Joint Ventures at Scale

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I'm Kisan Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Welcome to M and A Science Live, where putting together companies is complicated and taking them apart is even more complicated. In this podcast series, we interview leading M and A practitioners to learn lessons from their experience. Learning proven techniques is key to optimizing your M and A practice. If you're interested in keeping up with the latest from M and a science, visit mascience.com, subscribe to our newsletter and with that I'm your host Kisan Patel, CEO and Founder of Deal Room. Today I'm here with Clayton Stanley, Vice President Head of Corporate Development at Amerivet Veterinarian Partners. Clayton has previously had roles as VP of Corp Dev for NTT Data, Director of Corp Dev at Xerox, and worked in transaction services at PwC. We're going to talk about how to make the JV model work on scale and figuring out the right size of the M and A team. Hey Clayton, to kick us off, can you tell us a little bit about your role and organization?

Thanks Kishan. I work for Amervet Veterinary Partners, a private equity backed vet clinic consolidator headquart in San Antonio, Texas. We were started 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 at 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 tell run the corporate development. Being that we're a consolidator, we kind of have two separate groups where I've got a separate team, our business development team that handles all the sourcing side and really once we have a live opportunity to negotiating 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?

It's still a very highly fragmented industry. The estimates are it's still up to 80% fragmented. And when I say fragmented, I mean 80% of the vet clinics are still owned independently by the veterinarian. So there's still a lot of greenfield 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 until the industry becomes more consolidated and it gets tougher to buy clinics. That's one reason. Another, I'd say the private equity firms make a very good return investing in this space. It's a high margin business. The EBITDA margins for a typical good veterinary clinic are in the mid-20s and it's a very low risk business. A couple of other advantages are there's the lack of strategic buyers in the space. Typically most of the people buying the clinics are the PE backed consolidators like ourselves. 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, the blue crosses, the aetnas, the Uniteds of the world, setting your prices here, you know, the veterinarians can set their own prices. It's a cash pay point of service model. The industry has proven to be recession proof compared to other industries. And also even more recently, the vet business thrived throughout Covid. So I'd say it's even pandemic proof. And there's also a couple of other things 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. Then another thing too, obviously anytime a private equity firm invests in a portfolio company, they're obviously having exit in mind at some point. And all of the recent recapitalizations in the space have all been north of 20 times EBITDA. It's a very nice return for your financial sponsor.

Is there anything bad about the industry?

I should say because of all that 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. Ultimately we can still buy the Clinics at a lot lower multiple than we hope to exit at, but it's highly competitive. So it makes your LOI issue to close rate a lot lower than you would like because of the competition.

Got it definitely seems like it's got the fundamentals being a highly fragmented market, good margins. I think the healthcare nature of the private pay you mentioned is also a really good element.

Ultimately, another challenge is just there's a shortage of veterinarians out there. Your veterinarians are 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. Can you 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 100% of the clinics. The 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 instead of a top co model. You know, 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 because 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 exit. That's kind of a big pitch of our strategy is we're going to pay you X up front, but, you know, you retain 30% when we get scale and bring a lot of operational efficiency 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 kind of had to find a way to differentiate yourself when there's 20 other players doing the same thing. Some are better capitalized than others, which is obviously important thing. You know, if somebody is getting better leverage in their credit agreements or debt package, they can obviously afford to pay higher multiples. So you just have to find a way to differentiate yourselves, but then also show a good value prop to that veterinarian of, hey, you know, 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 interest in their clinic. But it's really just aligns us so we're all working towards the same goal.

It's interesting. So you've really differentiated your investment model by creating this incentive with the targets that they now become part of your greater model and what you're trying to achieve with a larger potential exit down the road. Yep.

We're all aligned too. They obviously help refer deals to us because the more clinics we can buy and the more EBITDA we can acquire, obviously that's going to help us sell at a premium multiple down the road. And 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 kind of help them take care of the back office stuff.

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

A lot of it's really uniformity when you're doing this many deals in 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 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 too, 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 cadence. Whether it's between the law firms we're working with, our accounting firms with the quality of earnings, our different internal teams, the integration teams team. That's key. Having a regular cadence because there's a lot of activity going on. I have over 20 deals under LOI right now that I'll be closing over the next couple of months. So there's not much time to pause and take a breath. You really have to kind of 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.

It seems like there's a lot of components that are similar to other rollups in this industry or other industries. You're running through a typical process. You're doing a search, you're having similar conversations. You're going to get to an loi run your diligence. The two parts I wanted to get into, one is what are the distinct differentiators when you're creating this structure? Because you mentioned creating uniformity in terms of how you lay this out. I'd love to even hear of that conversation that you have with that company in terms of. Let me explain the difference. I know you just got approached last week by XYZ PE firm and they gave you this sort of multiple forecast on what they would pay for it. But let me sort of explain our model and why it's different.

I think that's one of the challenges, right? I mean, obviously a hundred percent acquisition is 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. We're going to pay you a multiple on your EBITDA upfront. Then we're going to show you a timeline of, you know, up until a recapitalization and during that time frame you're going to get paid a salary, then also get profit distributions for your, you know, the percentage interest you have in your clinic. And then also at the same time, you know, having assumptions based on where the market is. And then here's what we think Your, let's say 30% retained interest is going to be worth based off of an exit multiple a few years or a couple of years down the road. 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 and A, explain some complex things to a doctor who that's not their, you know, kind of bread and butter. 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 up front. But, you know, and there's risk involved as well. So that's why you really have to, you know, kind of sell them on the industry and how we really believe based on recent exit multiples for our competitors. This is going to come true. And it's not a pie in the sky type scenario.

What you're selling is, hey, I'm going to buy a portion of your clinic and you're going to retain partial ownership. 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, yes. So we set up a legal entity for each of the clinics we acquired that's in its own legal entity. And there's obviously some structuring involved too, not just in the vet space, but certain states prohibit the corporate practice of medicine. So you have to kind of structure around that, where you have a veterinarian own the actual legal entity that employs the veterinarians, and then you have, you know, some intercompany 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 to find out, but, you know, based on what their EBITDA is at the time of exit. So, you know, if they can grow their clinics, they're going to do better than they would if they. If they don't grow the clinics. That's all laid out in the operating agreements. And it's 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.

But it's nice drivers for them because it's like the growth equity model where, hey, we're going to let you take some chips off the table but still get part of the secondary exit.

Yep, ours is very generous for veterinarians where there's some JV consolidators in our space that will. It has kind of a predefined amount that they would get on exit. Ours is, hey, the better we do, the better you'll do. Right. So the higher multiple Amerivet gets when we take our whole platform to market, the better you'll do.

So do you see other groups that would keep a single Entity and basically give them fractional ownership into the.

Yeah, no, 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 top co. Equity. Yes. Where you're getting equity in the overall parent company versus equity in your individual clinic. We kind of set ours up purposely this way because that way everyone controls their own destiny. Right. You kind of get some people that want to rest on their laurels and just let all their other partner clinics pick up the slack. Where here is 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 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.

Yeah, that's interesting. Some interesting drivers and considerations around which direction to go with that kind of structure. What concerns do you see from these clinic owners when you start talking to them about this kind of model?

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

Interesting. I guess the other part of this is when you're done with the transaction, are you doing an integration at all?

A lot of our integration is happening pre closing. Once we go live and close a clinic, they're on our benefits, they're on our payroll. So kind of the last 30 days before we close, our integrations and ops teams really get involved in meeting with the staff, answering all the questions they may have, and also getting them onboarded 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 the 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. We're really just there in the background to help and assist them, you know, grow their clinic and kind of take things off their plate.

Interesting. It sounds like you're still capturing some of the cost energies you're sort of kind of picking out some of the stuff that you could leverage in terms of the cost energies when on scale, but then still allowing them to have that autonomy.

We even let them choose their own suppliers they've always done business with. We have contracts with all the suppliers in the space and obviously can get better pricing that they can take advantage of once they come under our umbrella. So there's always some immediate cost synergies from a procurement side. Most vet clinics are small businesses, right? I mean I'd say between 2 to 3 million of revenue and they're focused on, you know, delivering great medicine to the pets and their in their patients and 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 when you're 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 the profits and revenue to kind of justify spending all that money. You know, at jv. JV model is 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 differently 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. I mean there's a lot of tax returns to file. So just there's a lot of kind of administrative stuff that has to take place in a JV model. So it's one of those things too that most people want to kind of slowly build the team and the infrastructure, making sure the revenues are there to justify. 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 and.

A team for anyone. A lot of it, you know, 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. Right? Because I think, you know, we use an M and A software platform and we're, we Track all phases of the deal process from 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, and then all the execution phases as well. Once the LOI sign, how long does it take us to get our first legal drafts out? How long does it take to get the Q of the report done with our third parties? Anytime I start seeing, you know, kind of bottlenecks in the process, I'm definitely looking to add to it. The team of a person could solve some of those problems sometime. It's, it's changing a process. But if I say, hey, this is just a bandwidth issue, we. I just need another person that obviously a key time to add someone, you know, just getting the daily vibe of your team too. You can tell when people are being overworked, they're maybe keeping up. It's just probably working more hours than they or you would like for 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 being productive, but also is happy with the work they're doing and getting challenging work and not just having to do monotonous activities. It's not really helping them grow. As a corporate development professional, I'm always.

Interested by this because all these organizations that we've ever worked with, they have such a varying team size when it comes to their M and A function. I'm curious, how do you assess between operationally we need to adjust things to be more efficient. 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 technical technology that you make the buy versus build decision. And you don't really need a big team when you're kind of 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 if 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 valuations and produce the Lois, even negotiate them sometimes. Then you never actually win the deal. You know, it's finding that balance. And like you said, we're always trying to improve processes, figuring out, okay, how can we get our loi close rate up? You know, things like that, where we can kind of take some of the workload 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 improve a process?

Yeah, that's interesting how you got to figure that out. Is there certain things that you've seen as you've been involved with this and how it's evolved? Because I feel like with consolidators, like you mentioned, a lot of times you can have a really small core, core dev team that's doing the front end of the process, sourcing deals, tracking it, running it through to close. And then what does that structure look like when you have to go through the other components of IT integration and things of that sort? You have a dedicated team around that. Like, I'm just kind of curious in general how you seem sort of. 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, where they're sourcing their own deals. You know, not necessarily deals coming in from bankers or brokers, but actually out there pounding the streets, you know, meeting the veterinarians through their. You know, a lot of our BD team has history in the animal health space. Like they were product salespeople in the. In the veterinary space, selling drugs or different. Different products. So they have a lot of connections in the vet space. And working those connections, in addition to cold calling, too, you're going off of lists of the veterinarians in their markets where they're the right size that we would like to approach. But also then 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, then handing that off to the operation, and the integration team.

Interesting approach. Three distinct teams. Biz dev, you're doing your own deal origination or do you use bankers? Are you?

Yeah, we do. So we obviously get a lot of inbound stuff from, you know, there's a lot of business brokers in our space, you know, 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, then you'll see more of the traditional investment bankers get involved. So a lot of business brokers that specialize in the space, so yeah, there, that's a deal source. And then you rely on your own team to go out there and source their own deals. Then they can actually find deals that maybe the seller, the future partner we're talking to, is not shopping around and taking it to every competitor out there. Maybe you get it at a lower multiple with less competition, which is obviously a good thing for us.

And that's the value of having your own proprietary.

Right back to our earlier conversation too. I mean, some of the stuff, you can obviously outsource some of these functions as well. I mean, obviously we use the third party UV firms to do that. We obviously have outside legal counsel and stuff. We do have a lot of interaction with 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.

Got it. You have biz dev, then you're on the corp dev side. You're really doing the negotiation, finalizing the terms. I saw a question from Dev on chat. What percentage of the business does the original owner usually keep?

On average, it's 30%.

Okay, so it could range a little bit, but right around 30%, we have.

Some that are at 49%. Most of our deals are between that 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've seen 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 learn something every day. Some nuance comes. You do a lot of deals, and 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, just 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 the disruption to your own business. So that's a challenge with our integration teams too is getting the seller comfortable to informing the staff and stuff. So we really can make sure we have a smooth close and a smooth integration. So we're always learning from that. On 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 for veterinarians. Only one of them is a partner who's really going to be getting proceeds from this sale. Right. So you really have to spend some time with those associate veterinarians, the ones who aren't 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 kind of help make your job easier for you. Obviously retaining our veterinarians is really key in having a successful acquisition.

With these sort of learnings that you pick up field to deal with, is there an approach that you have to retain it? Is there? Hey, do we have a meeting, do like a retrospective or post mortem, talk about what went good, what went bad. I'm just kind of curious. I feel like different organizations approach that differently.

A lot of it gets discussed kind of after a deal close. We could really call it like a budget handoff call. That's kind of a call to kind of recap everything. We have our finance team there, the ops team integration to make sure that everyone's. We can kind of 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. I mean 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 success. We also do do a lot of surveys too. You know, we'll send out surveys after a deal is closed to our now partner. Right. 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. I mean that's one thing I challenge 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, well, that's because we've always done it right. I mean I want us to always be challenging the norms and looking for better ways to do things.

Awesome. Continuously optimize when it comes to tasks you can't delegate to other team members. How do you handle prioritization of tasks and manage the different responsibilities you have.

In your place, making sure 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 where you where I need to get involved and also keep them as involved as 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 decisions. 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, I mean obviously on any of those deals an important issue could pop up that you have to immediately address. But you know, some of it's obviously just kind of knowing the timing of when your schedule hey, when's this deal supposed to close? You kind of have to. If it's an issue that's kind of 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 on site closings 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 those deals on track to hitting their close dates or it really becomes a nightmare for your integrations. Team of deals are constantly shuffling around the close dates because it puts a strain on your HR teams too because 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 we try to stick to our close calendar the best we can constantly.

Keep prioritizing it and using the 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.

Absolutely, Deb, keep the questions coming. What is your exit strategy and what's the timeline for that kind of 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 business continue to grow, what we kind of 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 for that is diligence.

You always come across these surprises. I'm curious if you've seen anything interesting on deals that 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 post.

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 and he basically said if you do good diligence you can have one of these boats. We ended up not doing that acquisition with the Foreign Corrupt Practices act and bribery and things like that wasn't going to be real kosher, but that was something that it 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 happened to me on a deal dealing with somewhat of, I'd say unsophisticated sellers from a financial M and a perspective. Some deal, especially during COVID where you have some valuation gaps, we do earnouts, you know, on certain deals, even though these earnouts are negotiated at arm's length with both sides represented by council at the end of the earnout period, you know, where you have defined metrics, you know they will have potentially achieved none of the metrics. They get the earn out but they're still like hey, I know I didn't earn the earn out but can you still pay it? Kind of explain no that the business is kind of 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 the unique things, dealing with a small business owner versus in my prior lives doing large, you know, billion dollar acquisitions, it's somewhat of a different negotiation process. That's one thing that's unique about the JV model too is that in a traditional 100% deal, I'd say the negotiations can be somewhat more adversarial. You're two parties negotiating the best deal. Then sometimes you go your separate ways. Hey, you buy the business and 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. So you kind of have to explain to them. And you want to really make 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 maybe realize things that they didn't understand at the time the deal was negotiated.

That's an interesting view because it does give you more incentive to be fair. You don't want them feeling salty afterwards.

Yeah. And as a consolidator, we heavily rely on our partners as referrals to buy more clinics. It does me no good to get a great deal. You know, I paid less than market. Maybe a very buyer friendly indemnification structure. That really doesn't do me any good. Then I have an upset partner post closing. You know, I saved a couple pennies that's going to cost dollars on the back end because he's not going to help refer me other clinics to buy.

What do you see as like causes of seller remorse?

If it ever does happen, we use our partners heavily. They would all say it's a fair deal. I mean a lot of, you know, sometimes no fault of anyone, you know, sometimes the business just 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. Right. And then you got to 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 earnouts involved, anytime someone agrees to do an earn out in their mind, they're going to achieve that whole earn out. 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. Yeah, you have to kind of walk them through that. Not really 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, 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 so it was really a great time to have a partner to help you control your labor and make sure you were complying with all these new laws that were being put in place. I think our partners are thrilled with the decision they made.

Interesting model. What other industries could we apply this to? Obviously we need a fragmented industry, which.

Is why it's so ripe for a lot of the healthcare. You see this in whether it's ophthalmology, dentists, 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 the 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, you know, in the space. It's pretty low risk as well. So I mean, 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 risk.

Interesting. Yeah, you're right. We're running out of industries we can do this in. Yeah.

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

Because every industry I'm thinking of that's fragmented, there's somebody doing a roll up. Rias, they're doing it. Any of those managed service providers? Yeah, those are the security agencies. Yeah.

No, you see it in the car wash industry. I mean there's the healthcare like we talked about, whether it's behavioral health, you know, I've seen a lot of different service providers, whether it's H vac repair, anything really any type of people based service provider business. It's pretty ripe for that.

We got a good amount of practitioners new to the industry for working on M and A, even in house folks that are now getting active. What kind of advice would you give for practitioners starting 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 is just doing lots of deals. If it was someone looking to get into corp dev, I would want to try to get in with a company that's kind of key to their business model. Not just, just, you know, we'll do one or two deals a year. Because for companies that don't do a lot of acquisitions, they start having the discussions of do we need a corp dev team? Right. If I'm only going to do one deal a year, I'll just go hire a big four accounting firm and investment banker and they can do it for me versus investing in a dedicated person. Because you obviously want to make sure you keep yourself busy when you're employed somewhere. But 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 kind of learn that way. Or from the I banking side, there's obviously lots of different avenues for getting deal experience. For someone that doesn't kind of want the same thing every day where it's hey, here's what I do each month and I kind of 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 task and roles in the process. But try to always offer to help your bosses. Go sit in on the management meetings. You may be not 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. Being that it's a negotiated deal. I've never done a deal that's the same. Everyone's different.

That's a good point. Get closest to the deal. Get hands on. Do you have a preference for working on these kind of consolidation strategies or would you ever go back to working on more of the traditional strategic approach where you're working on a variety case by case type of strategy.

This is my first time doing it from both a PE backed company but also in consolidator space. So yeah, it's definitely challenging and the deal flow is pretty aggressive. I, I like it. I mean, I definitely like the PE backed space. I've done it for a public company before because, you know, 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. So one year you may be really focused on acquisitions and then the next year, 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 know, 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 doing any acquisitions.

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

I was thinking of my potential foreign corrupt practices issue. I was. That was presented to me in Barcelona years ago. That's probably the one thing that comes to mind in reading like disclosure schedules on deals. I mean it's amazing though 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, to do. 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.

Yeah, I'm sure that's now become part of the diligence process.

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

Yeah, I can imagine that. Adding some complexities and if you're not prepared for it, some more surprises.

Yeah, no, for sure.

Hey Clayton, thank you so much for your time today. I really appreciate the conversation and walking through how to scale the JV model.

No, I appreciate it. Thanks.

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