Webinar Wednesday Replay: Terry O'Neil
Terry O'Neil was previously a CFO for a group of eight veterinary practices as well as a stakeholder in that business, and has been working with veterinary practices for over 30 years. But for the past 20 years, he's been with Katz, Sapper & Miller, and is the partner in charge of their Veterinary Services Group. Terry was instrumental in shaping the Veterinary Financial Chart of Accounts that's been adopted by VSG, Veterinary Study Groups, as well as the American Animal Hospital Association, and he aids clients with tax and strategic planning, forecasting, budgeting, employment incentive contracts, financing, debt structuring, valuations, mergers and acquisitions, and the sale of veterinary businesses.
The last time we saw each other face-to-face was in February in Las Vegas at WVC just right before COVID mania swept the US and locked everything down. How are you doing, my friend?
I am doing well, thank you. I believe it was the week before, if memory serves me right, and we've learned a lot though, haven't we in the last five months? And it's been quite the adventure, and I'm happy to share what we've learned, and the family is safe. In regards to our business, we were able to figure out how to work from home for all of our employees literally instantaneously. So, I've kind of equated it. You're trying to fly a plane and building the landing gear while you're up in the air. So that's kind of the way life has been especially for the veterinary hospital owners and the challenges they've been facing.
What have you been doing to keep yourself sane, to keep yourself healthy, happy, productive despite the pandemic?
A couple of things, thanks for asking. First of all, I've tried to keep my life as normal as possible, and my schedule and my routines as normal as possible. I still get up at the same time, I still exercise at the same time, still try to keep some semblance of a habit there. What's been keeping me very happy is this is the first time in the last 10 years where I've not been traveling 50% of the time. So the amount of quality time with the family has been fantastic, so that really keeps me sane.
The other thing that keeps things in perspective is, because my family and I are blessed and safe and we're able to provide, we try to give back a little bit back to the people who we work with, and give back a little bit to help some people that maybe need the help now.
Veterinary practices across the country have been on a pretty wild ride, but since so many people respond to the lockdown by adopting new pets, there's been some really great news over the past few months, and veterinary practices have been acquiring new clients like crazy and doing a ton of business. What types of business dynamics have you been seeing from your clients over the last few months?
The new client acquisition that the biggest dynamic change we've seen is just the labor model, and the inability for hospitals to allow full staffs anymore, and really trying to operate under a split staffing model, a valet model, or curbside check-in model. Those are two of the biggest changes that we've seen, and it's interesting to see that the demand is so high for veterinary services right now.
But when we get down into the details, we are seeing some decline in invoice count, so we haven't been able to quite figure out what the root cause of that is, but we believe that pets are coming in a little bit more ill. And we also believe the surge in revenue is not only the new adoptions, as you mentioned, but we believe that a number of other hospitals are not able to continue to fully operate that there's some staffing levels and same hours of operation.
So you're seeing some transfer of clients that couldn't get into their existing hospitals, that's one issue. Another issue that I think is very important is that at least through the end of last month, people had a little bit more disposable income from the standpoint of not spending it on entertainment or travel or not spending money in other areas where they maybe have a little bit more of a resource to pay for their veterinary care. Also, most of the people are working from home now and noticing different things with their pets that maybe they wouldn't have noticed not being home all day long.
So to go back to your original question, I think the biggest thing that the veterinary hospitals are learning are efficiencies. They’re asking, “How can we provide services at a high level with limited resources?” And it's been fascinating to see how they've adapted from a technology and workflow standpoint to try to fill that need.
From a financial standpoint, what are the metrics that you think veterinary practice owners really should be paying attention to?
I think the most important metric would be invoice counts. How many people are coming to the hospital? There's a number and I'll try to boil it down, but one of the first things we always look at is invoice counts. Another thing we look at is what the gross revenue is and what the average invoice would be, so you know what each person is spending. But then also, I think equal to that, the most important measurement is labor efficiency. How much time does it take your support staff to support the doctor to see a patient, and we like to measure that in minutes.
So if I were to bring my dog, Frank, in to see you at your veterinary hospital, for example, how many minutes do you have to pay your support staff to support that one invoice that's going out for Frank? And I think that's a really important measurement efficiency, and not a lot of hospitals are looking at that very closely. But with the supply or the demand being so high right now, trying to look at their efficiencies, it's just so vitally important with the limited resources they have. So invoice counts and labor are probably the two most important.
The one that I failed to mention is the most important is the safety of the employees. That's not a metric we can really measure, but I think the hospitals that we've talked to and worked with, the number one thing they always say when I ask how they're doing is they're just trying to make sure their employees are safe. I think that's just a great overriding metric that we're going to measure, as safety is the most important to start with.
If you're working with practices who actually measure the minutes that it's taking to service things, what's the model there for them to look at it and make improvements?
I think they have to measure themselves to start with. That's the starting point. We like to look at the leverage ratio of how many non-doctor staff are helping the doctor that's on the floor; that's one measurement. But the staff efficiency, if they can be operating at 100 or less minutes per invoice, I think that's very efficient, and they can simply measure that on a weekly basis. They know how many hours their staff worked, they know how many invoices that went out the door. So it's a very easy measurement to quantify.
It's a little bit different now with the valet or the curbside check off, and trying to figure out the extra time it's going to take to go get the pet, bring it back in, and communicate with the client, and check them out. Some of the more progressive hospitals have really embraced technology to assist with the check out, the technology to communicate before I would even come into the hospital. Why are you coming in, what issues should the doctor be aware of, et cetera. So just using that technology to make it as efficient as possible when I show up with the pet patient, so they're not having to come out and speak to me three or four times.
They can take two of those communications out of it, they've just cut their communication time in half. So a lot of this, like I said before, they're learning on the fly what works, what doesn't work, what clients want, whether you can FaceTime or whether clients are willing to jump in the telemedicine app to communicate.
The other thing that I did want to mention is that they have realized that their previous staffing model maybe has some room to do a little bit more. They kind of proved that during COVID when they've gone to split scheduling, and maybe split the staff in half, and the doctor staff in half. They're really doing more with less right now, and so they're figuring out, they're on the fly figuring out those efficiencies." Let's do it this way, this way, or that way to make us more efficient," because it's like I said, the demand is so high.
So would you weigh those minutes and take their position - from vet tech to veterinarian - into consideration as far as value?
We would love to, but we just don't have the data to do that. We're not in a position to break the data down that far. The other metric to look at is the doctor efficiency. How many patients can the doctor see in a given period of time? And if I'm the doctor on the floor, and I've got three or four people helping me, what's my throughput of patients I am seeing? So am I seeing one and a half patients an hour or am I seeing three patients an hour? Well, you can do the quick math.
If one doctor is seeing two, and the other doctor is seeing three patients an hour, that's 50% more with the same labor. So it's just little things like that and trying to balance the schedule out and really leverage the staff. So one of the most important keys is that they've got really, really smart, intelligent support staff and trained technicians that work for them. Let them be the technicians they're trained to be, and truly let the doctors be what the doctor should be, and trust your staff, and have the checks and balances in place. And that's very similar to the model that a lot of other professional service businesses use whether it's law firms or engineering firms or architecture, CPA firms, or IT firms like yourself. You don't want the highest priced people doing all the work, you want to try to push down and leverage as much as you can.
You mentioned the safety of the staff and the safety of the client—how do you measure that? Are you measuring it in terms of wellness?
There really isn't a metric. But from the support of what we've all gone through, and I consider the people in the veterinary hospitals really to be in the front lines because they've never closed as COVID initially hit. But I think it's just open transparent communication, and keeping that in front of them, stressing the safety, the importance of it, the importance that if somebody doesn't feel safe that they need to let somebody know about it, and not forcing people to do anything they shouldn't be doing or don't feel comfortable doing. Being very empathetic to the employees, and trying to understand.
They're in a completely different world than the veterinary hospital owners are in. They're completely different worlds financially, and these people have to work, and it's just trying to keep that open line of communication. The empathy, compassion, and truly believing that it's important to the ... Not that it isn't, but truly communicating that it's important to the owner to let the employees know that they're going to do everything possible to keep them safe.
You’ve mentioned that you think some veterinary practices may have a false sense of security right now because business is booming right now. Can you speak to that a little bit?
Yes. So things have gone really well since COVID hit. After the initial shock of what happened and we started to figure out after the first two or three weeks, business has been booming. They don't have enough bodies, and doctors, and employees to service the needs or the demands at the veterinary hospital.
If we go back to 2008 and look at the financial meltdown, there was about a six month lag before the veterinary hospitals felt the financial impact of the financial markets melting down, and the ripple effect it had through the economy. And what I'm trying to continue to communicate to people is that business is really good right now for the veterinary industry, and I keep stressing to them that we might be in a little bit of a bubble from a COVID-related matter, and that they really need to be aware of what's going on outside of their veterinary hospital walls with the economy.
I remind them that 80% of the people in the United States live paycheck to paycheck before this even happened. In April, May, June and July, most Americans, if they chose, got forbearance on mortgage payments, car payments, student loan payments, credit card payments. People that were unemployed were not only receiving state unemployment, but enhanced federal unemployment, and making up to almost $50,000 a year. Well, all that has come to a screeching halt at the end of July, and the prospect of a second wave of COVID hitting our people and our country because of lack of compliance or maybe not lack of compliance. Just from the standpoint of not protecting themselves as well as we maybe should, you're seeing this spread again. And what that repercussion may or may not be, we don't know, and that's why I'm asking them to really take the time and put a contingency plan in place to know what you're going to do.
So many of the owners got caught flatfooted as did we. I think everybody got caught a little flatfooted as this pandemic started, which is why it’s important to really have a strategy in place. What are you going to do if this happens, if we go back to another shutdown order? What's going to happen? So, I'm not trying to be Mister Negative. I'd much rather been extremely wrong than to not talk about it, David. I just think that we all have to be ... I think we're still in the first half of this battle with COVID right now, and probably mid next year we'll have a lot better guidance as to what the other side of this looks like, and I'm just asking all of the veterinarians that we work with to be extremely responsible, and set aside as much extra work, and capital, and cash as they can in the event that they need to access it.
My guess is that the government is not going to drop $4 trillion dollars out of helicopters again to help spur the economy along. They're trying to work on something as we speak right now. So, I'm just trying to be real with them that things are going pretty good right now. You're feeling pretty good, but we might have some choppy waters ahead of us.
What types of economic indicators are you paying attention to in order to try and predict what the economy might be doing over the next several months or several years?
Unemployment is a good leading indicator. Gross domestic product is another good leading indicator of where people are spending the money, but I think the other indicators are people that are getting behind on credit card debt, and mortgage debt, and car payments. Just other debts ... What am I looking for? They're just behind on making their payments timely or critical things.
And the other thing that we don't have enough of is data on that prediction—the one that the economists were predicting as a result of COVID. They were estimating almost 100,000 businesses across the United States would not reopen, and trying to keep tabs on businesses that are going through restructuring or failing will have a ripple effect not only to the employees that work for them, but then the companies that supply them as well.
So you're just trying to keep an eye on a lot of those things, and the other item that I do not like looking at is just the graphs that we all see on TV every day. The number of infected, and number of deaths, and things like that. You can see that it went down, but it's kind of gone back up again. So it seems like we're almost back at the starting point. So, I wish I had a magical answer to tell you that we need to look at this one indicator. I don't have that. I can't pinpoint the one.
I've heard you mention how important it is for practice owners to be putting a playbook together. So what should a veterinary practice's financial playbook consist of?
That's a good question. I think it's really important to have just an outline of “what if” scenarios. When COVID first hit, we were really concerned with what the ripple effect was going to be at veterinary hospitals, and we built a damage calculator so that veterinary hospital owners can actually input what their revenue expenses have been historically. And if there is a downturn in business and they do nothing, it will actually calculate the amount of damages their business is going to take. So it actually lets you know that you can estimate the downturn in revenue and the length of the downturn, and it'll just stick right out for you on the back side.
So that's a really good tool because if you see a 15% decline in revenue, you're probably going to think, well, it's just a week or two. Well, now you've got a tool to say, "Okay, Dave. That 15% downturn, this is what it really is costing the business." So at what point do you have to make a decision to maybe furlough some employees or make those really difficult decisions you don't want to make? And the other calculation or spreadsheets that we put together are what's my break even? Not very many veterinary hospitals know what their breakeven is on a daily basis.
Veterinarians need to figure out how much revenue should be based on who I've got scheduled to work tomorrow, based on my average invoice, how many people need to come in tomorrow so I'm not losing money. And so it goes through and it'll calculate your exact breakeven for you, but then it will also calculate based on the amount of cash and debt service you have. If you don't make a change, this is when you run out of money. You've got 14 weeks. If you don't do anything, you're completely out of money in 14 weeks or whatever the calculation would be. So that was a real eye opener. Things have been so good in the veterinary business since 2010. It's just been a constant climb, and the business owners need to have a playbook to get back to basic blocking and tackling.
This is my cost structure, here is my fixed, here's my variable cost, here's my variable number of invoices, how much I'm charging, and just put it back together so that, God forbid, we have to pull those back out again—we've got them there and that they're ready to be used. In addition to that, I think the playbook also has to outline the “what if” scenarios. What's the decision tree if this happens, and how am I going to handle it? So, I just think it's important to think through those things now when the heat of the moment is a little bit tougher sometimes.
Are those calculators that you and your firm developed?
Yeah. They sure are, and we've gone all through COVID, so we've told everybody that anybody that wants to just reach out, we'll send you a copy. We have password protected it. For some reason, veterinarians like to change formulas and really screw some sheets up, so we have password protected it. We've literally given out hundreds of copies of the spreadsheets over the last five months, and that's just a little bit of our way of giving back. And if people have questions, we're more than happy to try to help guide them through some of the questions they may or may not have.
How would a veterinary practice owner get access to those? What do they need to do to reach out to you?
Just go to our website, www.ksmcpa.com/veterinary, and there are a couple of different ways. You can say just hit the button, "You want to talk?" And one of our colleagues will call you and ask you what you'd like, or you can just email and say, "Hey, can you send me a copy of this spreadsheet?" It's as easy as that.
Something that amazes me about this industry is, according to the US Small Business Administration, any business with less than $5 million dollars in revenues and with an EBITDA of 10 to 12%, which describes most veterinary practices, they should be spending somewhere between seven to 8% of their revenue towards marketing. Now that's not me saying that. That's what the SBA says, and it's easy to look that up and get a quote on that. But in the veterinary industry, most veterinary practices are spending between one and 3% towards marketing. So marketing is this really important thing for attracting and retaining clients and staff, and it's chronically underfunded. I'm not saying veterinarians should necessarily be spending in the 7 to 8% range, but what do you think is actually a healthy range for marketing budgets if a veterinary practice owner wants to ensure they're coming from a place of good business fundamentals?
That's a great question, and I'm going to kind of clarify my answer. My answer would be we believe that all hospitals should have marketing plans to not only to attract new clients, but also to retain and to get their existing clients to come back. Those should be two distinct marketing budgets. The other really important thing is that, if you set a marketing budget, that's great. If you give me 2 to 3% of gross revenue from marketing, I'm going to throw it out the window driving down the highway. I'm not a marketing professional. They need to surround themselves with marketing professionals, and I'm not trying to put a plug in for GeniusVets, and you did not hit me up to say this.
But so many times I ask veterinary hospitals, "What's your budget? How much does it cost to bring in a new client in? What's your marketing plan? Who put this together? How do you measure the results?" "Oh, the lead receptionist does all that for us because she's really good on Facebook." That's okay, that's okay, but they need to work with a marketing profession, and I am extremely okay with up to a 3% budget on marketing. I understand what you're saying on the SBA side of things, assuming that the hospital has the bandwidth to take on the attracted new clients.
If they're already booking out three to four weeks with so many hospitals being challenged, and being able to hire doctors to service them, and most hospitals are booked out four to six weeks right now. So they really cut back on the marketing side. But the main message I have is that a budget is great for marketing, which everybody should have, but use a professional to help you spend it, especially if you're a $5 million dollar practice. And if you're looking at a 1 to 3% spend on advertising, that's a lot of money, and you have to be able to measure what the effectiveness of those campaigns are. I don't think I've yet met a veterinary hospital management team that really can quantify that the way it needs to be to make sure they're spending the money in the right areas.
In terms of ROI, what should a veterinary hospital management team want to see?
Again, that's very difficult to quantify because they don't track it. They can't tell you how they attracted a new client. They don't know if it was the sign on the road, a referral, or an SEO optimization. But yeah, we try to quantify what it’s going to cost them to acquire a new client. We'll calculate that, and then you can benchmark that against, "Okay, but the cost to this much acquire the client, how much are they going to spend over the next three to five years with you on an average basis?" So is that investment worth it? Of course, it is. So does it make sense to up that investment a little bit more to get that new client?
So, I'm not a marketing professional, but I can tell you the one area that's often overlooked in veterinary hospitals, they focus on new clients, new clients, new clients. Yeah, that's great, what about the 40 to 50% of clients that are past due on their reminders? And those are the clients that have already been in the business that are delinquent on doctor recommendations, and it's kind of a no-brainer where you might want to spend your resources. Put a marketing strategy together to attract new clients, but then one also to retain and keep those people engaged with you. So, I'm not advanced at marketing at all. We can measure that against what the growth in the hospital is versus what the growth in the area has done, so it's a fairly easy calculation.
And when you surround yourself with the right people, the marketing costs should more than pay for themselves and be just a fantastic return on their investment.
Do you have any advice on how to figure that out benchmarks of what that should be for veterinary practices?
An informal benchmark that we use is we would like to see the new client cost be less than what the annual examination fee is. So if your annual examination fee is $72 or $75, then the cost to acquire a client would be ... Our target is to be below that. What's your opinion? I'll put you on the spot.
(David Hall) My partner, Doctor Michelle Drake, runs a very, very sound veterinary practice financially. Something certainly most veterinary practices could aspire to. And the first time I asked her that, I said, "What's a good cost per acquisition for you?" She said that she'd be happy with under $200 cost per acquisition. So, I think it goes above what her exam fee is by just knowing where-
(Terry O'Neil) It does.
(David Hall)...she counts her revenues and all that. She says, "That's pretty healthy for me." And then not too long ago, Doctor Georgi Ludwig...you may know Doctor Ludwig...she's a VMG member. Anyway, she came and she was going to do a VMG presentation for a group last year, and she really wanted to dive in the numbers to figure out what her cost per acquisition was. So she came to me with a bunch of numbers, so we sat down and worked it out because she's a GeniusVets client. We worked out that the CGA she was getting was at $38 bucks. And we see that it's widely varying, it depends a lot on your area and what exactly you're doing, size of practice, and other complexities. We find most of our clients are kind of in that range. We've been happy with that.
(Terry O'Neil) Good. The other thing I like to dive into, David, is what the average client per year at the hospital is, and how many years the client stays at hospital. So if the average client spends $500 a year and they're going to stay for five years, that's $2,500 of revenue. From that standpoint, your fixed costs are already covered with your existing clients, so I think the owners really need to kind of gauge that. $200 you get 2,500? I'm not good with math, but that's a pretty good return, I think, on the invested dollars.
Before we go, I would like to actually just get to know you a little better, and the way that we do that here on Webinar Wednesdays is by playing a game called What You Would Rather. So that's where I take this book of 3,000 Would You Rather questions and flip through it to find a random question to ask. It's for everybody who's watching get to know you a little better. Would you rather drive the entire Route 66? Kind of cool. It's a pretty nice scenic drive. Or walk the Great Wall of China?
I'd rather walk and enjoy it versus drive. I'd rather take my time and walk. It doesn't seem like we do enough of that. That's the other thing that I've learned to do a lot during this pandemic is in the evenings I get a little more time to relax...to get out and enjoy myself instead of being on the fast lane every single day.
Is it okay if I interject one more thing, David before we sign off? The other thing that business owners need to really look at right now is to capitalize on the fact that we have shifted. In my opinion, we're shifting from an employee market to an employer market, so that the labor pool is changing in front of our eyes. So use this as an opportunity. Really use this as an opportunity to recruit and get great staff to join your team. I didn't mean to go from walking the Great Wall to going back to business, but I just think that everybody is just so, so busy right now, but there are other really good people out there that are furloughed that would possibly be great additions to their teams.
Are you aware of any programs or do you have any good advice on where people should be looking or how they should be going about it?
I don't have enough data on that yet. I do not have enough data, but the resounding response we're getting is that staff really like the modified schedules. They like working a little bit more during a particular day, but having maybe another day off or two during the week. Or some hospitals have gone on three day ons, off four days, on four days, off three days—so that their employees are getting larger blocks. They work hard, but then they get a nice block of time off, and that's been very well received. Every hospital owner has to look at overtime laws though, and what the cost to the business may or may not be. It's different in every jurisdiction.
I think the balance there is what I keep hearing. Balance to prevent burnout is key, as a lot of people are not only physically tired right now, but they're mentally tired too. So getting more bodies in there to help to give more time off to the staff, I think, is going to be a wonderful investment owners could make right now.
Before we go, is there anything that you want to encourage those who are watching to pay attention to? Or again, reiterate, let people know how to get in contact with you or your firm if they want to reach out?
Just continue to make good business decisions. Make good decisions based on the safety of yourself, your employees, and then the pets you're serving. I think that's always been on the forefront. A lot of us business owners have made decisions during the COVID crisis, and the businesses that we are in touch with or associated with, they made the decisions because they are the right decisions, and not because of the balance sheet or income statement impact. They made the right decisions that may have cost them a little bit of money in the short term but, in the long term, it's going to make them a much stronger company, so it's a fine balance.
Just continue to surround yourself with people that can help. If people need to get a hold of me, use the website at www.ksmcpa.com/veterinary. I'd be happy to talk on the phone with anybody that has any questions. It's just like I said, go to the website, click “You Want To Talk”, and you pick the time and tell me. It's as easy as that. We try to make it super simple. So just continue to be safe and support each other, and hope that we all work towards getting our country back on track again. From the standpoint of coming out of COVID, we might even do so perhaps stronger than we were when we went in.
Well, that is all for this Webinar Wednesday everyone. Thank you so much for tuning in. Please check your email tomorrow for a link for the replay along with an invitation to next week's Webinar Wednesday. If you're a veterinary practice owner or manager and you haven't yet claimed your GeniusVets profile, go right now to GeniusVets.com/start where your veterinary practice already has a full-page profile filled with tons of information about your practice. It's really incredible, you have to see it for yourself. Just go to GeniusVets.com/start and check it out.
If you have any questions about your profile, Webinar Wednesdays, veterinary marketing, or if you just want to chat, visit GeniusVets.com and let us know. I'm David Hall, and thanks so much for tuning in.