Hello everyone. Welcome to another Webinar Wednesday, brought to you by Genius Vets. I'm your host, David Hall, and today, I'm just thrilled to be able to bring you an interview of one of the most intelligent people that I've personally ever met in the field of veterinary medicine, Dr. John Tait.
So I'm going to go over your bio a little bit here because it really is impressive. Dr. Tait graduated from the Ontario Veterinary College in 1986, received his MBA from the London School of Business in '95, and received a combined Master of Finance, and became a certified financial planner in 2001. You're a certified business valuator, and you received your certification in mediation and negotiation from Harvard. He's certainly a well-educated man and, in addition to being an owner and a practitioner of mixed and companion animal hospitals, Dr. Tait has spent three and a half years as the vice president of VCA, spent time as a lecturer and professor at five different veterinary colleges, you're a past president of the AAHA, and vice president of veterinary management groups, not to mention the author of The First Bite: A Guide to Establishing and Growing Your Career in Veterinary Medicine.
What I want to ask to start this off is, what things have you found to play an important role in helping you get things done? Morning routines, healthy habits, organizational discipline, people you rely on, etc.?
I'd say it's probably a combination of all three. No question, I'm very much a creature of habit. Having constructive outlets, mostly physical but some mental outlets, as well. That to kind of energize you for your day. That's, typically for me, a morning routine. I'm very much a, "Here's today's schedule. Here's what I want to get done," and if it takes me until 7:30 or 8:30 or 9 o'clock at night, typically I'll do that, just being a little bit of type A, obsessive personality. In other words, to meet deadlines. I have a number of clients, too. They all have expectations on timing and deliverables and so on, so I think it's important to meet those as well, so I would say a little bit of all three.
Really holding yourself to that. Type A people get so much stuff done. As we're building our organization, I really look for them, because I know I can always rely on them to get stuff done.
I know you're a skier, too, right? You enjoy getting out and physical activities. What do you do in the summer months to stay busy?
I think all of the northern hemispheres, right, not too much snow around now. The same thing, I'll shift over to summer sports, so a lot of biking and so on, and cross-training and what have you as well, some boating and stuff. Whatever's out there.
Many veterinarians are really booming right now. There are also other market forces, a lot of consolidation is going on. A lot of practice owners have been stressed out by all that's going on in 2020, and a lot seem to be considering selling their practices. But you've said that now might not be a good time to sell a veterinary practice. Can you expand a bit on that?
Yeah, and I think a couple of things right now. I think we're definitely seeing a period of a surge right now, and the question is, oftentimes in the past, if you look at the past performance of this profession where we've had periods of the surge and economic activity, typically we've had some retraction after that, and a quieter period and I hate to be the bearer of potentially a negative message, but I think we should just exercise some caution that we may not see this surge just continue to last and that with a potential second wave in the pandemic and colder weather coming in a lot of places, and so on as well. It'll send people and their pets and companion animals back indoors, and we may be seeing a period of greater quiescence as we get a little bit further into the fall.
As far as transitions and so on are concerned, when you look at the analytics behind a practice evaluation, no matter who's looking at it, an evaluator like myself, or a consolidator or what have you, I mean, we do take the long view. I call it looking back historically over the last three to four years of financial performance and a number of risk metrics and so on as well, on a typically weighted average basis, so kind of what you've done for me lately counts for the most.
When you look at lately, now being six months into this pandemic period, depending on the performance of the practice, if they've had any kind of a dip and so on as well, over time, that will become normalized or counted as largely a long-recurring event, but if somebody's looking at selling as an end date to the end of June or July this year, and they have had some kind of a slump during the second quarter, we're going to have to look at that as a valuator, so it introduces risk. It introduces less profitability and so on.
But even having a quarter or two where they start to climb out of that and then experience this surge and return more to normal, in essence creating what I would call a letter V in their tracking practice value, looking back over the last three years, that could be largely normalized out or discounted, the same way in evaluation we would discount a transient or a non-recurring event such as the absence of a principle veterinarian, say, for a healthcare issue, or, sometimes, a prolonged maternity leave, or the building caught on fire or something like that. So I think timing is everything, not only in the calculation of practice value but the amount of what I would call a risk shift that we would see.
If there's potential volatility and uncertainty in a practice's performance, and that may include what happens after a surge period is over, and what some of the offers may include, looking at an end date in 2020 here, is what I would call a risk shifts, which would be basically performance metrics down the road, or commitments on the part of outgoing owners right now, that in another time they may not have to make, and they may include a certain return to revenue over a sustained period of time, or a certain EBITA or profitability or an ongoing commitment on the part of a practice owner who may want to leave, to have to stay on for a period of time, generate a certain amount of revenue, et cetera, themselves, if the revenue concentration falls back mainly to them, meaning they're generating a lot of the revenue in the practice. You may see joint ventures that cause practice owners to lose a lot of control and so on, as well, and burnouts and models where the ultimate price paid for a practice depends on what happens in the future.
All those are risk shifts and commitments back to an outgoing practice owner that we didn't largely see before all this hit, and I don't think we'll see again down the road when we have more longer-term stability. Really interesting to look at it from the concept of how a short-term dip that was caused, for instance, at the beginning of COVID this year, would potentially negatively impact the current valuation. You have to take that into consideration as a valuator.
You have to take that into consideration, not just the number, but also the multiple of earnings, what you hear as the multiple, which is a technique to present value, current profit, into one figure in today's dollars. But if there's risk introduced there, that multiple, too, is going to see some deflation.
But doesn't the current surge up, at least in the short-term, potentially push for a higher value now?
It does, and I think the key is not to look at it over too short a term. So I want to see, if I go back to the analogy of that letter V in tracking practice values over time, what I want to see is when that surge period ends, then where does it go? Doesn't it look like an electrocardiogram rhythm, where it drops straight back down again or something like that, or does it just decrease slightly to normalize out at a comparable client throughput and practice performance that we might have seen before this hits, as well, so no question that the bounce helps show that we are a recession-resistant profession. We are a prioritized discretionary expenditure. On this part of our clients, all good things. But we do need a little bit of an arc of time, even in the most recent year, to really get an idea of the longevity of this surge and its true impact.
So obviously, just right now in the short-term, because of all this, there's a ton of volatility that is obviously mucking up the valuation calculations...causing you to have to look at, maybe, a few different tea leaves than you would normally look at?
Absolutely, so purchasers hedge their purchase offers. You have to remember, volatility also includes a surge.
I'd love to talk a bit about vulnerability audits today, tactical exit scenarios, awesome, great topics that we've discussed leading up to this. I know it's a lot to cover, and normally, you'd take a lot longer to dive into the topics than we're going to have here today, but I'd really like to see whether we can at least touch on them at a high level and give the viewers a path that they can maybe dive in and find some deeper information on that. What are the most important things for people to key in on now in order to maximize the value of their practice?
I think there are a number of qualitative and quantitative risk factors. I’ll get some owners that come along and say, "I've run this for 20 years. I'm thinking of selling." And I'll look at their performance and some of the financial metrics will be way offside and there just isn't enough time to correct them, whereas somebody that's thinking, "Well, it could be around the corner," is probably going to be dialed into a higher level of acumen on those.
But as far as your question on things we look at in valuation, no question, the trickle-down effect, financial statements are the end result, and tracking everything from absolute quantitative profitability to revenue distribution to expense efficiency and so on, their cash management, working capital ratios, the value of the assets in the practice. Those are all a passive result of the performance of the practice and the strength of management, so there are a lot of clues coming from within there, obviously.
But other things that we would look at would be the types of risk that we see in today's environment, which would be competitive and absolute business risk in the practice, and that would go to things like client counts, current client counts, new client counts. They would go to the strength of the marketing portfolio, the strength and continuity of their management. It would go to, certainly, their staff turnover and the length of time staff have been with them, because they helped run the practice as well. The qualifications and roles of the staff. Veterinary productivity, definitely, would be a big one, particularly over the more recent time periods. The stability of occupancy that they would have there, particularly companion animals versus immobile ones because it has a defined catchment area where the majority of their clients come from, so the idea that there's stability in the location, certainly very important.
Things like they're making informed planning decisions on capital spending as well. I think their fees are a clue to the style of practice, whether they're kind of a transaction-based practice at one end, where the philosophy is, "The veterinarian's role is to diagnose, prescribe and do surgery, primarily," versus the so-called no-lo, which are often gatekeeper, heavily discounted practices where they may not have any technicians or the veterinarian is doing a lot of primary care and wellness and so on as well, and that sort of practice style, [inaudible 00:14:15] philosophy, and so on, I hate to say will come back and haunt some owners, but the truth is, it will when it comes to looking at the value of transitionable goodwill and so on in a practice, too.
So, again, the strength of their HR portfolio, everything from their employee management lifecycle from recruitment training through to exit, and so on. How much strength, resources, infrastructure, they have there. Nowadays, in marketing, we're certainly looking at a split demographic and multiple social media presences and how they communicate on what their clients do and, of course, their operating model experienced a lot of volatility with COVID and so on, in terms of trying to get through it but touch points with clients as well, and how they look at that. So, I mean, on a practice valuation, I'll typically have a page and a half of background information that really goes through the qualitative and the quantitative metrics, but those, I would say, are the key ones.
In our conversations leading up to this, you mentioned 10 value drivers that came out of Harvard a few years ago: the strength of their management, dedicated management, the stability of occupancy, current client counts and client turnover rates, expenses and revenue at benchmarks, efficient capital spending, HR portfolio strength, marketing portfolio strength, their pricing strategy as well. As far as deeper information for our viewers to dive into each one of those, what resources would you recommend that they can dive a little bit deeper into each one of those and see really what, not the high level bullet point of what it is, but what they should be getting some coaching and deeper in your philosophies there?
Yeah, and I think, just if I can mention VMG here, we started a transitions program there that does exactly that, looks at the current performance of the practice through to modeling individual situations and optimal exit plans for owners, or entrance plans for associates as well. Including your resource base, there's probably no one-stop shopping for all of it, because it brings in accounting expertise. It brings in legal expertise. It brings in valuation and operating expertise, as there are a web of experts there who are participating in that program as well, very well established accountants and consultants from across the country.
One of the things that you mentioned, and obviously I key in on it being a marketing guy, you mentioned the strength of marketing portfolio. Could you talk for a minute about kind of what would be looked at there, what they go into?
When you look at a split demographic, a client who's 20-30 years old is going to receive their information very different than somebody who is 70 years old, so recognizing that we have that and a client base, some of them that will respond to traditional measures like mail cards and phone calls, versus other ones that are looking at using Chatbot, Hootsuite, and some of these very quick online instantaneous answers that they can receive, relying more on testimonials and so on, or perhaps telemedicine new modalities of getting services screened before they actually create an interaction with their veterinary.
It comes down, also, to the two divisions of marketing. External marketing to get new clients, and social media plays a role in there, but so does traditional means like signage and curbside presence and so on for drive-by traffic, for companion animals. To internal marketing, which is the experience that clients have to determine, "Okay, I got value here, and because I got value here, I'm going to come back and I'm going to recommend you."
So really, when you look at marketing tactics, and you're developing a strategy, it becomes really down to those and adapting to both the fads and trends that are out there, because those are changing, but they work.
We didn't need to think about the value of marketing for a long time. That's the thing. This profession had 19 consecutive years of double-digit growth, really starting in the post-recession times of the late 1990s, when the first suggested T guides come out. When you have 19 years of double-digit growth, there was a book written called Boom, Bust or Echo, that looked at the three best places for sustained employment and economic growth, and veterinary medicine, along with housing for seniors and ophthalmology and optometry to deal with the aging population, were the top three back then, so you didn't really need marketing, but now that we kind of came through the 2010, 2012 post-recession time, it's become a much more perfectly competitive marketplace and the split demographic and so on, and people needing validation. Yeah, it's very important now.
Can you dive a little bit into the five functional portfolios you talk about?
Yeah, so quickly, really, there are five areas that integrate together in the day to day management and operations of the practice. So there's the financial portfolio, everything from what we charge to actually charging it to financial results and so on. There's the HR portfolio, everything from establishing a culture to how we manage different stages of the employee lifecycle. There is the operations portfolio, everything from what days are we going to do surgery, to what are our operations hours going to be, to what's our vet schedule going to be. There's the marketing portfolio that we just discussed. And there's the usage layout and flow patterns through the facility, so the facility becomes the fifth one, and all of those integrate together. Some of them have benchmarks, optimum benchmarks. Others don't.
Obviously, there's going to be some customization there, and so on as well, but today's manager or owner needs to kind of have their eye on all five, almost simultaneously, but certainly no question the one that takes up the most time and I'm sure any manager would agree with me, would be the HR one.
For non-VMG members who are seeing this right now, how can they get hooked up with VMG and start getting access to all these great resources?
Yeah, VMG is really a study group concept. At its core, it's a study group concept that brings peer-based learning together and sharing of ideas, sharing of problems, and so on, and really what they are, based out of Atlanta. They are really best just to, I think, reach out to either other members for networking about what it's about, to get them put in touch with the office. We have a central talented team of individuals there that'd be more than happy to send out information, answer questions, determine what group would be a good fit. And there's also a huge social benefit, too. Just having those peers that are going through something at the same time and in similar circumstances. We sure found during, particularly the early stages of this pandemic, that the group collegiality, input, and sharing of ideas was very much value-added.
It's certainly one of a kind model, and it doesn't have to be a big practice, it doesn't have to be a small practice. Multiple practice owners, we look for common ground in what they're particular business model is.
In addition to being able to take that path to VMG, I assume people can reach out to you through John Tait Veterinary Consulting. Are you taking on clients?
Yep, absolutely. I enjoy working with anybody and certainly the VMG members as well.
What's your website for the consulting business?
It's just simply TaitVet.com. Simple and easy.
You advocate for some creative and compelling tactical exit scenarios other than ultimately selling to a large corporate entity. Could you talk about that a little bit?
Sure, and I think, well, traditionally, I mean, if you wind the clock back 30 or 40 years, or back even into the '70s, I mean, so much of practice transitions were based on rules of thumb, when a practice grows 10 a year, or two times its net, or so on, or what the guy down the road got, or what I need for my retirement. Those days are long gone, and they kind of got replaced by, really, one of two options. One would be selling to an associate or perhaps another practitioner and so on as well, versus the whole corporate consolidator model. No question, because of the scale that they can achieve, and the cost of capital that they have been cheaper. In other words, they're not borrowing money from the bank where they have interest payments every month and so on that limit the amount that a conventional valuation would arrive at, or that a conventional purchaser can pay.
And one of the highlights of our transitions program, as well, is to look at, okay, what potential models might there be to, say, bridge a consolidator offer with a traditional one where associates want the practice and perhaps the practice owner or owners would like to see it transition to an associate, maintain that kind of culture that they have developed, and so on as well. So some of the strategies, of which you can combine too, may include tactics such as an outgoing owner maybe not divesting themselves completely, but divesting themself from an active role where they could perhaps have some paths of ownership for a different series of non-voting shares for a while, collect the dividend and then they leave.
There are ways that purchase prices, or purchase amounts coming across from an associate or associates buying in, can actually be converted to pre-tax dollars, so we'll see models for outgoing owners, maybe, are paid out for a while as a consultant, or if they own the real estate, they'll receive, maybe, an inflated amount of rent for a period of time. Really what's buried in there is part of the purchase price as well. For very large organizations, employee stock ownership plans are options too. We'll also see several where small practices, in particular, may look to ladder their exit by changing their own scale, so what they'll do it maybe a full-scale merger first, so the exit option becomes not just "sell what I have and get what I can", it becomes "let's join with other practices in the area and not even in the area". They might do a roll-op or a uniform commitment to exit at the same time as well.
Sometimes, rather than actively exit, practice owners will leave it as an estate issue that they might leave too, or other things. Sometimes, when there is real estate involved, we might see an early purchase option on the real estate too. So, when you add them all up, there's probably a good 10 to 12 exit tactics unique for each situation. I mean, I've had cases where we've had bridges, and the bridge I... term the difference between a consolidator offer and a conventional offer from an associate. There may be several million dollars in difference and the key is not what the difference is but what the difference is after tax is applied. That's the real difference. So often that number comes down when you tax effect to different offers and so on as well.
So there are numbers. I mean, earnouts and so on is another one that pops into my mind too. But the truth is, in some cases where you got a consolidator that really wants a practice or a group of practices, and they distance themselves considerably from what a conventional valuation or bank or debt-financed offer shows, they become very difficult to bridge. They cannot all be bridged, so there's no guarantee here that some of these exit tactics will allow an outgoing owner or owners to transition to associates and still walk away with the same amount at the end of the day. But to me, I always try to educate my audiences. It's not about the sale price, it's about wealth accumulation over time, and as a financial planner, when you get them to think about that a little bit differently and they're willing to take some calculated risk in reinvesting in the practice or waiting...
Many cases during a lecture I illustrated a few where their wealth accumulation over a reasonable period of time, this isn't like 10 or 15 years, but three to five years, actually, with a reasonable amount to bridge, actually puts them in a better position than taking the higher consolidator offer upfront. Not all, but certainly, in some cases, definitely there are multiple ways to go when you factor in time in particular with an exit strategy.
There is a really low level of awareness though. Very low level of awareness, I think. Certainly, it's not going to be flagged by the purchasers, "Hey, you can do this and sell the practice to somebody else." And I think that's one of the commitments we made in the transitions program, too, is to create some awareness around models.
I know you had some really great ideas about the value of recruitment and retention, and I think this is a great topic to kind of leave this off on. What do you recommend practices do in order to get their associates to stay committed to the business long-term?
I think it depends on the associates and what it is they're looking for, because we can have associates that are second income earners that are simply looking for reasonable hours, a steady job, diversity in their responsibilities and so on as well, and they're quite happy, and there's nothing wrong with that to make that your career. There certainly is, I think, a significant proportion of associates out there who would like to become practice owners, and inside of that group, some that think they might not be able to become practice because, again, all they see is the traditional models and what they think is big bucks being floated around to current owners that they can't compete with. And that may be true in some models, but as new graduates heading into the marketplaces...
I mean, oftentimes, the idea of equity in a practice and so on isn't as important right out of the gate as it becomes a few years later, as they kind of start seeking salary and security and so on, but as they move on a little bit further, the idea of having risk-free equity, certainly as well as some autonomy and control over the culture and expansion of their responsibilities and so on becomes very important, and I think there are emerging models that are supporting those as well. Obviously, the so-called promissory option as to where an owner says, "Okay, as of this date, I'm going to give you an option to buy in and we're going to do the analytics, and I'm not going to sell to anybody else and here we go," is great, but certainly not the predominant model out there.
And one thing that's I've, as well as kind of illustrating the specific things that early-career graduates, two, three, four, five years out, that's typically when they start thinking about practice ownership and so on, taking an equity position, but some of the things that have emerged are concepts of no-buy and no dilution equity strategies or tactics. That might include share growth strategies, or what we called phantom or ghost stock, whereby associates can be promised what we call notional equity based on growth and the value of the practice grossed and the profitability of the practice, where they don't actually put any money out and there isn't any necessarily, and some of these models real shares, created the what we call notional or phantom shares, and can be rolled over after a vesting period to become, actually, part of the true equity in a practice as well.
Or, if I had a practice for, say, $100 and I wanted to retain an associate, I could say to them, "Look, every year I'm going to gift you 5% of the growth above my $100 value and after three, four, five years, you're going to be able to cash that out or roll that over." Well, that aligns itself perfectly with what early-career people dealing with student debt and mortgages and growing families and lack of ability to take on a lot more debt are thinking is attractive to them, and it certainly differentiates the practice kind of from the norm, where they may dangle out those words that I hate hearing. "Partnership is a possibility." Well, what does that mean?
Those, to me, are empty words unless there are clear options and so on written.
But I think the underlying point being is there are opportunities here for retention strategies that are a little bit outside the box. Thinking, but they work. They work because really, you're meeting the needs of both parties and, at the same time, laying out a succession plan.
Before we go, I'd rather get to know you even just a little bit better, and the way that we do that here on Webinar Wednesday is I've got this book of 3000 "would you rather" questions, and what I'm going to do is just to have a little bit of fun, because you're a serious guy, but I'm going to force you to have a little bit of fun. I'm going to open you up to some random questions. I have no idea what these questions are going to be, but I'm going to read you one and we'll see what you say. Okay, here we go—deep dish or thin crust pizza?
Thin crust. Go for the topping, not the bread.
Would you rather discover the unknown or explore the familiar?
That's a good one. I would say, I would rather explore the familiar just because I know what I'm getting, and then I can kind of pre-plan, so I'm more of a set expectations guy.
Would you rather only be able to watch movies that have ever won an Oscar, or only listen to songs that have reached number one on the charts?
I would say I would probably... The first one. About the movies. Not sure I'd even know too many songs that reached number one on the charts.
Would you rather be politically correct always, or always be yourself even if it offends people?
I'd be myself even if it offends people. Politically correct, too boring.
Dr Tait, thank you so much for your time. Before you take off, do you have any shout-outs or any calls to action, anything that you would recommend that people should be paying attention to and doing right now?
In your practices, hey, I mean, I have great admiration for all the people in this profession and I've liked working with them for over 30 years and so on. I say, just keep doing what you're doing. There's a reason veterinarians show up on the top 10 list of trusted professionals, and I think it's who we are, not so much what we do, but it's who we are, so my shout-out would be, "Keep doing what you're doing."
That's going to do it for Webinar Wednesday this time. If you are a veterinary practice owner, right now I highly recommend you go to geniusvets.com/start because your veterinary practice already, currently, right now, has a full-page profile that is live on geniusvets.com. Full page all about your practice, photos, logos, doctor bios, all the services you offer, videos, blog, all sorts of stuff about your practice that we've compiled and put there. So go to geniusvets.com/start. There's a video that'll tell you all about it right there, one minute video, and you can look up your practice, find your page and claim it.
I'm David Hall, co-founder of Genius Vets, this has been Webinar Wednesday. Please join us next week and you can sign up at Webinar Wednesday... No, geniusvets.com/webinars. We'll be sending out the recording, a link to the recording of this one, and some more great information tomorrow.