Stages of Veterinary Business Growth: How to recognize the humps
In 1983, a seminal article was published in the Harvard Business Review. It described ways in which businesses grow and the challenges they face at different stages in their life cycle. This paradigm was originally introduced to me by Brian Cassell, DVM, now chief strategy officer at Ethos Veterinary Health, and he has lectured on this topic in the past. I believe we all need a better understanding of the specific stages of veterinary business growth.
When I think about ownership challenges in our industry, they span the spectrum of the business life cycle. Understanding the different stages and transitions may help with decision making in your personal business. It can also help make sense of some of the overall trends in the veterinary industry.
Five stages of veterinary business growth
These stages of the business lifecycle exist across all industries. The time frames and revenue numbers for each stage vary between types of industries. Technology firms such as Facebook have raced at a crazy pace from stage one to five while healthcare has traditionally moved at a slower pace. Here is my explanation from a veterinary viewpoint.
Stage one: Start-up/Existence
This is where you decide you are going to start your own practice. You secure financing, a location, and hire initial staff. The revenue production and management is all on you, the veterinarian. Your goal is to make sure clients know you are available and what you offer. Being able to maintain cash flow is your key to survival. Often, if you start as the only veterinarian, you might have 2-6 staff to start. Thus, you see all your employees most days, and you don’t have to develop a lot of systems. In fact, your key to survival is adapting quickly and finding creative solutions to all the “bumps” that come your way. This is a chance to experiment, change course if things don’t work, and to find a model that works.
Stage two: Survival
Stage two is when you no longer feel like you are going to go out of business at any moment. It is when you can cover your loans, pay yourself a fair salary and are also seeing the possibility of true profits. You also face less crises each week and it starts to feel more like an oiled machine rather than chaos. You have established clients and are developing a place in the community. However, this is the stage, where you are still working really hard and wondering if this is all there is to success. One of the keys is developing a budget that allows you to have both profit and positive cash flow.
It is easy for small primary care veterinary practices get stuck in stage two. You are big enough to make ends meet but you haven’t figured out how to have the practice work well without you. Thus, the other key to moving to the next phase is supervised supervision. You have to learn how to direct staff to take over some of the administrative work for you so you can generate revenue in a more sustainable way.
Supervised supervision may be hiring an associate that you educate in the culture of the practice but don’t micromanage. It may be teaching a technician take over the ordering or helping you coordinate interviews for new staff. It may even be hiring a practice manager. While you are still small enough that you don’t need many systems, building systems makes the work easier, more efficient, and sets the ground work for further growth.
When stuck in stage two, options are limited if you want to retire. Because the revenue and decision-making are so reliant on you personally, the business may not be sustainable without you. In addition, while the cash flow may have been enough for you to be comfortable, it may not be high enough for someone to want to purchase the practice.
In the past, corporations were unlikely to purchase stage two businesses. However, in the current climate, in some markets, corporations believe that they can take well placed stage two practices and grow them into more sustainable entities. Other veterinarians however, may be less likely to purchase these practices as in some locales it may make more economic sense to simply do a start-up themselves.
Stage 3: Success and options
Stage three gives you options. Reaching this stage of veterinary business growth means that you have passed through some pretty big hurdles. If you reach this stage, you are profitable with a comfortable cash flow. In addition, you have developed functional managers so the practice really can work while you have true time away. The managers are able to be functional because you have taken the time to develop systems. You have written job descriptions, an employee handbook, written procedures for dealing with client issues, and even protocols for equipment maintenance and repair.
Maintain
There are two options if you successfully reach this stage. Your first option is to maintain. You can enjoy your success, put some effort into the business but have some both time and money to pursue other interests. As long as you are able to stay nimble and react to changes in the market to preserve your niche, you can continue at this stage for potentially lengthy periods of time. Many 3-6 doctor practices are in this stage. The key of staying here is continuing to be willing to delegate and for aging owners, that really means delegating management, leadership, and then ownership in a thoughtful way. When you are ready to retire, the business will then be in a good position to be sold either internally or to an outside buyer.
Grow
The second option in stage three is to use the profitability, system set up, and the management team to grow. This growth may be moving to a new larger hospital, adding new departments or equipment, or opening new locations. This is a time of potential new profitability but also a time of risk. Cash flow can get squeezed again if the second location is not profitable right away. Things may also fail or feel really hard if you have not successfully delegated enough responsibility to allow true functional management.
Much of the consolidation in the veterinary specialty market has originated in part from the hard transition from a growth-oriented stage 3 business to a true stage 4 business. Many specialty hospitals added a second location but did not have truly functional managers or systems and thus used more cash than anticipated. Other specialty groups grew well to even 25 locations but then could not build the needed layer of divisional managers and accountable systems to survive well.
Leaders who bring businesses to stage three will often be unsuccessful in phase four for one of two reasons:
1) They push for growth too fast and run out of cash and /or
2) They fail to delegate effectively to make the company really work.
It can be really hard for leaders that used in the trenches operational skill to transition to strategy and vision. I believe we will see more consolidation in the market as some of the newer private equity backed corporations, which are stage 3 aiming for growth, try and fail to reach stage 4 businesses.
Stage Four: Take Off/Growth
Stage four businesses made it through the growth learning phase and now have true systems and divisional managers to allow for profitability, cash flow and continued growth. The best leaders of stage four businesses do not need to be hands on (but often were previous experts – see my previous blog on why veterinarians should control veterinary hospitals). Instead, they provide vision, lead strategic planning, and define the culture. Their greatest skill is building a team that works cohesively but with independent skills and ideas for a common well-defined goal. A strategic plan that everyone understands is crucial but if the decision making is too centralized, you will not be able to execute on the vision.
I think there our both large groups and smaller local groups that could be classified as stage 4 veterinary businesses. Several locally owned multi-location veterinary businesses around the country have grown smartly and are able to take advantage of new opportunities.
Stage Five: Resource Maturity
By stage five, the company is highly profitable and is providing a good return on investment to its owners. However, there may be less opportunities and lower growth. The main risk at this stage is ossification. Because the company is so big and has so many systems, it may no longer be able to retain entrepreneurial or innovative employees. In addition, the company may be less nimble and less able to respond to changes in the environment or to jump at new opportunities.
This ability to be nimble is the biggest Achilles heel of the largest veterinary players and also the greatest opportunity for the start-ups. What changes are coming down the pipeline in the veterinary space and can you jump on them? Do you have an idea for way to provide better quality care that you can implement faster because you are small? Are you able to appeal to the best and brightest veterinarians because you are smaller, faster to adapt, and more innovative?
As we look at business life cycles, we have to remember the power of disruptive innovation to change markets. Walmart was the king of the world for awhile but online marketing changed the game. Taxi companies had been highly successful for decades until Uber arrived on the scene. While the fate of veterinary medicine to become dominated by three or four players seems inevitable to some, the power of new ideas and innovation could alter the course.
Thoughts on these veterinary description of the stages? Comment below or email me at bdavidow@vetidealist.com.
©Beth Davidow, DVM DACVECC, 2018
2 comments
Hi Beth,
Thank you for the mention in your post and for helping to keep these concepts in front of the profession and alive. They are truly fundamental to understanding growth of any service-based business (vs manufacturing businesses) including veterinary practices. (Hopefully by now, we’re all on the same page that our practices are service-based organizations.)
A few additional thoughts…first, to be evidence-based and acknowledge sources, I first learned about this information from Bob Beale, who generously provided in-depth training in this framework and has become a lifelong friend and mentor.
Next, I like to say that no business is a single data point at a specific phase but rather we’re more like a jellyfish with a central mass located somewhere on the growth journey, and with a few aspects (tentacles?) extending into or across different phases. And, a single practice or a single organization might have different services or hospitals or lines of business in different phases, so is really a collection of business activity across various phases. For us at Ethos, this is true of our hospitals, of individual services in some of our hospitals and even some of our “vertical services” such as our three diagnostic labs; all in different phases of growth.
This brings me to my next point today, that of Organizational Colonialism. This is the concept from Corporate Lifecycles by Adizes, and refers to the idea that within a single organization, business units at a more advanced stage will usually try to impose their formula for success (tools, plans, approaches, etc) to units in a less advanced stage not realizing that the tools, plans and approaches needed in each phase are unique to each phase. And, when tools from a higher stage are misapplied to lower stage business units, this can be fatal to the lower stage unit given that the priorities for each phase are different.
There isn’t any “bad stage” to be in (although I often call Phase 3 the “better and more” phase), each comes with it’s own unique challenges and conditions that match up better or worse with individual preferences and skills. The only bad places are to get stuck in the transition zone (No Man’s Land) by accident or bad luck, or to individually be involved in a business stage that doesn’t match our preference or intention.
Finally, one dimension that isn’t covered by the phases is the Permanent Small Business (PSB), usually a business that permanently consists of one or just a few people over it’s lifetime. This is where I refer to my brother Jeff, the plumber. And PSB’s aren’t good or bad either, they have their advantages and disadvantages and are exactly the right place to be for many people.
Thanks,
Brian
Thanks, Brian. I appreciate your comments. I do think this idea of organizational colonialism is interesting. It may be why some practices have an easier merge than others into some of the larger groups.