There are 10 vet practices in your city. 7-8 get rolled up into one uber practice by a PE firm.
They now have far less overhead per patient. Billing, equipment and even vets can be amortized over far more patients.
You, the hold out clinic, are now more expensive, or have a far smaller profit ratio, thus you are operating at a big disadvantage to the other clinics in your city.
You can hold out but what is your edge in this case where your competitor is now bigger and can handle things like a vet quitting as they have a bunch that roam from practice to practice. Or they can handle buying a new machine for millions while the bank won't lend to you due to your shrinking margins.
Economies of scale are a thing and can be a very real competitive differentiator.
You the hold out are now getting crushed by your competitors while you look around and see your fellow vets taking weekends off to take their new boat to the lake because they sold their practice and you're working your 11th weekend in a row because your other vet quit to work for your competitor that can now pay more than you.
Another issue is that doctors are coming out of school with more student loan debt than ever before, so when it comes time for the older doctors to retire, the younger doctors haven't built up enough personal equity to take over the clinics.
Nobody seems to care about the student loan debt of doctors, because doctors can make a good salary, but student loan debt still has negative consequences down the road such as this.
Dentistry is different. I've seen multiple comments from fresh DDS graduates being able to take out 7 digit loans to acquire/start/buy in to a practice, because it's seen as a low risk license to print money.
The edge is far better service and less scammy practices (pushing unneeded treatments/medications etc..), at least from what I heard locally about Dutch vets.
Incidentally in Belgium they just passed a law requiring each veterinary practice be owned by a veterinarian. Life could be simple...
>what is your edge in this case where your competitor is now bigger and can handle things like a vet quitting as they have a bunch that roam from practice to practice. Or they can handle buying a new machine for millions while the bank won't lend to you due to your shrinking margins.
To answer your rhetorical question:
1. People would rather deal with neighbors than with PE or megacorps, and will do so to the extent that the difference in price is tolerable (and to the extent that they even know their neighbors.)
2. Management layers and performance based incentives are huge costs that small enterprises should be mostly able to avoid.
3. Owning a business can have a really compelling advantage at tax time in the ranges of professional incomes we're discussing.
4. Owner-operated businesses should be able to integrate with family life, allowing dads to spend time closer to their kids, which should be another advantage in favor of professionals going it on their own.
5. Owner-operated businesses can also operate with much more efficient facilities (housing over top of business) when not forbidden by zoning or other regulations.
On the other hand, people like steady salaries and set working hours. They like leaving work at work. And, especially as these professions increasingly see their schools dominated by women, many of these professionals really like stepping away from work or going part time for 5-10 years around their 30s.
People care about multiple things on different time horizons. There’s nothing contradictory in saying, “I would prefer a world not owned entirely by one PE firm” and “I will generally seek the lowest acceptable prices.”
The contradiction is not between saying two different things about different time horizons, but saying one thing and doing another.
It matters little what you someone says with their words if they say the opposite with their money - if in practice someone is seeking the lowest acceptable prices, then their "revealed preference", to use the technical term, is that they're actually preferring a world where that shop is run by a PE firm, as they're actively helping make that world happen. And sure, their stated preference may well be that a world not owned entirely by one PE firm, but really, who cares about the stated preference that doesn't get reflected in acts in the real world? Those are just empty, misleading lies if the actual choices show the opposite.
It's like saying "I prefer a world where I will lose weight" while buying a 12-pack of donuts for lunch.
That term isn’t “the” technical term. It’s a term from economics to try to explain apparently contradictory behaviors. Gee wiz, what a great explanation! “People just don’t actually prefer the things they say they prefer, even when they have far better reasons to prefer their stated preference over their revealed preference.”
Now here’s the thing, when you actually ask someone actually amidst buying the dozen donuts if they’d prefer to have the donuts or to lose weight, they’ll tell you “to buy the donuts.” If you remind them of their goal to lose weight, they’ll shrug and say “yeah but that starts tomorrow,” or “oh well,” or “I’ll skip dinner later.”
Why? Because it’s not actually the case they are behaving against their preferences. It’s that their preferences are alternating as different rewards approach on different time horizons.
“Revealed vs stated preferences” is the laziest frictionless spherical cow explanation of human behavior ever crafted.
Too late to edit, but I’ll add: the revealed vs stated explanation is plenty useful for some things. A lot of times (especially in business) you don’t really care why someone behaves against their stated interests. But that doesn’t mean it’s actually an accurate description of what’s happening at the individual level.
First, you should be careful about thinking you know people in general, and even if you could know such an abstract and totalizing thing, you don't need all the customers, just enough customers, or even plenty of customers.
Also, the very fact of charity shows that people must care about something other than price. Paying higher prices to interact with your neighbors is just a much smaller step on the same road of doing things you think are beneficial but that won't maintain your bank account at the highest possible value at that exact instant. Farmer's markets are another example of the same.
You're either looking at the wrong people or making the wrong changes, if you don't think anyone actually cares about anything other than price.
It's people with deeper wallets who do what you're describing, including shopping at farmer's markets. This brings us to the real way a smaller business survives against a giant competitor: they raise their prices and target a niche market by offering more obscure/luxury products or services.
That produce at the farmer's market? It's not the same produce that you'll find at Kroger. If it were, the farmer's market wouldn't last long.
RE 1: Customers have zero influence on this. If you have a pet, you'll need a vet, and if the owner of the owner-operated clinic next to you gets an offer they can't refuse... I can't imagine you'll find some other owner-operated clinic to visit out of spite, where the now-corporate one next to you is open, and perhaps even cheaper.
RE 2-5: These are all rounding errors compared to economies of scale the PE-backed companies have. Also, those PE roll-ups target businesses whose owners are at the stage of life when they're just happy to take a big payout and retire. Tax time advantages and spending some time with kids (which is arguably less than salaried employees of the corpo-clinic will have) can't possibly beat being able to not work at all anymore, live comfortably, and have all the time you want for kids.
> I can't imagine you'll find some other owner-operated clinic to visit out of spite
No, but I did organise a few patients to grant our vet a loan to open a new facility. (It wound up creating some Michael Scott Paper Company drama between the vet and her former colleagues, which was interesting.)
People like you are our last line of defense on the ground. Sadly, I don't think there's enough of such people to hold the line against PEs doing targeted divide-and-conquer on specific market segments, one by one.
>RE 1: Customers have zero influence on this. If you have a pet, you'll need a vet, and if the owner of the owner-operated clinic next to you gets an offer they can't refuse... I can't imagine you'll find some other owner-operated clinic to visit out of spite, where the now-corporate one next to you is open, and perhaps even cheaper.
I have seldom gone to the nearest vet/pediatrician/hospital. Inevitably I try it, it's bad, and then I spend time driving to some place further away that I actually like. And I drive an average of 4000 miles per year; with the median driver traveling some multiple of that each year, I can only assume that most people are way more willing than I to shop around.
Taking the emotion out of the analysis, all i am hearing is that the PE uses more capital, but produces a cheaper, more efficient service.
If the original small business owner sold, the money they got paid isn't gone - they could've used it to start another small business (or fund one as a VC themselves). I don't see how PE is stifling anything, but to produce a more intensely competitive environment.
More profitable perhaps, but not cheaper. In fact, usually more expensive, because the PE firms buy up all the clinics in a city, eliminating competition, and then they can set the rates to whatever they want. Needless to say, any "savings" are passed along to the investors, not to the consumers.
> If the original small business owner sold, the money they got paid isn't gone - they could've used it to start another small business
They're usually selling because of retirement, so they're not going to start another business. The issue here is that the business is not passed along to another new small business owner, it's passed along to a giant PE firm.
> produce a more intensely competitive environment.
In reality, to reproduce an environment with less competition and more consolidation, as mentioned above.
Great, that "less competition" means higher prices... Which means someone setting up a new clinic can benefit from those higher prices - oh look, now you have competition again.
Sure, until they have no competition anymore, and raise the prices to whatever they want them to be, extracting 99% of value from what they offer with a huge moat that eliminates all competition. Then the consumer is left with no pricing negotiation and the experience is objectively worse for most of the society.
The escape hatch for that is taxes to the powerful market entities, that revert value back to the less powerful market entities, but that's not popular in the U.S.
Because customers tend to almost universally agree that they create a worse service in the process. Scaled systems perform poorly in areas where people require customized service rather than a one-size-fits-all experience, and veterinary care is absolutely not a one-size-fits-all type of service.
Quantity has a quality of its own. Dude named Piketty wrote almost 2k pages about wrt capital accumulation. The opposite of what you propose is what actually happens. For another example, please see Amazon.
> i am hearing is that the PE uses more capital, but produces a cheaper, more efficient service.
You have to understand what "more efficient" means. It really means "it's shit and only getting worse, but isn't bad enough to abandon the service entirely". It starts with a corresponding price drop, and you either get a race to the bottom, or the competition gives up early, at which point the quality continues to go down the drain, but the price stays the same, as the provider pockets the difference.
I haven't thought about it this way, I hope youre right. Here's what comes to my mind after PE buys vet clinic:
- Analyze all the employees using a "system" to gauge "productivity metrics"
- Pressure management to get rid of an employee or two to increase profits, making everyone else work harder.
- Seek additional income streams from dubious "insurance" products that may or may not pay. Help market their products by spreading false information that insurance gives them "peace of mind".
- Increase costs to see what the market will bear
- Put all employees on a unified HR system that has a strict 1-size policy, little gotchas like "no health insurance for the first 60 days", limited PTO, etc. Ignore anyone who speaks badly because "this is company policy ". Give the business director a bonus when he finds new and creative ways to "maximize profits" at the cost of denigrating staff and making them work harder under more constrained policies.
- Lock all dr's salaries and staff pay to the same scale because "policy". Work harder? Why try? I get paid the same amount either way. Employees game the system to work the minimum to avoid termination. Not because they love animals, those people quit in the first 60 days (which is why our health coverage doesn't kick in before then).
- remove as much of their agency as possible, helping a poor persons injured dog is no longer acceptable, pay-as-you-go and sliding-scale billing are so 1990's, we have a business to run, the policy is "put the animal down and move on to the next paying customer". House calls are a liability and take valuable time away from the business, effective next year they are no longer allowed.
- appeal to emotion to upsell wealthy customers to services that promise to prolong the animal's life (but increase suffering and are medically unethical).
- Fewer people go to the vet now because they can't afford it, more animals suffer so that rich men can have more profit.
It's not enough that large corporations use economy of scale to undercut smaller businesses. That would generally be a good thing for consumers. Instead, we're seeing larger companies use their influence to increase regulation: a cost they can absorb that smaller businesses cannot.
We've seen this in medicine in the last 10 years. I know of no independent doctor's offices in my area. They looked at the cost to comply with electronic medical records requirements and joined a local health network.
If the government increases regulations, then it tends to place a bigger burden on small businesses than big businesses for the same reasons you highlighted about overhead.
Vet is probably a very good example of economies of scale. I remember a vet in my town in Brazil complaining how hard it is if he get ill (or take vacations i presume), that he will lose his customers and how much he regretted not becoming a state employee.
My wife works in a lab for a regional medical company. They just sold out their labs to a national medical lab company, effective January.
She's only heard bad things about this other company. Her wage is basically guaranteed to stagnate, they're not as generous about PTO, and they contribute surprisingly little to health insurance plans.
Oh, but I'm sure the management is flying away on a golden parachute.
The actual problem is that the unmonetizable value gets tossed out by PE. E.g. customer service will take a massive dive because everyone working for the clinic or whatever else will be time-pressured out of good service.
Generally the problem with treating everything via pure financial models is that some things are valuable but hard to measure financially and those are inevitably destroyed by PE and other entropy-maximizers.
You're shifting goalposts. Your first comment was about how small businesses could just refuse to sell, then a commenter described the (very real) consequences of that decision: a person has to work harder, for less money, to compete with entities that can outspend them by a few factors. Now you're saying that's more efficient overall which is a completely different point.
And, that's true, it is more efficient. But those veternarians, despite now having their weekends off, are paid barely market rate for their skills (if that) and more importantly, no longer running their business: A PE firm is. That means they have zero recourse if the PE firm starts doing PE firm shit: keeping bare minimum stock at their clinic of every last consumable, to avoid taxation; keeping bare minimum staff at all times to avoid paying workers; abusing staff and causing high turnover; basically every stupid ass "why would they do that" type decision you've heard of a large business making in the last 30 years, PE's LOVE those decisions.
And that's not even going into the fact that the profits of that business are no longer going to the community in which it operates, they're going to far away shareholders.
More efficient for the mega-vet, sure.
Once you've consumed all the competition, there's no need to compete on price anymore. Prices can go up quite a bit before it becomes economical for a new entrant to take a risk in the market. Except maybe another mega-vet.
See what Walmart did to communities and small business. Efficiency is not all roses.
You joke but it's not benign. The reason economic regulations exist is to ensure we maintain the economy as a crucible for rewarding the smartest and hardest workers in society.
When private money can grow cancerously via pump and dump crypto schemes, overhyping IPO's that peaked during the series A round, and strong arming small branches of independently owned practices (all to later enable milk mode and reap monopolistic profits), the general public and society is left with overlords who do not build, they eat.
It's easy for me to believe it's not always been (and doesn't have to be) THIS bad.
There's functional value in a capitalist system. It just requires ongoing maintenance, to avoid situations like we're currently in. It's not self-repairing. Operated properly, it makes market conditions self-repairing, but this is at the expense of the potential market capturers.
It was better when corporate tax rates and income taxes for the incredibly wealthy were much, much higher. My favorite hobby is putting Thatcher and Reagan's faces on economic graphs to show what year they were elected is almost universally either the same year or just about when the global economic system went bugfuck by basically every metric we measure.
But, thanks to those two and the larger political milieu they so well represent, those entities are now rich beyond all reason and in a capitalist system that permits things like Citizen's United, money more or less equals political power so the odds of getting any of this addressed are basically nil, along side other issues that would demand corporations make less money: like climate change, crumbling infrastructure, socialized healthcare for the US, better socialized healthcare elsewhere, the vanishing middle class, etc.
Private Equity is going to get us all killed in a very real sense.
> When private money can grow cancerously via pump and dump crypto schemes, overhyping IPO's that peaked during the series A round, and strong arming small branches of independently owned practices (all to later enable milk mode and reap monopolistic profits), the general public and society is left with overlords who do not build, they eat.
They could, but my opinion is that this is putting personal responsibility front and center on what is a systemic problem. If our economic systems encourage the consolidation of wealth, we should change the systems, rather than blaming individuals.
Usually what happens is that 60 something year-old founders have retained control and not shared profits with their employees. Looking to sell, the employees can’t buy out the founder, and the founder finds PE with deep pockets. The fork in the road for keeping the company out of PE was passed long before the founder got to retirement age.
It's partly that, but in medicine (dentistry, fertility, etc) a lot of clinics are being rolled into PE conglomerates because the bureaucratic overhead in medicine has skyrocketed in the past 20 years, and clinic chains have better support for doing all the paperwork and legal side of things.
Exactly. No one forces these businesses to sell. It’s the owners easiest retirement plan instead of passing them down to their kids who may not want to or have the skill set to run the family business.
Sure, no one is blaming any individual business for selling. Nor would you blame any particular drop of water for flowing downhill. Still, too much water will make a dam burst and most of the water will flood the land; too much business owners realizing their retirement plan by selling out to PEs, and everyone suffers - including those retirees.
How is that any different? You’re still trying to stop mom and pop shops from selling out to PE’s.
Are you also going to stop startups from getting acquired to? Seeing that only 6 of the hundreds of companies that YC has invested in have ever gone public, acquisitions is the most likely exit
The difference is that PE is just one of many kinds of buyers, but the one that has a particular tendency of doing trades with nasty externalities. It's this pattern of buying that is a problem, and I don't see fighting it any different than fighting factories dumping toxic waste into rivers. Factories, in general, are not a problem. Actions that have destructive impact on people at scale are a problem.
Startups are a bad example because I absolutely would stop startups from being acquired as a general phenomenon. The pattern of startups seeking an exit is one of the worst economic innovations that happened to the world. They at best just waste time of their users/ customers before inevitable rugpull, and at worst, they actively disrupt whole market segments - not creatively disrupt, just in the "blow the whole thing up with VC money, disappear when it's clear the business was never sustainable" kind of way.
And again, it's not the acquisitions as a concept that are the problem - it's the pattern of startups being created with acquisition as the goal that is a problem.
All startups have acquisition as a goal. If not, they aren’t paying attention to statistics.
This very site you are on is funded via VCs where only 6 of the hundreds of companies that have been funded have gone public.
Who is going to buy these mom and pop shops? Are you going to say that startups can’t be acquired and either have to go public or go out of business when the large companies just put a few people on a clone of their project and crush them?
> All startups have acquisition as a goal. If not, they aren’t paying attention to statistics.
That's a problem, though. I'm under no illusion that startups are founded for purely altruistic reasons, but there used to be more focus on creating an actual business, one that makes money by delivering value to customers. Nowadays, the focus is on exit - and the main strategy is to hype up a shitty MVP to force rapid growth, and then either trick some incumbent corporation into acquiring the startup, or go public and run away with the profit before people figure out the company is just hot air.
I'm looking at this from the POV of a customer and a member of society, and as such, I see contemporary startups as wasting everyone's time and hopes, at scale. A perpetual flashy mediocrity that slows progress by starving would-be legitimate businesses for oxygen, and occasionally destroys a random market segment in the process.
Once again, the pattern is a problem. Startups are fine, acquisitions are fine, keeping an eye for an exit is fine. The issue is that the entire startup ecosystem - founders and investors alike, and increasingly even acquirers - found a way to game the system, and is busy printing money without doing anything of lasting value, while still burning resources and dumping externalities on the rest of the economy.
Why would a PE firm be buying (for example) a doctor's office if the doctor-owner was retiring? The doctor is why the business exists in the first place. Without him, it's no longer a doctor's office, it's a charming little suite with front desk people and a few nurses running around.
We had a local machine shop (that I used to go to for welding) sadly go out of business because the owner was retiring. I asked him if he considered selling it instead so it could stay open and he said "Who would buy it? I am this shop and I'm retiring. In 5 days it's just going to be a pile of tools."
I have seen "mergers". A doctor will join up with another doctor and then disappear in a year or two. That let's them legally sell the practice while weening patients over.
I have had a CPA start that process recently too. Suddenly announced he's joined up with this new CPA firm
. Not to worry, he'll still be here to take care of our corporate needs and has transferred everything over
(he's late 60s and snowbirding already)
A PE may buy up a already larger medical practice chain or something, but never individual practices.
The machine shop example is rough, he could do a merger retirement as well, but he needs to have consistent clients that he can bring over to another shop before slowly phasing himself out. Which may not have been scenario unfortunately.
If only those small businesses could just refuse and continue operating on their own... alas.