot of clinics in our current signed LOI pipeline.

I came on board to help to run the corporate development, being that we're a consolidator. We have two separate groups where I've got a separate team, our business development team that handles all the sourcing side. 

Then really once we have a live opportunity to negotiate the NDA and the LOI, all the way through deal execution is what my team is focused on, where our BD team is the relationship team. That's focused on finding the partners that are interested in partnering with us. 

The vet industry itself has generated a lot of interest from PE firms. What are some of the reasons the industry is so attractive? 

  1. It's still a very highly fragmented industry. The estimates aren't still up to 80% fragmented. 80% of the vet clinics are still owned independently by the veterinarian. 

So there's still a lot of greenfields where even though there's a lot of competition in our space, there's a lot of clinics for consolidators to buy. We're still probably in the early innings of a baseball game, as far as the industry becomes more consolidated and it gets tougher to buy clinics.

  1. It's a high-margin business. The EBITDA margins for a typical good veterinary clinic are in the mid-twenties. And it's a very low-risk business.
  2. Lack of strategic buyers in the space. Typically most of the people buying the clinics are PE-backed consolidators like ourselves. 
  3. It has a private pay revenue stream. Unlike human healthcare, where you have the government through Medicare and Medicaid setting your prices or the big payers setting your prices here. Veterinarians can set their own prices. It's a cash pay when a service model, the industry is proven to be recession-proof compared to other industries. 
  4. It's even pandemic proof. The vet business thrives throughout COVID. Millennials research is showing they're delaying starting families. They're buying pets instead of having kids, at least putting that off, which has obviously been a positive for the vet industry. 
  5. Good return for your financial sponsors. Obviously anytime a private equity firm invests in that portfolio company, they're obviously having an exit in mind at some point and all of the recent recapitalizations in this space. They've all been North of 20 times EBITDA. It's a very nice return for your financial sponsors. 

Is there anything bad about the industry?

  1. It's highly competitive. When you're going to talk to a veterinarian about buying their clinic, a lot of your competitors are also talking to that same clinic. 
  2. It’s highly competitive. Ultimately, we can still buy the clinics in a lot lower, multiple than we hope to exit at, but it's highly competitive. So it makes sure your LOI issue to close rate a lot lower than you would like to because of the competition. 
  3. Shortage of veterinarians. Your veterinarians or your revenue producers. So you're always trying to recruit, recruiting is a huge part of that consolidator’s organization.

Your investment strategy is unique. Tell us about it

We were one of the first joint venture consolidators in the space. A lot of the competition in our space is buying a hundred percent of the clinics. The former owner then just becomes an employee practicing medicine instead of a part-owner in the space.

We wanted to differentiate ourselves in the market when we entered. We do the JV model, we're buying obviously a minimum of 51%. So we have a controlling interest. But what we do is, we allow our partners to retain or have rollover equity in their own clinic.

Some of our competitors would give equity in the parent company, whereas our partners retain equity in their own clinic. It aligns our goals that they're really focused on driving their own clinic's performance cause that's what's going to benefit them at the end when we exit. 

And we also are going to give them the same multiple that we get at the exit. That's a big pitch of our strategy is we're going to pay you X upfront, but, if you retain 30%, when we scale and bring a lot of operational efficiencies and help you grow your clinic.

When we sell this large group of clinics down the road for a much higher multiple, you'll get that same high multiple on your rollover equity. 

Why take this approach over a traditional buyout?

It was really due to the competition in the space, you have to find a way to differentiate yourself when there are 20 other players doing the same thing. Some are better capitalized than others, which is obviously an important thing.  

If somebody is getting better leverage in their credit agreements or debt package, they can obviously afford to pay higher multiple. So you just have to find a way to differentiate yourself. 

And also show a good value prop to that veterinarian of, Hey, in addition to paying you this competitive multiple upfront, you can make a lot more under our model.

They get profit distributions as well because they're retaining their interest in their clinic, but it's really just a lot that aligns us so we're all working towards the same goal. 

They obviously help refer deals to us because the more clinics we can buy in the more EBITDA we can acquire. Obviously, that's going to help us sell at a premium multiple down the road. 

We're basically a service organization. We have a big acquisition team, which is our core business, but we're also trying to help drive same-store sales, introduce operational efficiencies, take advantage of our procurement synergies, and things like that. 

So it's really about all marching towards the same goal, allow the veterinarians to do what they do best and that's practice medicine and we'll help them take care of the back office stuff.

The economy of scale at its finest. So let's break this down. How does a team create a JV model that works on scale?

Lots of it is really uniformity when you're doing this many deals and a tight timeline, whether it's with our legal agreements, deal structures, we want things to be as similar as possible. 

Today we've got 85 clinics in the legal agreements and the operating agreements look very similar on those. 

I don't want to have a nightmare where I go off and do have 85 different structures. That's also going to make us less attractive to the next sponsor that comes in when our private equity firm just chooses to exit at some point in the future. 

That's key to keep track of everything, the uniformity, a lot of it though, with us wanting to do 40 plus acquisitions a year. Communication is key too. We have to have a lot of cadences. 

Whether it's between the law firms we're working with or accounting firms with the quality of earnings, our different internal teams, the integration teams, the ops team.

That's key is having a regular cadence because there's a lot of activity going on. I have over 20 deals under LOI right now. They're all being closed over the next couple of months. There's not much time to pause and take a breath. 

You really have to keep everything on track and keep everything marching forward and try to keep things as simple as possible. Obviously, every deal is negotiated, but we have a structure that is slightly tweaked over time, but we try to stay true to that as much as we can.

The two parts I wanted to get into one is what are the distinct differentiators when you're creating the structure? I'd love to even hear of that conversation that you have with that company in terms of, let me sort of explain our model and why it's different? 

I think that's one of the challenges, right?

Obviously a hundred percent acquisitions, a lot easier to understand we're going to pay you X versus when I'm showing someone a term sheet, it's going to include some different components.

I have to do a lot of coaching of our business development people. It's not just a relationship job too, they really have to understand M&A. Explain some complex things to a doctor.

They practice medicine. They're not thinking about multiples and exit recaps and things like that. So it's something that you definitely have to walk them through, but to show the value in our model and how it could be a lot more beneficial versus taking a little more upfront,  and there's risk involved as well.

So that's why you really have to, kind of sell them on the industry and how we really believe based on recent exit multiples for our competitors, that this is going to come true. And it's not a pie in the sky type scenario.

You're keeping all these entities independent. So they're keeping essentially the same structure or are you still acquiring them into a larger company? Is it still like an asset sale? 

They're all asset deals. So we set up a legal entity for each of the clinics we acquire that's in its own legal entity, and there's obviously some structuring involved too, and not just in the vet space, but certain states prohibit the corporate practice of medicine. 

So you have to structure around that, where you have a veterinarian own the actual legal entity that employs the veterinarians. And then you have some inner company agreements and things like that. Each of our acquisitions sits in its own LLC entity.

I'm wondering, how does that fare out when it does come time to actually exit the portfolio?

We have to address complicated things in our operating agreements. It's one thing when you're negotiating an agreement, but you're also having to contemplate what's going to happen in the future as well, which is an unknown.

So it's really all defined out, based on what their EBITDA is at the time of exit. If they can grow their clinics, they're going to do better than they would if they don't grow the clinics. That's all laid out in the operating agreements. 

And it is things that we usually get involved with the other side's legal counsel on, and the veterinarians don't get too involved in it. They want to know when they're going to get their money and when they'll get the next big check down the road. 

Do you see other groups that would keep a single entity and basically give them fractional ownership?

Definitely, so most of our competitors in the JV space, they're setting up the clinics in the individual entities. But a lot of them are doing TopCo equity. Yes, where you're getting equity in the overall parent company versus equity in your individual clinic. 

We set ours up purposely this way, because that way everyone controls their own destiny, right? You get some people that want to rest on their low rolls and just let all their other partner clinics pick up the slack. 

Where here as you control your own destiny. Hey, if you really believe in your clinic, you can grow it. You're going to do better off. Whereas if one of our other clinics under our portfolio, it doesn't grow as much, they won't benefit as much. So we really want everyone to be aligned, to drive in the same direction, and help grow their clinics. 

What concerns do you see from these clinic owners? When do you start talking to them about this kind of model? 

A lot of it is making sure they really understand it. Obviously, this year has been challenging with the restrictions on travel. Cause obviously it's a lot easier to explain this, sitting down with someone and walking you through an LOI versus having to do it over the phone or over zoom calls. That's been a challenge for our business development team. 

Interesting. When you're done with the transaction, are you doing any integration at all? 

The integration is happening pre-closing once we go live, we can close a clinic. They're on our benefits, they're on our payroll. So the last 30 days before we close our integrations and ops teams really get involved in meeting with the staff, like answering all the questions they may have, and also getting them on boarded for payroll and benefits and things like that. 

Because at the end of the day, we're a people business. So we really want to make sure that the employees are comfortable because really nothing other than a name of who their payroll check is coming from. Nothing really changes on a day-to-day basis. 

It's really important for us to keep the culture of the clinic we're buying. We don't go change their name, all of our clinics keep their names or really this, there in the background to help and assist them grow their clinic and kind of take things off their plate.

We even let them choose their own suppliers they've always been business with, we have contracts with all of the suppliers in this space and obviously can get better pricing that they can take advantage of once they come under our umbrella. 

So there are always some immediate cost synergies from the procurement side. Most vet clinics are small businesses. I'd say between 2 to 3 million of revenue and they're focused on delivering great medicine to the pets and their patients and not necessarily focused on driving down their cost of goods, sold as low as they can.

There's a lot of low-hanging fruit in ways that we can help these clinics out, both from growing revenue, but also reducing expenses at the same time. 

What are some challenges you need to consider when building a JV model to scale?

Starting off, I think it's always that tough decision on spending all the money to invest in the infrastructure that you know, you're going to need at some point before you actually have the clinics under your umbrella and their profits and revenue to justify spending all that money.

JV model's complex. There's a lot of cooks in the kitchen. You have a lot of interaction with your partners because they're co-owners of the business. An owner of a business acts a lot different than just an employee, as far as the information they want to see and their involvement in decision-making. 

You also think about it too. There's a lot of tax returns to file, so just there's a lot of kind of administrative stuff. It has to take place in a JV model. So it's one of those things too, that most people want to slowly build the team and the infrastructure, making sure the revenues are there and justified. 

It's a big leap of faith to go spend the money and then hope it works out. But luckily we've been successful and it's worked out for us.

Let's talk through the telltale signs about adjusting the size of your M&A team. 

For anyone, a lot of it, especially in being a consolidator with a lot of deal activity, I think some of it is when your team can't keep up with the deal flow. And you start identifying bottlenecks in the process.

I think we use an M&A software platform and work. We track all phases of the deal process once an NDA signed to how long it takes us to get the financial information back from the potential partner. To when we're presenting the deal for approval to getting the LOI issued, to sign. 

Then all the execution phases as well. Once on the LOI side, how long does it take us to get our first legal drafts out? How long does it take to get the QoE report done with our third parties? 

Anytime I start seeing bottlenecks in the process, I'm definitely looking to add to the team if a person could solve some of those problems. Sometimes it's changing a process, but if I say this is just a bandwidth issue, I just need another person that obviously a key time to add someone.

Just getting the daily vibe of your team too, you can tell when people are being overworked, there may be keeping up. It's just probably working more hours than they are. You would like them to work so everyone can have a balanced lifestyle. 

So it's something, as a leader of a team, you just got to keep your eye on to make sure your team’s still productive, but also is happy with the work they're doing is getting challenging work and not just having to do monotonous activities. It's not really helping them grow as corporate development professional. 

I'm curious, how do you assess between operationally, we need to adjust things to be more efficient vs. we need to throw more bodies at this? 

A lot of corporate development teams are one or two people. I think it's different when you're a consolidator because, in a lot of companies, the corporate development group or person is opportunistic. 

We need to add to this business segment or here's a new technology that you make the buy versus build decision. You don't really need a big team when you're opportunistically doing one or two deals a year. 

But for us, that's our core business. We want to go do 40 deals a year. The funny thing though is, as competitive as the market is, I wish I wanted to do 40 deals. I could just go issue 40 LOIs right, but that's not the reality and how competitive it is.

So a lot of your team's work is spent on deals that will never come to fruition. It's somewhat of a volume game. It takes a lot of effort to do the evaluations and produce the LOIs, even negotiate them sometimes. And then you never actually win the deal.  

It's finding that balance, like you said, We're always trying to improve processes, figuring out, okay, how can we get our LOI close rate up?

Things like that where we can take some of the workloads off of my team and still allow us to close the same number of deals. It's a constant challenge of , is it out of body or is it an improvement process? 

Are there certain things that you've seen as you've been involved with this and how it's evolved? I'm curious in general how you've seen things evolve and what are the lessons learned in driving that process to be efficient? 

We really have three distinct teams. We have the business development team, which is in charge of sourcing the deals. When they're sourcing their own deals, you're not necessarily deals coming in from bankers or brokers, but actually out there pounding the streets meeting the veterinarians. 

Through there,  a lot of our BD team has history and animal health space. Like they were product salespeople in the veterinary space, selling drugs or different products.

So they have a lot of connections in the vet space and in working those connections, in addition to cold calling too, going off of lists of the veterinarians in their markets where they're the right size that we would like to approach. 

But also, that I have my corporate development team, which really handles from an identified opportunity all the way through closing the transaction. But we also have an integration team as well. 

And so obviously that's an important handoff later in the process between my Corp dev team who has most of the knowledge on this particular clinic since we're the most heavily involved in handing that off to the operation of the integration team.

Interesting approach: three distinct teams, biz dev, you're doing your own dealers nation, or do you use bankers?  

We do. So we obviously get a lot of inbound stuff from there's a lot of business brokers in our space. Not necessarily as many I wouldn't say true investment bankers because the typical veterinary clinic is just a little on the small size for a big bank, but you'll see groups of clinics come to market together.

And then you'll see more traditional investment bankers get involved. So a lot of business brokers specialize in the space. So yeah, that's a deal source. Then you rely on your own team to go out there and source their own deals.

Then they can actually find deals that may be the seller or the future partner we're talking to is not shopping around and taking it to every competitor out there. Maybe you get it at at lower, multiple, with less competition, which obviously is a good thing for us.

Some of this stuff, you can obviously outsource some of these functions as well. Obviously, we use third-party AUV firms to do that.

We obviously have outside legal counsel and stuff. We do have a lot of interaction with the third-party, but ultimately, me and my team are the ones making the decision along with working with our internal teams and also some external parties as well. 

What percentage of the business does the original owner usually keep?

On average? It's 30%. 

We have some that are at 49%. Most of our deals are between 20 to 40, but we have some outliers there. We have a majority interest in all of our clinics, but 30% is the average for the retained interest for the veterinarian.

When you take those deals to close. And even prior to that, you get the integration team involved. Has there been anything specific that you have seen to help you become more efficient between running a deal or coordinating between the different teams in a deal process? 

You learn from every deal. Every day is a new day. I learned something, every day some nuance comes. You do a lot of deals. It's amazing how they're all still unique. 

So constantly whether we're negotiating employment agreements, working with our HR team and our future partners is figuring out the right timing. And we face this on every deal, just like anyone selling their business.

They're always a little apprehensive to bring everyone over the wall on their side until they know the deal is going to happen. There's always that risk in kind of disruption to your own business. So that's a challenge with our integration teams too is getting the seller comfortable informing the staff instead.

So we really can make sure we have a smooth close and smooth integration. So we're always learning from that and ways to get the partner on board with that. And how we go about handling the negotiations for our revenue generators, which are our veterinarians. 

And typically let's say in a vet clinic, they may have three or four veterinarians. Only one of them is a partner who's really going to be getting proceeds from this sale.  So you really have to spend some time with those associate veterinarians, the ones who are you getting any equity. 

Make sure they're comfortable and know that, Hey, nothing's going to change in your day-to-day life. Other than there's a new partner, that's there to help make your job easier for you. Obviously retaining our veterinarians is really key and having a successful acquisition. 

With these sorts of learnings that you pick up from deal to deal. Is there an approach that you have to retain it? Do you like a retrospective or a post-mortem? Talk about what went good, what went bad?

A lot of it gets discussed after a deal close. We really call it a budget handoff call. That's a call to recap everything. We have our finance team there, the ops team, the integration to make sure that everyone's, we can have that transfer of the knowledge. 

We're also talking about making sure that they understand our first 12-month forecast. Talk about any intricacies and things like that. A lot of it's via communication too.

We're still somewhat of a small growing company, so there's constant communication amongst the leadership team on learning from past mistakes and how we can build on our successes. We also do a lot of surveys too. We'll send out surveys after deals close to our new partner. 

Hey, what did you not like about the process? Everybody complains about diligence. So you take some of that with a grain of salt. We're always looking to improve and get better. 

That's one thing I challenged my team is that I don't like anyone who tells me that when you ask them why they're doing something a certain way less because we've always done it. I want us to always be challenging the norms and looking for better ways to do things 

When it comes to tasks, you can't delegate to other team members. How do you handle the prioritization of tasks and manage the different responsibilities you have on your plate?

For one, you have a very good team underneath you that you trust because I'm the one that's held responsible so I can't make all the decisions. You teach and train them to make sure they're flagging the appropriate issues up to you or where I need to get involved. 

Also keep them as involved as I can. Hey, when it's something that needs to come up to me, but keeping them involved in the process, they can learn from the way I'm thinking about things, making the decision.

So ultimately you can then push and delegate more stuff to them so I can focus on other things. If you've got 20 deals under LOI, obviously on any of those deals an important issue, you could pop up that you have to immediately address,  some of it's obviously just knowing the timing of when your schedule.

If it's an issue that's of equal importance, I probably need to focus on the one for the deal. That's going to close the soonest. We like to do onsite closing for all these deals. And when you're doing the math, when you're closing 40 plus deals a year. 

That's one a week for most weeks of the year, sometimes two a week because you'll have some gaps. You really have to keep those deals on track to hitting their close dates, or it really becomes a nightmare for your integration team of deals that are constantly shuffling around the close dates.

Because it puts a strain on your HR teams too. Cause they're setting up payroll to go live on a certain day or benefits. And those aren't things that can just be easily changed with the flip of a switch. It requires some time and effort from those teams. 

So what we try to stick to our close calendar, the best we can. And using the software and things you have at your fingertips to help flag issues and things like that. Email is a big part of any company as far as communication, but it can get somewhat overwhelming. 

So you try to find ways of centralizing the communication where it's not just all via email and stuff I could spend all day just answering emails. It's not the most efficient use or best use of my time.

What is your exit strategy? What's the timeline for that? 

The market will dictate that obviously when they entered into the investment, they don't have a strict date they have to be out. 

But with the market where it is today and the vet visits continuing to grow, what we tell people is probably in the next two to three years would be the most likely exit event for our current sponsor. But ultimately the market will end up dictating when the right time is. 

Diligence, you always come across these surprises. I'm curious, have you seen anything interesting on deals you've worked on, maybe it's particular to your space or even some of your prior roles? If you have any interesting stories around surprises, you come across for your posts? 

It's somewhat related to diligence. One thing that comes to mind at a prior company, we were looking to do an acquisition in Spain, and we went over to spend some time with the owners of the business. We went to dinner with him.

It was in a Harbor in Barcelona, in his kind of broken English.  He basically said, if you do good diligence, you can have one of these boats. We ended up not doing that acquisition Bay. With the foreign corrupt practices act and bribery and things like that wasn't going to be real closure.

But that was something that was interesting, obviously different parts of the world, different things are accepted. As a US-based public company at the time that wasn't going to fly. That was somewhat of an interesting thing that happens to me on a deal. 

Dealing with somewhat of, I'd say unsophisticated sellers from a financial M&A perspective, some deals, especially during COVID where you have some valuation gaps. We do earn outs,  on certain deals, even though these earn-outs are negotiated at arm’s length with both sides represented by counsel.

At the end of the earn-out period, where you have defined metrics, they will potentially achieve none of the metrics. They get the earn-out, but they're still like, Hey, I know I didn't earn their nap, but can you still pay it to explain now that the business is underperforming and it really wouldn't be a good use of our capital to put more money into it based on your performance.

But some of the unique things yelling with a small business owner versus in my prior lives, doing large, billion-dollar acquisitions, it's somewhat of a different negotiation process. 

One thing that's unique about the JV model too, is that the traditional a hundred percent deal I'd say that negotiates can be somewhat more adversarial. You're two parties negotiating the best deal. 

And sometimes you go your separate ways. You buy the business in the person you bought the business from might not even be coming on as an employee of the new business. 

But here I'm partnering with these people. So you had to explain to them and you want it to really make it a fair deal for both parties. 

Because if you come in too buyer-friendly, you may get the deal closed but you're just going to create headaches for yourself, post-closing when they may realize things that they didn't understand at the time the deal was negotiated. 

As a consolidator, we heavily rely on our partners as referrals to buy more clinics. 

“It does me no good to pay less than the market price and get a great deal if I’m going to have an upset partner post-closing.” - Clayton Stanley.

I saved a couple of pennies that are going to cost dollars on the back end because he's not going to help refer me to other clinics to buy.

What do you see is like causes of seller remorse if it ever does happen? 

Our partners heavily, they would all say it's a fair deal. Sometimes no fault of anyone, sometimes the business may not work out sometimes they lose a veterinarian. You may have a high-producing veterinarian that decides to move to a different state or for family reasons decides to stop working. 

And then you gotta go find a replacement. Obviously, that's going to affect your profitability. So everyone wants to have a successful deal. I think sometimes when you have earn-outs involved, anytime someone agrees to do an earn-out in their mind, they're going to achieve that whole earnout.

Obviously, when you get to the end of that period, if someone hasn't earned all that additional purchase price that they thought they were going to get, there's always some disappointment there.

You have to walk them through that. Not really set seller's remorse because, at the end of the day, I think the vast majority of our partners are very happy that they partnered with us. 

Especially during the pandemic everyone's been through in the last year. Because it was really a great time to have a partner. Versus being a single owner of a business and especially in a healthcare-related business where you're researching on websites trying to find out if your business is allowed to be open and the governors are putting out mandates on what businesses are essential or not and stuff. 

It was really a great time to have a partner to help you control your labor and make sure you were compliant with all these new laws that were being put in place. I think our partners are thrilled with the decision they made. 

What other industries could we apply this to, obviously we need a fragmented industry? 

Which is why it's so right for a lot of healthcare, you see this in whether it's ophthalmology, dentist, dermatologists, that's where you see a lot of these roll-up strategies in the human healthcare space.

The fragmentation obviously is one of the big keys because if someone's going to invest in this space, knowing that, Hey, there's plenty of clinics out there for all the competitors to buy, which is why there's so much PE in this space, it's pretty low risk as well.  

It's one of those things I've heard people say, investing in this space, it's not going to be some crazy multiple where the PE firm gets 10 times their investment, but it's going to be a solid, low risk, double or triple. It might not be a grand slam, but those grand slams have a lot of risks.  

Many years down the road, once it becomes more consolidated, you'll probably see more strategic buyers. Cause at that point you'll have some of the consolidators probably buying each other versus a lot of it right now as new PE firms coming into space that have been itching to get into the vet space.

What kind of advice would you give for practitioners trying to work on their first deal? 

In corporate development, it's really about getting in a place where you can do deals. That's how you learn in this space. It's just doing lots of deals. So you obviously want to make sure you keep yourself busy when you're employed somewhere. 

I'd say it's just getting in a place where you can do deals, whether it's doing Corp dev work for a company where you can really focus on just doing deals for that company or coming at it through the transaction services space, where you get to work on a lot of deals to learn that way. 

Or from the iBanking side, there are obviously lots of different avenues for getting deal experience for someone that doesn't want the same thing every day, where it's, Hey, here's what I do each month and I  want to keep doing the same thing. 

It's a great line of work to get into. The lower you are, you're obviously going to have your tasks and roles in the process, but try to always offer to help your bosses. Go sit in on the management meetings. 

You may not be able to talk on a call, but go and sit in your boss's office and kind of just absorb as much as you can. 

Everyone's looking to grow their careers, just be a sponge and absorb as much information as you can, because you'll learn on every deal you do think that it's a negotiated deal. I mean, I've never done a deal that's the same, everyone's different. 

Do you have a preference for working on these kinds of consolidation strategies or would you ever go back to work in more of the traditional strategic approach where you're working on a variety of case-by-case type of strategy? 

This is my first time doing it from both a PE-backed company, but also in consolidator space. It's definitely challenging. And the deal flow is pretty aggressive. I like it. I definitely like the PE-backed space. 

I've done it for a public company before because sometimes you can have competing priorities within a public company. That's having to manage their profitability a quarter at a time for the street and stuff. 

So one year, you may be really focused on acquisitions and then the next year we’re, Hey, we're going to use all of our available cash to buy back shares and things like that. 

The one thing that I like about the consolidator PE-backed company is that they're always going to be aligned with what I want to do because a consolidator is going to do deals. That's really the point of why they exist. 

So you're going to have plenty to do and not have any kind of months where you're maybe sitting around or working on. Some different projects because the company is not currently focused on and doing any acquisitions. 

What's the craziest thing you've seen in M&A?

I was thinking of my potential foreign corrupt practices. The issue that was presented to me in Barcelona years ago. That probably the one thing that comes to mind in reading like disclosure schedules on deals. 

I mean, it's amazing that when you're buying people-based businesses, like kind of the things you have to get involved with on trying to close a deal, and there's a divorce involved and you've got a spouse that's on the title for the real estate that you're trying to do.

And it's amazing how things that you didn't think you'd have to get involved in like marital disputes in order to get a transaction closed, but those definitely have popped up on a number of transactions that I've been involved in. 

You have to make the decision on whether it's a good thing or a bad thing when there are kids and spouses involved in the same business. 

Ending Credits

Thank you for taking the time to explore the world of M&A with our podcast. Please subscribe for more content and conversations with industry leaders. 

If you like our podcast, please support us by leaving a five-star review and sharing it. I enjoy hearing feedback and connecting with our listeners. You can reach me by my email. It's kison@dealroom.net. 

M&A Science is sponsored by DealRoom, a project management solution for mergers and acquisitions. Additional educational content is available on Dealroom's blog at dealroom.net/blog. Thank you again for listening to M&A Science. See you next time.

Views and opinions expressed on M&A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.

“It does me no good to pay less than the market price and get a great deal if I’m going to have an upset partner post-closing.”

Joint Venture Consolidation Strategies

On this episode of M&A Science, Kison interviews Clayton Stanley, Vice President, Head of Corporate Development at Amerivet Partners Management, about the organization's unique approach to joint ventures.

Instead of buying veterinary clinics outright, their strategy is to buy a majority portion of the clinics, 51% at minimum, and let the company owner retain equity in their own clinics. They also don't turn veterinarians into employees; they become partners, which helps them align their goals and drive growth into their clinics.

The key to scaling this model is uniformity, especially with regards to the legal and operating agreements. You don't want to end up having 85 different clinics and having 85 other structures.

This way, it makes your organization more manageable and more attractive if you plan on exiting down the road.

Communication is also crucial when you're doing this at scale. Clayton has many deals under LOI, all at the same time, and constant communication between the law firms, accounting firms, and different integration teams is vital to keep everything moving forward. 

One of the early challenges in doing these types of deals is making sure that the buyer has a detailed understanding of the deal. In their case, the sellers are doctors who are not familiar with these kinds of deals, so sitting down with them and explaining the complexities of the deal is crucial.

A big part of their operations relies on referrals from acquired clinics, so having a happy partner is in their best interest. 

Shownotes

00.00- Introduction

1.19.54- Background

2.46.11- Attractiveness of the Vet Industry

5.24.83- Joint Venture Consolidation Strategy

8.03.24- How to Create a JV model at Scale

9.41.21- Difference From Traditional M&A

11.27.68- Legal Entities Under JV

14.03.50- Concerns from Clinic Owners

14.31.74- Integration Model of JV

16.12.03- Challenges When Building a JV Model 

17.07.04- Managing Your M&A Team

19.57.52- Evolution of JV process

22.39.85 - Average Equity Retained by Owners

23.07.49- Learning From Every Deal

25.52.63- Handling Different Responsibilities

28.16.47- Diligence Surprises

30.32.56- Fair Deals is Important in JV Consolidation

32.28.90- Other Industries That Needs Consolidating

33.52.92- Clayton’s Advice for First-Timers

36.38.44- Craziest Thing in M&A

Text version of interview

Clayton to kick us off, can you tell us a little bit about your role and organization? 

I work for AmeriVet Veterinary Partners, a private equity-backed. That clinic consolidator headquartered in San Antonio, Texas. Westarted in 2017 in Canada because our financial backer is a private equity firm out of Canada called Imperial capital. 

I came on board in August of 19 as the head of corporate development. Today, we're about 85 clinics, probably around 120 by the end of this year. So we have pretty aggressive targets and a lot of clinics in our current signed LOI pipeline.

I came on board to help to run the corporate development, being that we're a consolidator. We have two separate groups where I've got a separate team, our business development team that handles all the sourcing side. 

Then really once we have a live opportunity to negotiate the NDA and the LOI, all the way through deal execution is what my team is focused on, where our BD team is the relationship team. That's focused on finding the partners that are interested in partnering with us. 

The vet industry itself has generated a lot of interest from PE firms. What are some of the reasons the industry is so attractive? 

  1. It's still a very highly fragmented industry. The estimates aren't still up to 80% fragmented. 80% of the vet clinics are still owned independently by the veterinarian. 

So there's still a lot of greenfields where even though there's a lot of competition in our space, there's a lot of clinics for consolidators to buy. We're still probably in the early innings of a baseball game, as far as the industry becomes more consolidated and it gets tougher to buy clinics.

  1. It's a high-margin business. The EBITDA margins for a typical good veterinary clinic are in the mid-twenties. And it's a very low-risk business.
  2. Lack of strategic buyers in the space. Typically most of the people buying the clinics are PE-backed consolidators like ourselves. 
  3. It has a private pay revenue stream. Unlike human healthcare, where you have the government through Medicare and Medicaid setting your prices or the big payers setting your prices here. Veterinarians can set their own prices. It's a cash pay when a service model, the industry is proven to be recession-proof compared to other industries. 
  4. It's even pandemic proof. The vet business thrives throughout COVID. Millennials research is showing they're delaying starting families. They're buying pets instead of having kids, at least putting that off, which has obviously been a positive for the vet industry. 
  5. Good return for your financial sponsors. Obviously anytime a private equity firm invests in that portfolio company, they're obviously having an exit in mind at some point and all of the recent recapitalizations in this space. They've all been North of 20 times EBITDA. It's a very nice return for your financial sponsors. 

Is there anything bad about the industry?

  1. It's highly competitive. When you're going to talk to a veterinarian about buying their clinic, a lot of your competitors are also talking to that same clinic. 
  2. It’s highly competitive. Ultimately, we can still buy the clinics in a lot lower, multiple than we hope to exit at, but it's highly competitive. So it makes sure your LOI issue to close rate a lot lower than you would like to because of the competition. 
  3. Shortage of veterinarians. Your veterinarians or your revenue producers. So you're always trying to recruit, recruiting is a huge part of that consolidator’s organization.

Your investment strategy is unique. Tell us about it

We were one of the first joint venture consolidators in the space. A lot of the competition in our space is buying a hundred percent of the clinics. The former owner then just becomes an employee practicing medicine instead of a part-owner in the space.

We wanted to differentiate ourselves in the market when we entered. We do the JV model, we're buying obviously a minimum of 51%. So we have a controlling interest. But what we do is, we allow our partners to retain or have rollover equity in their own clinic.

Some of our competitors would give equity in the parent company, whereas our partners retain equity in their own clinic. It aligns our goals that they're really focused on driving their own clinic's performance cause that's what's going to benefit them at the end when we exit. 

And we also are going to give them the same multiple that we get at the exit. That's a big pitch of our strategy is we're going to pay you X upfront, but, if you retain 30%, when we scale and bring a lot of operational efficiencies and help you grow your clinic.

When we sell this large group of clinics down the road for a much higher multiple, you'll get that same high multiple on your rollover equity. 

Why take this approach over a traditional buyout?

It was really due to the competition in the space, you have to find a way to differentiate yourself when there are 20 other players doing the same thing. Some are better capitalized than others, which is obviously an important thing.  

If somebody is getting better leverage in their credit agreements or debt package, they can obviously afford to pay higher multiple. So you just have to find a way to differentiate yourself. 

And also show a good value prop to that veterinarian of, Hey, in addition to paying you this competitive multiple upfront, you can make a lot more under our model.

They get profit distributions as well because they're retaining their interest in their clinic, but it's really just a lot that aligns us so we're all working towards the same goal. 

They obviously help refer deals to us because the more clinics we can buy in the more EBITDA we can acquire. Obviously, that's going to help us sell at a premium multiple down the road. 

We're basically a service organization. We have a big acquisition team, which is our core business, but we're also trying to help drive same-store sales, introduce operational efficiencies, take advantage of our procurement synergies, and things like that. 

So it's really about all marching towards the same goal, allow the veterinarians to do what they do best and that's practice medicine and we'll help them take care of the back office stuff.

The economy of scale at its finest. So let's break this down. How does a team create a JV model that works on scale?

Lots of it is really uniformity when you're doing this many deals and a tight timeline, whether it's with our legal agreements, deal structures, we want things to be as similar as possible. 

Today we've got 85 clinics in the legal agreements and the operating agreements look very similar on those. 

I don't want to have a nightmare where I go off and do have 85 different structures. That's also going to make us less attractive to the next sponsor that comes in when our private equity firm just chooses to exit at some point in the future. 

That's key to keep track of everything, the uniformity, a lot of it though, with us wanting to do 40 plus acquisitions a year. Communication is key too. We have to have a lot of cadences. 

Whether it's between the law firms we're working with or accounting firms with the quality of earnings, our different internal teams, the integration teams, the ops team.

That's key is having a regular cadence because there's a lot of activity going on. I have over 20 deals under LOI right now. They're all being closed over the next couple of months. There's not much time to pause and take a breath. 

You really have to keep everything on track and keep everything marching forward and try to keep things as simple as possible. Obviously, every deal is negotiated, but we have a structure that is slightly tweaked over time, but we try to stay true to that as much as we can.

The two parts I wanted to get into one is what are the distinct differentiators when you're creating the structure? I'd love to even hear of that conversation that you have with that company in terms of, let me sort of explain our model and why it's different? 

I think that's one of the challenges, right?

Obviously a hundred percent acquisitions, a lot easier to understand we're going to pay you X versus when I'm showing someone a term sheet, it's going to include some different components.

I have to do a lot of coaching of our business development people. It's not just a relationship job too, they really have to understand M&A. Explain some complex things to a doctor.

They practice medicine. They're not thinking about multiples and exit recaps and things like that. So it's something that you definitely have to walk them through, but to show the value in our model and how it could be a lot more beneficial versus taking a little more upfront,  and there's risk involved as well.

So that's why you really have to, kind of sell them on the industry and how we really believe based on recent exit multiples for our competitors, that this is going to come true. And it's not a pie in the sky type scenario.

You're keeping all these entities independent. So they're keeping essentially the same structure or are you still acquiring them into a larger company? Is it still like an asset sale? 

They're all asset deals. So we set up a legal entity for each of the clinics we acquire that's in its own legal entity, and there's obviously some structuring involved too, and not just in the vet space, but certain states prohibit the corporate practice of medicine. 

So you have to structure around that, where you have a veterinarian own the actual legal entity that employs the veterinarians. And then you have some inner company agreements and things like that. Each of our acquisitions sits in its own LLC entity.

I'm wondering, how does that fare out when it does come time to actually exit the portfolio?

We have to address complicated things in our operating agreements. It's one thing when you're negotiating an agreement, but you're also having to contemplate what's going to happen in the future as well, which is an unknown.

So it's really all defined out, based on what their EBITDA is at the time of exit. If they can grow their clinics, they're going to do better than they would if they don't grow the clinics. That's all laid out in the operating agreements. 

And it is things that we usually get involved with the other side's legal counsel on, and the veterinarians don't get too involved in it. They want to know when they're going to get their money and when they'll get the next big check down the road. 

Do you see other groups that would keep a single entity and basically give them fractional ownership?

Definitely, so most of our competitors in the JV space, they're setting up the clinics in the individual entities. But a lot of them are doing TopCo equity. Yes, where you're getting equity in the overall parent company versus equity in your individual clinic. 

We set ours up purposely this way, because that way everyone controls their own destiny, right? You get some people that want to rest on their low rolls and just let all their other partner clinics pick up the slack. 

Where here as you control your own destiny. Hey, if you really believe in your clinic, you can grow it. You're going to do better off. Whereas if one of our other clinics under our portfolio, it doesn't grow as much, they won't benefit as much. So we really want everyone to be aligned, to drive in the same direction, and help grow their clinics. 

What concerns do you see from these clinic owners? When do you start talking to them about this kind of model? 

A lot of it is making sure they really understand it. Obviously, this year has been challenging with the restrictions on travel. Cause obviously it's a lot easier to explain this, sitting down with someone and walking you through an LOI versus having to do it over the phone or over zoom calls. That's been a challenge for our business development team. 

Interesting. When you're done with the transaction, are you doing any integration at all? 

The integration is happening pre-closing once we go live, we can close a clinic. They're on our benefits, they're on our payroll. So the last 30 days before we close our integrations and ops teams really get involved in meeting with the staff, like answering all the questions they may have, and also getting them on boarded for payroll and benefits and things like that. 

Because at the end of the day, we're a people business. So we really want to make sure that the employees are comfortable because really nothing other than a name of who their payroll check is coming from. Nothing really changes on a day-to-day basis. 

It's really important for us to keep the culture of the clinic we're buying. We don't go change their name, all of our clinics keep their names or really this, there in the background to help and assist them grow their clinic and kind of take things off their plate.

We even let them choose their own suppliers they've always been business with, we have contracts with all of the suppliers in this space and obviously can get better pricing that they can take advantage of once they come under our umbrella. 

So there are always some immediate cost synergies from the procurement side. Most vet clinics are small businesses. I'd say between 2 to 3 million of revenue and they're focused on delivering great medicine to the pets and their patients and not necessarily focused on driving down their cost of goods, sold as low as they can.

There's a lot of low-hanging fruit in ways that we can help these clinics out, both from growing revenue, but also reducing expenses at the same time. 

What are some challenges you need to consider when building a JV model to scale?

Starting off, I think it's always that tough decision on spending all the money to invest in the infrastructure that you know, you're going to need at some point before you actually have the clinics under your umbrella and their profits and revenue to justify spending all that money.

JV model's complex. There's a lot of cooks in the kitchen. You have a lot of interaction with your partners because they're co-owners of the business. An owner of a business acts a lot different than just an employee, as far as the information they want to see and their involvement in decision-making. 

You also think about it too. There's a lot of tax returns to file, so just there's a lot of kind of administrative stuff. It has to take place in a JV model. So it's one of those things too, that most people want to slowly build the team and the infrastructure, making sure the revenues are there and justified. 

It's a big leap of faith to go spend the money and then hope it works out. But luckily we've been successful and it's worked out for us.

Let's talk through the telltale signs about adjusting the size of your M&A team. 

For anyone, a lot of it, especially in being a consolidator with a lot of deal activity, I think some of it is when your team can't keep up with the deal flow. And you start identifying bottlenecks in the process.

I think we use an M&A software platform and work. We track all phases of the deal process once an NDA signed to how long it takes us to get the financial information back from the potential partner. To when we're presenting the deal for approval to getting the LOI issued, to sign. 

Then all the execution phases as well. Once on the LOI side, how long does it take us to get our first legal drafts out? How long does it take to get the QoE report done with our third parties? 

Anytime I start seeing bottlenecks in the process, I'm definitely looking to add to the team if a person could solve some of those problems. Sometimes it's changing a process, but if I say this is just a bandwidth issue, I just need another person that obviously a key time to add someone.

Just getting the daily vibe of your team too, you can tell when people are being overworked, there may be keeping up. It's just probably working more hours than they are. You would like them to work so everyone can have a balanced lifestyle. 

So it's something, as a leader of a team, you just got to keep your eye on to make sure your team’s still productive, but also is happy with the work they're doing is getting challenging work and not just having to do monotonous activities. It's not really helping them grow as corporate development professional. 

I'm curious, how do you assess between operationally, we need to adjust things to be more efficient vs. we need to throw more bodies at this? 

A lot of corporate development teams are one or two people. I think it's different when you're a consolidator because, in a lot of companies, the corporate development group or person is opportunistic. 

We need to add to this business segment or here's a new technology that you make the buy versus build decision. You don't really need a big team when you're opportunistically doing one or two deals a year. 

But for us, that's our core business. We want to go do 40 deals a year. The funny thing though is, as competitive as the market is, I wish I wanted to do 40 deals. I could just go issue 40 LOIs right, but that's not the reality and how competitive it is.

So a lot of your team's work is spent on deals that will never come to fruition. It's somewhat of a volume game. It takes a lot of effort to do the evaluations and produce the LOIs, even negotiate them sometimes. And then you never actually win the deal.  

It's finding that balance, like you said, We're always trying to improve processes, figuring out, okay, how can we get our LOI close rate up?

Things like that where we can take some of the workloads off of my team and still allow us to close the same number of deals. It's a constant challenge of , is it out of body or is it an improvement process? 

Are there certain things that you've seen as you've been involved with this and how it's evolved? I'm curious in general how you've seen things evolve and what are the lessons learned in driving that process to be efficient? 

We really have three distinct teams. We have the business development team, which is in charge of sourcing the deals. When they're sourcing their own deals, you're not necessarily deals coming in from bankers or brokers, but actually out there pounding the streets meeting the veterinarians. 

Through there,  a lot of our BD team has history and animal health space. Like they were product salespeople in the veterinary space, selling drugs or different products.

So they have a lot of connections in the vet space and in working those connections, in addition to cold calling too, going off of lists of the veterinarians in their markets where they're the right size that we would like to approach. 

But also, that I have my corporate development team, which really handles from an identified opportunity all the way through closing the transaction. But we also have an integration team as well. 

And so obviously that's an important handoff later in the process between my Corp dev team who has most of the knowledge on this particular clinic since we're the most heavily involved in handing that off to the operation of the integration team.

Interesting approach: three distinct teams, biz dev, you're doing your own dealers nation, or do you use bankers?  

We do. So we obviously get a lot of inbound stuff from there's a lot of business brokers in our space. Not necessarily as many I wouldn't say true investment bankers because the typical veterinary clinic is just a little on the small size for a big bank, but you'll see groups of clinics come to market together.

And then you'll see more traditional investment bankers get involved. So a lot of business brokers specialize in the space. So yeah, that's a deal source. Then you rely on your own team to go out there and source their own deals.

Then they can actually find deals that may be the seller or the future partner we're talking to is not shopping around and taking it to every competitor out there. Maybe you get it at at lower, multiple, with less competition, which obviously is a good thing for us.

Some of this stuff, you can obviously outsource some of these functions as well. Obviously, we use third-party AUV firms to do that.

We obviously have outside legal counsel and stuff. We do have a lot of interaction with the third-party, but ultimately, me and my team are the ones making the decision along with working with our internal teams and also some external parties as well. 

What percentage of the business does the original owner usually keep?

On average? It's 30%. 

We have some that are at 49%. Most of our deals are between 20 to 40, but we have some outliers there. We have a majority interest in all of our clinics, but 30% is the average for the retained interest for the veterinarian.

When you take those deals to close. And even prior to that, you get the integration team involved. Has there been anything specific that you have seen to help you become more efficient between running a deal or coordinating between the different teams in a deal process? 

You learn from every deal. Every day is a new day. I learned something, every day some nuance comes. You do a lot of deals. It's amazing how they're all still unique. 

So constantly whether we're negotiating employment agreements, working with our HR team and our future partners is figuring out the right timing. And we face this on every deal, just like anyone selling their business.

They're always a little apprehensive to bring everyone over the wall on their side until they know the deal is going to happen. There's always that risk in kind of disruption to your own business. So that's a challenge with our integration teams too is getting the seller comfortable informing the staff instead.

So we really can make sure we have a smooth close and smooth integration. So we're always learning from that and ways to get the partner on board with that. And how we go about handling the negotiations for our revenue generators, which are our veterinarians. 

And typically let's say in a vet clinic, they may have three or four veterinarians. Only one of them is a partner who's really going to be getting proceeds from this sale.  So you really have to spend some time with those associate veterinarians, the ones who are you getting any equity. 

Make sure they're comfortable and know that, Hey, nothing's going to change in your day-to-day life. Other than there's a new partner, that's there to help make your job easier for you. Obviously retaining our veterinarians is really key and having a successful acquisition. 

With these sorts of learnings that you pick up from deal to deal. Is there an approach that you have to retain it? Do you like a retrospective or a post-mortem? Talk about what went good, what went bad?

A lot of it gets discussed after a deal close. We really call it a budget handoff call. That's a call to recap everything. We have our finance team there, the ops team, the integration to make sure that everyone's, we can have that transfer of the knowledge. 

We're also talking about making sure that they understand our first 12-month forecast. Talk about any intricacies and things like that. A lot of it's via communication too.

We're still somewhat of a small growing company, so there's constant communication amongst the leadership team on learning from past mistakes and how we can build on our successes. We also do a lot of surveys too. We'll send out surveys after deals close to our new partner. 

Hey, what did you not like about the process? Everybody complains about diligence. So you take some of that with a grain of salt. We're always looking to improve and get better. 

That's one thing I challenged my team is that I don't like anyone who tells me that when you ask them why they're doing something a certain way less because we've always done it. I want us to always be challenging the norms and looking for better ways to do things 

When it comes to tasks, you can't delegate to other team members. How do you handle the prioritization of tasks and manage the different responsibilities you have on your plate?

For one, you have a very good team underneath you that you trust because I'm the one that's held responsible so I can't make all the decisions. You teach and train them to make sure they're flagging the appropriate issues up to you or where I need to get involved. 

Also keep them as involved as I can. Hey, when it's something that needs to come up to me, but keeping them involved in the process, they can learn from the way I'm thinking about things, making the decision.

So ultimately you can then push and delegate more stuff to them so I can focus on other things. If you've got 20 deals under LOI, obviously on any of those deals an important issue, you could pop up that you have to immediately address,  some of it's obviously just knowing the timing of when your schedule.

If it's an issue that's of equal importance, I probably need to focus on the one for the deal. That's going to close the soonest. We like to do onsite closing for all these deals. And when you're doing the math, when you're closing 40 plus deals a year. 

That's one a week for most weeks of the year, sometimes two a week because you'll have some gaps. You really have to keep those deals on track to hitting their close dates, or it really becomes a nightmare for your integration team of deals that are constantly shuffling around the close dates.

Because it puts a strain on your HR teams too. Cause they're setting up payroll to go live on a certain day or benefits. And those aren't things that can just be easily changed with the flip of a switch. It requires some time and effort from those teams. 

So what we try to stick to our close calendar, the best we can. And using the software and things you have at your fingertips to help flag issues and things like that. Email is a big part of any company as far as communication, but it can get somewhat overwhelming. 

So you try to find ways of centralizing the communication where it's not just all via email and stuff I could spend all day just answering emails. It's not the most efficient use or best use of my time.

What is your exit strategy? What's the timeline for that? 

The market will dictate that obviously when they entered into the investment, they don't have a strict date they have to be out. 

But with the market where it is today and the vet visits continuing to grow, what we tell people is probably in the next two to three years would be the most likely exit event for our current sponsor. But ultimately the market will end up dictating when the right time is. 

Diligence, you always come across these surprises. I'm curious, have you seen anything interesting on deals you've worked on, maybe it's particular to your space or even some of your prior roles? If you have any interesting stories around surprises, you come across for your posts? 

It's somewhat related to diligence. One thing that comes to mind at a prior company, we were looking to do an acquisition in Spain, and we went over to spend some time with the owners of the business. We went to dinner with him.

It was in a Harbor in Barcelona, in his kind of broken English.  He basically said, if you do good diligence, you can have one of these boats. We ended up not doing that acquisition Bay. With the foreign corrupt practices act and bribery and things like that wasn't going to be real closure.

But that was something that was interesting, obviously different parts of the world, different things are accepted. As a US-based public company at the time that wasn't going to fly. That was somewhat of an interesting thing that happens to me on a deal. 

Dealing with somewhat of, I'd say unsophisticated sellers from a financial M&A perspective, some deals, especially during COVID where you have some valuation gaps. We do earn outs,  on certain deals, even though these earn-outs are negotiated at arm’s length with both sides represented by counsel.

At the end of the earn-out period, where you have defined metrics, they will potentially achieve none of the metrics. They get the earn-out, but they're still like, Hey, I know I didn't earn their nap, but can you still pay it to explain now that the business is underperforming and it really wouldn't be a good use of our capital to put more money into it based on your performance.

But some of the unique things yelling with a small business owner versus in my prior lives, doing large, billion-dollar acquisitions, it's somewhat of a different negotiation process. 

One thing that's unique about the JV model too, is that the traditional a hundred percent deal I'd say that negotiates can be somewhat more adversarial. You're two parties negotiating the best deal. 

And sometimes you go your separate ways. You buy the business in the person you bought the business from might not even be coming on as an employee of the new business. 

But here I'm partnering with these people. So you had to explain to them and you want it to really make it a fair deal for both parties. 

Because if you come in too buyer-friendly, you may get the deal closed but you're just going to create headaches for yourself, post-closing when they may realize things that they didn't understand at the time the deal was negotiated. 

As a consolidator, we heavily rely on our partners as referrals to buy more clinics. 

“It does me no good to pay less than the market price and get a great deal if I’m going to have an upset partner post-closing.” - Clayton Stanley.

I saved a couple of pennies that are going to cost dollars on the back end because he's not going to help refer me to other clinics to buy.

What do you see is like causes of seller remorse if it ever does happen? 

Our partners heavily, they would all say it's a fair deal. Sometimes no fault of anyone, sometimes the business may not work out sometimes they lose a veterinarian. You may have a high-producing veterinarian that decides to move to a different state or for family reasons decides to stop working. 

And then you gotta go find a replacement. Obviously, that's going to affect your profitability. So everyone wants to have a successful deal. I think sometimes when you have earn-outs involved, anytime someone agrees to do an earn-out in their mind, they're going to achieve that whole earnout.

Obviously, when you get to the end of that period, if someone hasn't earned all that additional purchase price that they thought they were going to get, there's always some disappointment there.

You have to walk them through that. Not really set seller's remorse because, at the end of the day, I think the vast majority of our partners are very happy that they partnered with us. 

Especially during the pandemic everyone's been through in the last year. Because it was really a great time to have a partner. Versus being a single owner of a business and especially in a healthcare-related business where you're researching on websites trying to find out if your business is allowed to be open and the governors are putting out mandates on what businesses are essential or not and stuff. 

It was really a great time to have a partner to help you control your labor and make sure you were compliant with all these new laws that were being put in place. I think our partners are thrilled with the decision they made. 

What other industries could we apply this to, obviously we need a fragmented industry? 

Which is why it's so right for a lot of healthcare, you see this in whether it's ophthalmology, dentist, dermatologists, that's where you see a lot of these roll-up strategies in the human healthcare space.

The fragmentation obviously is one of the big keys because if someone's going to invest in this space, knowing that, Hey, there's plenty of clinics out there for all the competitors to buy, which is why there's so much PE in this space, it's pretty low risk as well.  

It's one of those things I've heard people say, investing in this space, it's not going to be some crazy multiple where the PE firm gets 10 times their investment, but it's going to be a solid, low risk, double or triple. It might not be a grand slam, but those grand slams have a lot of risks.  

Many years down the road, once it becomes more consolidated, you'll probably see more strategic buyers. Cause at that point you'll have some of the consolidators probably buying each other versus a lot of it right now as new PE firms coming into space that have been itching to get into the vet space.

What kind of advice would you give for practitioners trying to work on their first deal? 

In corporate development, it's really about getting in a place where you can do deals. That's how you learn in this space. It's just doing lots of deals. So you obviously want to make sure you keep yourself busy when you're employed somewhere. 

I'd say it's just getting in a place where you can do deals, whether it's doing Corp dev work for a company where you can really focus on just doing deals for that company or coming at it through the transaction services space, where you get to work on a lot of deals to learn that way. 

Or from the iBanking side, there are obviously lots of different avenues for getting deal experience for someone that doesn't want the same thing every day, where it's, Hey, here's what I do each month and I  want to keep doing the same thing. 

It's a great line of work to get into. The lower you are, you're obviously going to have your tasks and roles in the process, but try to always offer to help your bosses. Go sit in on the management meetings. 

You may not be able to talk on a call, but go and sit in your boss's office and kind of just absorb as much as you can. 

Everyone's looking to grow their careers, just be a sponge and absorb as much information as you can, because you'll learn on every deal you do think that it's a negotiated deal. I mean, I've never done a deal that's the same, everyone's different. 

Do you have a preference for working on these kinds of consolidation strategies or would you ever go back to work in more of the traditional strategic approach where you're working on a variety of case-by-case type of strategy? 

This is my first time doing it from both a PE-backed company, but also in consolidator space. It's definitely challenging. And the deal flow is pretty aggressive. I like it. I definitely like the PE-backed space. 

I've done it for a public company before because sometimes you can have competing priorities within a public company. That's having to manage their profitability a quarter at a time for the street and stuff. 

So one year, you may be really focused on acquisitions and then the next year we’re, Hey, we're going to use all of our available cash to buy back shares and things like that. 

The one thing that I like about the consolidator PE-backed company is that they're always going to be aligned with what I want to do because a consolidator is going to do deals. That's really the point of why they exist. 

So you're going to have plenty to do and not have any kind of months where you're maybe sitting around or working on. Some different projects because the company is not currently focused on and doing any acquisitions. 

What's the craziest thing you've seen in M&A?

I was thinking of my potential foreign corrupt practices. The issue that was presented to me in Barcelona years ago. That probably the one thing that comes to mind in reading like disclosure schedules on deals. 

I mean, it's amazing that when you're buying people-based businesses, like kind of the things you have to get involved with on trying to close a deal, and there's a divorce involved and you've got a spouse that's on the title for the real estate that you're trying to do.

And it's amazing how things that you didn't think you'd have to get involved in like marital disputes in order to get a transaction closed, but those definitely have popped up on a number of transactions that I've been involved in. 

You have to make the decision on whether it's a good thing or a bad thing when there are kids and spouses involved in the same business. 

Ending Credits

Thank you for taking the time to explore the world of M&A with our podcast. Please subscribe for more content and conversations with industry leaders. 

If you like our podcast, please support us by leaving a five-star review and sharing it. I enjoy hearing feedback and connecting with our listeners. You can reach me by my email. It's kison@dealroom.net. 

M&A Science is sponsored by DealRoom, a project management solution for mergers and acquisitions. Additional educational content is available on Dealroom's blog at dealroom.net/blog. Thank you again for listening to M&A Science. See you next time.

Views and opinions expressed on M&A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.

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