The history of employee ownership in America goes back to innovator and founding father, Benjamin Franklin. In 1733 Franklin dispatched journeymen printers to all corners of the nascent American territory with the aim of setting up printing shops. Franklin devised a start-up model which included his fronting of the set-up expenses for each shop and, as a result, a profit schedule which allowed him to recoup his money within 6 years. After his investment had been returned to him, the journeymen could purchase the equipment and own the shop thereafter. This structure allowed numerous printers to own their own businesses and enjoy profit from their own work at a time when they would not otherwise have had the means to do so.
Flash forward through the last three centuries and we have experienced industrial revolution, technological advancement, computerization of financial marketplaces and countless deaths and rebirths of our economic and workforce underpinnings. One thing has remained the same through all of this – employees still want to own a piece of the company for which they work, both as a means to grow personal wealth and in order to influence their own professional destiny.
So, why aren’t veterinary professionals broadly and equitably afforded the opportunity to do so?
At the risk of being reductive, let’s cover a few basics. The most common way for employees to ‘own a piece of the rock’ is for those workers to own stock, or be granted stock options, in said company. A share of stock is a security which has a face value, determined by many factors, and reflected in the trading or market price of that stock. That face value multiplied by the number of shares you own is how much value you can derive if you sell the stock. Options are shares or blocks of shares which become exercisable or sellable over time and then, we as the holder, can choose to own the stock or sell it and derive the value. Basic stuff, right?
We all know, and perhaps have experienced, now commonplace stories of companies like Microsoft, Google and Starbucks who offered stock as reward for great work, retention and, often, for being an early contributor to those companies’ success. We’ve heard the stories: The administrative professional who becomes a millionaire after working during the early days at a software company; The employee who purchases a vacation home after years of stock awards given in appreciation for hard work. These are incredible examples and each of them is a celebration of how a mutual sharing of wealth can be a key factor in how a company achieves its growth aspirations.
Let’s examine the ownership structure of the majority of multi-unit veterinary groups.
The largest group remains under the control of family owners who are among the wealthiest people on Earth. No harm, no foul. Growing wealth isn’t a crime, despite our nation’s complex feelings on the subject. And, size has its benefits, so the employees within this group can benefit from good compensation packages and the resources that come from being a part of a massive company. But, not a single employee owns a share of the company or derives any benefit from having equity in the future of the organization. All ownership is concentrated within one family and the profit derived from the business is centralized to that group that shares a last name. In addition, decision making, strategic direction, priorities and commitment to the industry are all, ultimately, decided upon by a small cadre of people. Put all of that together with the fact that this company has divisions in a variety of sectors which have nothing to do with veterinary medicine. Candy bars, bubble gum and a host of other product segments must each share space at the conference table with veterinary medicine. That means the veterinary professionals must compete for relevance and must often perform at fever pitch in order to compensate for segments that don’t do as well. Well, that’s one way to do it.
What about other consolidated groups in the veterinary services industry? The overwhelming majority of organizations that buy and open veterinary clinics in the United States are owned by private equity investors and managers. Typically, in the world of private equity, or PE, some matchmaking is happening. A group of folks which manage a fund pooled from sacks of money from investors works with research companies to analyze worthy investment opportunities. They examine markets, industries and new emerging areas of growth and look for places to invest those sacks of money. Funds are put in, a company is grown, and down the line those investors sell the company to new investors, take profit as a result and then look for another company or industry in which to invest. No problem, right? Well….
First, the investors in the PE space really don’t care about the industries into which they put their money. Surely some of them are more curious about the industries into which they invest, but nonetheless, in general, their primary interest is returns. Profit. How about the mission of veterinary medicine, you say? The well-being of pets and professionals? Solving the conundrums our industry faces daily? Those aren’t a huge concern for PE groups. They looked at the veterinary channel as dispassionately as they might have examined the underwater fiber optic market or companies that make strawberry preserves. They’re sector agnostic, worshipping only a high rate of return.
Our second issue comes from the time frame that most PE groups seek to recoup their investment. Standard in the investing world is a 2–5-year timeframe during which a private equity investor seeks to ‘recapitalize’ their investment by selling the company to another owner and taking their profit in the process. All well and good. Capitalism isn’t inherently evil. The issues that come from this timeframe are the unavoidable realities associated with PE ownership not being around for long. They don’t intend to be with the company for a decade and address the big issues. There isn’t a concern for career pathing for professionals. Any of us who have worked in veterinary medicine know that a few years is only around one cycle for a professional. It’s nothing. It means the PE owner can’t possibly gain an understanding of the trials and tribulations of veterinary professionals and they likely don’t want to. Like a member of congress who serves 2-year terms and halfway through that time must be campaigning for their next re-election, the PE group is already looking for the next industry into which they will put their money while the ink is still wet on the veterinary investment deal they’ve just made. Comp, or comparable revenue, is a term we use when we compare one year to the next and ask if we are growing. We say our ‘comp’ is up or down in the form of a percentage. As a leader from one of my former organizations used to proclaim, ‘never comp yourself’. That’s a sneaky way of saying, ‘get out before you have to be accountable for what you did (or didn’t do) on your watch.’ Yeah, the PE companies have that chiseled on the walls of their offices.
What does all of this mean to veterinary professionals? Let’s be real. It means you are a line item. You are a cog in a machine. A commodity who is measured by your ability to produce as if medicine were a factory floor.
If we are working for a company whose leadership will be gone in 2 or 3 years, how much expectation should we have that there is a commitment to understanding debt load for doctors? How can an absentee landlord be expected to understand the mental and emotional well-being trends which are moving in the wrong direction across our industry? And finally, if the veterinary channel is such a great place for private equity companies to invest, why doesn’t EVERY employee within every PE-backed company have an opportunity to share in equity?
In 1956, Louis O. Kelso created the first Employee Stock Option Program or, ESOP, as he helped realize the vision of the aging founders of a newspaper company who wanted the firm’s ownership to transition to its employees. This unprecedented event represented the passing of a legacy to those who had helped create it. Today, ESOPs are ubiquitous, and they afford employees the opportunity to own a part of the company and keep it thriving. Where are the ESOPs in veterinary medicine?
The last fifteen years have been a gloriously kinetic period of acquisition of veterinary clinics in the United States. Thousands of clinics have changed hands. Many owners have realized vast sums for the businesses they created. That is wonderful. Perhaps less wonderful is where the ownership of those clinics is going. Bankers, fund managers and PE leaders are deciding the future of veterinary medicine. And in the vast majority of cases, very few team members beyond former owners receive so much as a dollar from the new buyers in exchange for the work they did in realizing the value of a hospital they may have worked within for their entire career.
If a professional chooses to work for a company that isn’t making the profit it once did from chocolate and hence must demand sky-high daily patient counts in an effort to subsidize flagging business sectors, that’s the professional’s prerogative. If a clinician is happy working for owners whose intent is to flip their group of hospitals to new ownership in 3 years, along with all of the unanswered questions and challenges, more power to them.
But, if veterinary professionals want to have stake, ownership in new forms, a voice, as well as the ability to enjoy true equity in an enterprise they help be successful… it’s time for our industry to provide those opportunities.
It’s time for a new kind of veterinary organization.