When Private Equity Comes for Your Industry

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Loren Feldman:
Welcome Dr. Spencer. It’s great to have you here. First of all, if you would, could you tell us a little about 1st Pet Veterinary Centers? How’d you come to start the business?

Randy Spencer:
Thank you, Loren. Great to be with you. I mean, that goes back over 30 years. I came out of veterinary school, went to Colorado State University, and got into a practice that was a practice that was wanting to be PetSmart before PetSmart existed. And as it turned out, that didn’t fly real high, and the owners of the company came to me and asked whether I wanted to buy it. And so I bought it in August of 1989.

It was a pet store and a combination of things. I decided to eliminate the pet store and go just veterinary medicine. And so we started small, one veterinarian, then two veterinarians, and a small group. In 1995, we decided to add in a 24-hour emergency, just because the need was there in our area of Chandler, Arizona. And so, we started that up and brought in—

Loren Feldman:
That seems like a big step.

Randy Spencer:
Yup, that was. There were 10 veterinarians in a five-mile radius of us. And I had a friend who did some management consulting, and he and I went around and visited all the veterinarians in the area and just got a sense of what they needed and just tried to develop some relationships with the veterinarians.

But that was a big step. That was a turning point. We had a space that was only about 2,500 square feet as a general practice or primary care, but we added another 2,500 and had the 24-hour. Within two years, we built a building across the street, which is the one I’m sitting in right now.

And once we went into the new building, things really took off. This has been a rapidly growing area of the Phoenix metropolitan area. And we’ve had tremendous success in going out and publicizing the service that we have, and lots of people over many, many years came to us. In 2002, we added an internal medicine specialist. In 2006, we added a critical care specialist, and just right about that same time we added a surgical specialist.

So that was sort of the model we were going for. In veterinary medicine, it’s called a hybrid system, which is not very common, but where you have emergency, primary care, and where you have specialists. With the idea that, in that environment, you can have the very best possible patient care, because you have all these elements covering it.

We didn’t go off into other areas. I mean, there’s pet stores and grooming and boarding and all those things. We focused on veterinary medicine and providing care. And the other focus that we had from the very beginning was on client service and just providing a different experience for the clients and what they got at other emergency hospitals and most of the other general practices. We just focused on those things and doing it as a team.

Loren Feldman:
You mentioned that before you opened the 24-hour-care facility, it sounds like you went around and visited all of your competitors to talk to them about it. Had you had relationships with them previously? Was that an awkward conversation? What was that like?

Randy Spencer:
Good question. I mean, veterinarians as a whole tend to be a little introverted. Not all are, but I’d say 80 percent are, and I include myself in that list. So in a sense, it’s awkward. I mean, I’ve been in a lot of other situations, church and otherwise, where I’ve had plenty of opportunities to talk. There were several of them who I did know. There were others who I did not know. And I really consider them more as colleagues than competitors. Not all of them. Some of them had ownership in another emergency practice that was further away, but they elected to keep sending their cases there.

As it turns out, over time, we won many of them over. And even if we didn’t win them over, their clients still came to us by virtue of proximity. So we tried to keep good relationships with all of those other practices around. And over the many years, things have changed quite a bit. But we’ve continued to have that desire to have good relationships with the other veterinarians.

Loren Feldman:
You made a reference to how things have changed quite a bit. I mean, I think most of us are aware of a couple of things. One is that things changed during COVID, because of the puppy boom. And some of us are also aware that there’s been a change in ownership. Private equity got interested in what you guys do. Can you talk about the changes to the industry and how you view them?

Randy Spencer:
I did start to get inklings when I started to get emails. Probably after 2010-2012, somewhere in there is when they really started. It seems like not a week goes by that I don’t still get people trying to buy. And it’s private equity, it’s the corporations. I call the corporations Mars bars, just because the Mars candy company seems to be one that owns a big interest. That’s something they sort of started in dog food, and then they decided that this was a marketplace they could enter into. Their goal is to own half the market. And they’re getting closer to that.

Loren Feldman:
Wow. It’s kind of been under the radar, I think. Maybe not for you, I’m sure, but—

Randy Spencer:
Yeah, I think they’ve tried to, because they brand it under another name. I hope it’s not too snarky—but I sort of think it is—calling them Mars bars. My feeling is that all those M&Ms that I ever ate have come back to bite me now. I still haven’t stopped eating them. [Laughter]

Loren Feldman:
Well, I guess it’s nice to be getting a letter every week asking about buying your business. It beats the alternative, right?

Randy Spencer:
Yeah. And so I saw those groups, some of the big corporations, first. The private equity, I didn’t really pay much attention to. But I did start to get packages and other things saying they wanted to have a conversation. And I got an email once, and I said, “I’m just going to tell them I’m not interested.” I did that. And then they doubled down and started really trying to contact me. So I said, “That’s the last one.”

So that’s been my approach. I just haven’t ever contacted them. I just ignore everything that they send. And I’ll have a receptionist who’ll say, “Oh, it’s such-and-so on the phone.” And I’ll say, “Do you know who that is?” “No.” And I’ll say, “Well, there’s somebody trying to buy our company. Why don’t you handle that?”

But all of that, I saw that happening. We were just focused on us. But it became enough, and I’ve moved along in age. Every year we have a dinner awards for team members, where we do team member of the year and that kind of thing. But in January of 2018, I had already started reading some things, hearing some things, about employee ownership. And so, I promised the team at that awards dinner. I said, “I am not going to sell to a corporate entity. But what we are going to do and where we are going to head is toward employee ownership. I don’t know exactly how that looks, but there’s this thing called an ESOP, and so look at it.” I shared a couple little videos, and we said: That may be the path. It may not. But we’re interested in employee ownership. And I mean, really a great outpouring and appreciation of the team. They had seen other other companies that were being taken over. Over the last five years, that’s happened a lot.

One of the reasons why I really have felt that, as far as wanting to go to something other than a corporate buyout—and I will say, the strategic buyers and the private equity and all that, they are offering a premium price. But veterinary medicine, in my opinion, is just the best profession in the world. In a way, it’s a service industry, but we get to serve pets. That’s why veterinarians get into it. If they knew people were closely leashed to them, they may not have wanted to do it as much. [Laughter] But I want to take care of pets. And the people are a good part of it as well, as we develop relationships, but that’s what we do.

And so, I was the owner, I was the one really handling all the finances. And the way that I always looked at things was: As long as we provide the best patient care, the best client service, we’re going to be good. We’re going to be fine. And there’s this thing called profit. I didn’t talk a lot about it. I always considered it like the blood. You’ve got to have it. If you don’t have it, you’re dead.

So that I have shared, especially as we’ve shared more and more information with our team members. But at the very heart of veterinary medicine is people caring for pets. That’s what it’s about. And as I look at corporate entities, and what they do to businesses when they buy them out, their heart is the profit. That’s what drives everything about that. And in a business, that makes perfect sense, that you want it to be successful. But in our world, that’s still the way I look at it. I mean, profit is essential, but it’s not why we do what we do.

Loren Feldman:
Is that what attracted private equity to the industry? Did they sense that this is an industry run by people who care first and foremost about the pets, and not about profit? And they realized that if somebody cared more about profit, there would be more profit?

Randy Spencer:
Perhaps. I mean, I think there’s something to be said for that. Veterinary medicine is very fragmented. Basically, you have a lot of veterinary hospitals spread throughout a metropolitan area, throughout the nation, throughout the world, and each one duplicating what the others are doing. Each one has laboratory and radiology and all the services and that kind of thing. And so I’m sure they felt coming in that they could do some improvement in the scale. Much of that, as near as I can tell, is just by taking over some of the management functions.

I didn’t look deeply into it. But what I just told you is the way I looked at it, and the reason why I just didn’t want to go there: What I have learned is that when these companies buy veterinary practices, whatever you had is dead. And so one of the reasons for doing what we did with open-play ownership and ESOP is to maintain legacy. We feel like we built something really special. And to say, “Okay, now it’s dead,” is not where I want it to go.

Loren Feldman:
What do you mean by now it’s dead?

Randy Spencer:
Whatever the practice was, it changes dramatically. And I know the view on the business side is: We can do it better. I was speaking to a gentleman who works with private equity just a few weeks ago, and he said, “Yeah, I think doctors can’t do it as well as the business people, and doctors shouldn’t own practices.” Well, that may or may not be the case, but in my case, and our case in veterinary medicine, I think that that a veterinarian still needs to be very involved.

And so we’ve structured it, as we put our board and everything else together, that—this is language we’ve taken from the Mayo Clinic, they are physician-led; we are going to be veterinarian-led. That means the President/CEO, my position now, will always be a veterinarian. The majority of the board will always be veterinarians—not that they know how to run companies better, but that they maintain that heart. And we can always bring people in with experience in business and marketing and all that to help take care of the business.

Loren Feldman:
I heard what you said about those businesses that get taken over and essentially die. But I gather they must have some business success, or they wouldn’t keep paying premium prices to buy more practices. Is that what you’ve observed? Do these PE-backed practices do well, from a financial standpoint?

Randy Spencer:
I don’t have a lot of inside information. What I am seeing is that many of them sort of come in gently over the course of three years or so. They then change over to the culture that they want. They get rid of the management system and put their own in, and then it changes. Anecdotally, I have an individual I know in another area of the country whose practice he sold to private equity. And they’ve basically destroyed it. The people in the company have just come back and said, “Would you buy it back?”

Loren Feldman:
Wow.

Randy Spencer:
So I think some of that can occur. Some of these are truly trying to run a really good business, and so they do things right in a lot of ways. They throw money at it. I say throw money, but they invest money in a lot of different programs, and some of those I think are admirable and good. But I think, overall, it really is a negative to the system of veterinary medicine. And it is because of the priorities that are there. And that’s the issue. So many veterinarians, so many of the people who work at the places, are focused on really caring for pets.

Loren Feldman:
Has it had any impact on the way you run your business, having to compete with those other businesses?

Randy Spencer:
Again, I’m still very sold on doing what we do at a very high level, but I mean, there are several ways where we can be impacted from the corporate entities. We have a group that just came in on the emergency side. They’re venture capital- and private equity-backed, and had a lot of money. And so they’ve been throwing money around. And we try to stay top of market in all our salaries for technicians and veterinary nurses. And they came in significantly higher and have been able to draw off a few of our people, as a result of that strategy.

But as a whole, what I am seeing is that many people are dissatisfied with it. Veterinary medicine, one of the real struggles we’re facing—and it came from the pandemic somewhat, but it’s also coming from the corporate culture—is there are veterinarians who go through eight years of school, usually, for pre-vet, for vet. And some an extra year of internship, some longer residency. But then after all of that, they are leaving the profession. Emotional wellness, I think, is a piece of that. Disillusionment with corporate thinking is a part of it. But it’s also what’s happening in their interactions with clients.

At the beginning of the pandemic, everybody was very appreciative of the fact that we were there and able to help out. And the deeper in we got, and the longer along the path we got, people have become more contentious—certainly not everybody, but an increasing percentage. Veterinary people tend to be very compassionate, and I’ve learned that it also means a little bit sensitive as well.

Part of the grief process, there are several steps to that. One of those steps is anger. And one of the most interesting things I’ve just seen over the many years—and it’s worse of late—is that people in a situation of extreme stress or grieving, be it they don’t get what they want or something’s not going right or their pet’s died or a number of things, they take it out on the very person and people who are trying their very best to serve their pet.

It’s an interesting dynamic. But in that process, when you have people who love pets more than people, and then you have cases where, repeatedly, people are complaining about the price, people are complaining, it affects them. And so we’ve had quite an outflux in veterinary medicine. One of the things that’s being said—I don’t have any evidence of this, other than to believe it—is right now veterinarians are at the highest risk for suicide. And that’s a serious thing. I mean, that’s life. That’s something that you just don’t want anybody to have to go through. But it’s because of that compassionate view of things. And then, the other side of that is, back in late 2021, we brought in a social worker, a veterinary social worker.

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