A few years ago, an investment banking MD shared that one of his senior analysts refused to comply with the firm’s mandatory three-day-a-week return-to-office policy. The reason? He had just gotten a puppy!

The sentiment here is not uncommon; more than 80% of pet owners view their pets as their children. The humanization of pets has become more than a cultural phenomenon—it has become an economic one.

Capital has flowed aggressively to the veterinary services sector, where scaled veterinary services companies commonly trade at EBITDA multiples in the high-teens and low-twenties. But as one industry consolidator learned, compelling sector narratives do not eliminate the need to deeply understand unit level economics, particularly in de novo growth models.

This is a story of how rigorous diligence of the unit economics reshaped a deal thesis, reframed capital allocation decisions, and ultimately changed the outcome of a transaction.

The Situation

A veterinary services industry consolidator was evaluating the acquisition of a rapidly scaling de novo veterinary clinic group. The target had expanded across multiple states and was growing quickly, but its portfolio was still relatively immature.

The de novo business had launched only a few years prior to the global pandemic. Following aggressive expansion, approximately three-quarters of its dozens of locations were less than two years old. That immaturity complicated efforts to assess normalized performance and raised questions about the durability of the underlying unit economic model.

Investment Thesis—A Well Understood Sector Narrative 

The investment thesis behind veterinary services is well documented, and none of the core drivers were new to the consolidator:

• Strong Free Cash Flow Characteristics.
  • Veterinary services are predominantly cash-pay. Even insured pet owners typically pay the clinic directly and seek reimbursement from insurers separately.
  • Location-level EBITDA margins can exceed 20%, net working capital needs are minimal, and capex is limited outside of new clinic builds.

• Strong Growth. The veterinary services sector has experienced multiple growth drivers, with perceived room for continued expansion:
  • Volume: The number of U.S. households with a pet increased approximately 15% to 94 million between 2023 and 2025, with adoption accelerating during the pandemic.
  • Price: Veterinary service prices have consistently outpaced overall inflation, reinforcing perceptions of pet owner price insensitivity.
  • Demographic Mix Shift: Younger demographics spend more annually on pets: Gen-Z – $6.1k, Millennials – $5.2k, Gen-X – $3.9k, and Baby Boomers – $2.5k.
  • Growth Opportunities: Future growth opportunities exist through:
    • Industry consolidation (roughly half of clinics remain independently owned).
    • Management professionalization and economies of scale (e.g., centralized recruiting—veterinarians represent a scarce labor pool, labor utilization, marketing, and procurement).
    • Expansion of service offerings, including broader acuity coverage, wellness subscription plans, dental services, and ancillary “humanization of pet” offerings.
• Predictability & Recession Resistance. The pet space broadly—and veterinary services specifically—has demonstrated recession resistance. More than half of surveyed pet owners indicate they prioritize spending for their pets over themselves.

Diligence Insights—Where the Narrative Met the Data

The consolidator entered diligence confident in the sector and experienced in operating veterinary clinics. But it approached the process focused on fundamentals and open to the possibility that its existing perspective—shaped largely by acquired, mature clinics—might not fully translate to a de novo-heavy model.

Diligence focused on unit-level economics across clinic cohorts, ramp profiles, and capital requirements. Several findings challenged its original core underwriting assumptions.

• Pandemic Fueled Ramps Reverted Back to the Mean: Patient ramps and visit volumes for newer location cohorts have slowed materially in recent periods. The strongest performing cohorts were those opened in the early pandemic, when pet adoption was unusually elevated. The target’s forecast relied heavily on ramp assumptions more mirrored those pandemic-era cohorts, overstating expected ramp speed, understating payback periods, and inflating expected cash flow. While the consolidator had observed similar dynamics in its own acquired clinics, the cash flow impact was magnified when viewed across a portfolio dominated by immature de novo locations.

• Revenue Was Less Recurring Than It Appeared: Wellness subscription plans—now common in the industry—created the perception of recurring revenue; however, utilization data showed that spend is concentrated early in a pet’s life (vaccinations, spay/neuter) and again toward end-of-life. Between these phases, visit frequency is materially lower and more episodic, requiring a larger pet patient installed base to drive consistent revenue growth. This dynamic was familiar to the consolidator, but its mature acquired clinics benefited from years of patient accumulation, masking the impact that this utilization pattern had on newer locations.

• Price Increases Mask Volume Pressures: A price vs. volume analysis identified that a substantial portion of same-store-sales-growth driven by price hikes rather than volume. Volume growth had slowed materially when benchmarked against earlier pandemic-era cohorts. Continued healthy-sized price increases were embedded in the forecast, but the volume headwinds were not, further extending already lengthy payback periods.

• Marketing Economics Offered an Alternative Path: Amid intensifying competition, marketing spend across the sector had increased. In this case, diligence identified sharply improving customer acquisition costs (“CAC”) driven by recent company initiatives. This suggested a more capital efficient path to accelerating profitability at existing immature clinics, potentially superior to continued rapid new clinic openings.

How Diligence Changed the Deal

Incorporating these findings, the consolidator recalibrated its underwriting assumptions to reflect slower ramp curves, longer breakeven timelines, and greater cash burn. That assessment fundamentally altered the perceived capital required to support the business.

The consolidator weighed its perceived opportunity cost of purchasing additional mature practices against deploying capital into a largely immature de novo portfolio with extended payback periods. Its revised forecast emphasized increased investment in marketing to accelerate profitability at existing clinics rather than funding aggressive new openings with lengthening payback periods.

While the consolidator ultimately submitted a final bid, the revised valuation reflected a more disciplined (and less optimistic) view of the capital needs and risk. The transaction did not close.

The Crux

Sector tailwinds and high-level narratives do not change unit economics—only the speed at which mistakes compound.

By digging deeply into unit level economics—and, critically, how those economics evolved across cohorts and market conditions—the consolidator gained insights that went well beyond headline sector narratives. The diligence revealed nuances that were not obvious from the consolidator’s own experience operating mature, acquired clinics.

Although the deal did not close, the outcome was a more disciplined proposed price and capital strategy grounded in data rather than optimism. In growth-driven, de novo business models, rigorous unit economics diligence is not simply a check-the-box exercise—it has the potential to shapes views on replicability, capital requirements, cash flow durability, valuation, deal structure, opportunities and risks, and ultimately investment outcomes.