After all the blood, sweat and tears that have gone into owning your practice, you’re finally ready to sell. You have a prospective buyer who wants to assume ownership and, after many months of negotiating, you’ve settled upon the terms of your agreement. Then comes the fateful day when your attorney asks, “Is your laboratory contract squared away and ready to be assigned to the new owner?”
You examine your contract with your reference lab and discover that you still owe monthly payments for years into the future. You find some wiggle room in the assignment clause, but your practice’s new owner tells you she has contracted with her preferred lab – and it’s not the same as yours.
Upon taking a closer look at your laboratory service contract, you’re appalled to find that any attempt to terminate the agreement early would result in the entire balance being due. To make matters worse, the equipment you were led to believe was provided to you by the company turns out to be provided, sure, but via a loan. As you continue to read your contract, your retirement dream keeps crashing around you.
The scenario described above admittedly presents a gloomy view of an owner coming to terms with his or her laboratory service contract, one that isn’t necessarily typical. Having said that, though, it is common for these agreements to contain terms and conditions within densely worded paragraphs that can leave a practice owner at a disadvantage when it’s time to terminate the contract. That’s why, like with any contract, you should safeguard yourself against any surprises by taking the time to read all clauses and know exactly what is expected of you and of the contract holder.
For veterinary practice owners, there are multiple options and agreements offered by reference labs that will allow you to outsource your diagnostic lab work to their facilities. Here are typical arrangements.
- At a bare minimum, you can work with a reference laboratory on a “pay-as-you-go” type of relationship, picking and choosing which laboratory to send your samples to on an individual basis. The downside to this style is that labs won’t offer financial incentives to a practice owner who doesn’t enter a contract.
- The next level up would be a basic contract with a specified reference lab that gives you a discount on fees or a better rate schedule. Because the practice is charged lower fees, you can theoretically offer clients a better rate on lab work, which will likely convince more of them to agree to have lab work run.
- The most prevalent type of contract involves signing a multi-year deal with the lab of your choice, with the main incentive offered being a large-sum loan or special in-house lab equipment lease provided to the practice.
As long as you know what’s expected of you from these loans, discounts and equipment financing plans, the rewards of adding them to your practice can be very beneficial. In fact, according to a 2016 article found on the dvm360 website1, there are multiple reasons why it makes sense to sign a laboratory contract. The reasons mentioned most frequently by practice management professionals is the development of a strong relationship with the vendor/laboratory, better customer service and quick response to problems, and easier equipment replacement and upgrades. This data was taken from a survey conducted by the VHMA2 that categorized respondents by how many years were on their current reference laboratory contract. The survey showed that, out of the 64% of professionals whose practice had an exclusive contract with a reference lab:
- 3% were on a one-year contract
- 12% had a 2- to 3-year contract
- 40% had a 4- to 5-year contract
- 11% had 5+ years on their contract
- 34% had no minimum length required
Because the data shows how most of these agreements (51 percent) had four or more years remaining in their terms, it becomes obvious why practice owners need to take these types of contracts into consideration several years before retiring.
With any list of pros, there usually comes a list of cons and, when it comes to entering into a laboratory service contract, cons mentioned in the 2016 survey included:
- inability to take advantage of competitive pricing
- subpar customer service experiences
- confusing language of the contract.
As with many legal documents, these contracts typically contain an elevated level of vocabulary, which helps to explains why many owners look for the main points included and then sign their names. Tempting as this is, it can be dangerous to rush the process and not be aware of exactly what you’re signing.
So, what’s the bottom line? Are these contacts good to sign – or bad? The answer depends upon how long you plan to own or manage your practice. First-time practice owners may very well negotiate an acceptable rate schedule in a clear arrangement that will allow them to build a foundation for their practice. The diagnostic equipment that is provided as part of the contract can be a great asset to the practice once the loan is paid off.
Practice owners looking to sell sooner rather than later, though, will have some tough decisions to make. How will the procedure work when it’s time to assign the contract to a new owner of the practice? Are the economic terms listed acceptable? Can you decline to auto-renew your participation in the program if it’s within the appropriate time frame? Auto-renewal clauses on this kind of contract have been known to range from 60 days all the way up to one year prior to the end of the current term.
Incentives provided by the reference lab can be very beneficial to your practice, but you need to realize that all incentives will very likely cost you in some manner. Laboratory representatives might offer incentives as a show of good faith or appreciation for your business, but these incentives are likely to be a hook to persuade you to agree to other, less enticing terms of the contract. Any large sum of money provided or discount offered may be presented as a signing bonus, for example, but may more closely resemble a loan.
And, unless explicitly stated otherwise, discounts and other price alterations can disappear at any time. Even more troublesome, many of these loans or financing schedules are not commonly assignable even when you have requested written consent from the company. In other words, the lab contract you assign to your successor will not necessarily take the loan payments off your hands and, in some cases, assigning the contract may accelerate payments to make the full balance immediately due.
Pay close attention to monthly purchase requirements of laboratory goods and services, which may take various forms across the scope of these arrangements. The standard example would be a clause within the contract that requires your practice to order a specified threshold of payments to the laboratory for diagnostics ordered monthly. The amount required might fluctuate depending upon the size and productivity of your practice, but it is very important to make sure that your gross production will, in fact, allow for that much payment to the company. Some companies will allow for as much as 10% of your diagnostics to be submitted to other laboratories without a breach of contract, as well as any diagnostic tests that their laboratory cannot run. You’ll want to be clear on exactly what does and doesn’t fall under these exceptions because a breach of contract typically comes with severe consequences.
Ethical considerations also exist. If your practice has a monthly quota of diagnostics and associated charges that you must meet, you must carefully consider which tests are necessary for your clients’ companion animals and avoid ordering tests simply to reach your laboratory quota. Some members of the public already have the perception that veterinarians order unnecessary tests that do not provide meaningful results; practices that are perceived to recommend superfluous tests will begin to drive away their consumer base at best and sever the veterinarian-client-patient relationship at worst. So, before signing a laboratory service contract, make sure you can afford the level of production that your lab contract requires.
So, what happens if you can’t maintain your production and you fall behind on payments, or you order too many diagnostics from another reference lab and a breach of contract occurs? The consequences can be severe, such a penalty that states that, upon the event of default, all future monetary amounts and payments are due to be paid immediately to the company. Some companies will give you a brief period in which to cure your breach or default, but such time would usually only be beneficial if the amount of money owed was small. Another penalty for breach of contract is a tiered structure of money owed upon default that decreases depending on the amount of years the contract has been held. This may be more favorable for owners and managers who know they can fulfill the terms of the contract for the initial couple of years.
Returning to the initial scenario, here’s another variation. Let’s say you’re ready to sell your practice to an excited new owner but, in this case, the new owner is eager to fill your role in the reference lab contract. This is a much better scenario because most lab companies, when given the proper amount of notice as specified in the contract, are likely to assign the contract to the new owner. In this case, it will be very important to know what your obligations are after the assignment of the contract. As with purchase agreements, the original owner may still be kept on the contract as a guarantor, meaning that his or her assets are still vulnerable if the new owner defaults on the contract or commits a breach.
Contracts are not made up of purely economic terms. Within these agreements there are typically confidentiality clauses that prohibit you from discussing any aspect of the terms of your agreement unless necessary by law. This restricts the negotiating ability of practice owners or managers by disallowing them to consult with colleagues and assess the likelihood of more beneficial terms.
Part of your due diligence prior to signing a contract should be to consider your general impression of a laboratory’s diagnostics and services. Do you agree with their reference values and the sensitivity and specificity of the tests they perform? Have you had positive or negative experiences with their customer service? While you may not obtain much information from colleagues about the terms of their contracts, there doesn’t appear to be any penalty associated with discussing their satisfaction with service they’ve received.
Reference laboratories have pursued injunctive relief against owners and managers that breach their contract, whether such breach was intentional or not. VIN published an article in March of 2012 detailing multiple lawsuits filed by Antech Diagnostics, the laboratory services division of VCA, between 2011 and 2012. These suits were taken against practice owners who had attempted to end their agreement with the company prior to the full term, citing reasons such as the laboratory’s service being “unacceptably poor” or receiving a more attractive offer from competing companies, such as Idexx.
Many of these owners believed they could terminate their contracts by paying the money due for their loans or incentives ahead of the scheduled time, in part because of the lack of language within the agreement about that topic and in part because of information provided verbally by company representatives. However, in events where these attempts were made, Antech responded with lawsuits for the sum of any money currently owed as well as income they were due to receive for diagnostics ordered by the practice through the length of the contract. According to the article, the revenues that Antech was attempting to claim ranged from $234,000 to $798,000! Many times, Antech was successful in pursuit of these funds and, since that time, the wording in relevant clauses of these contracts has become more specific.
The VIN article emphasizes the importance of considering the ethical aspects of having a diagnostic revenue quota set by laboratory contracts and cautions practice owners to carefully read all laboratory contracts to ensure a clear understanding of stipulations before signing. Though these reference laboratories want your business and will offer a friendly gesture in the form of discounts and significant sums of money (as a loan, mind you), there will be no love lost if they feel you aren’t contributing your share or have breached their terms. As long as you know what’s expected of you, though, and can meet those expectations, the sunnier side of offered incentives will shine through, and reference lab relationships can be highly beneficial to you and contribute to the growth of your business.
- staff, dvm360.com. “Exclusive Veterinary Lab Contracts: Deal or No Deal?” dvm360.com, 12 Sept. 2016, veterinarybusiness.dvm360.com/exclusive-veterinary-lab-contracts-deal-or-no-deal.
- Shupe, Christine. “Lab Notes.” Veterinary Hospital Managers Association, 28 June 2016, vhma.site-ym.com/blogpost/1273540/250849/Lab-Notes.
- Lau, Edie. “Veterinary Diagnostics Giant Sues Multiple Practitioners.” VIN, Veterinary Information Network, 9 Mar. 2012, news.vin.com/vinnews.aspx?articleId=21802.
Letters of intent (LOIs) are used in veterinary medicine during employment and practice sale negotiations to put preliminary terms into writing. They can be useful for planning but unclear expectations and ambiguity in LOI language – particularly about the binding/non-binding nature of clauses – can cause proposed deals to fall through, and litigation can ensue.
A letter of intent (LOI) is a document describing preliminary terms in a complicated business negotiation. It is usually written in a letter format by one party with a place for the other party to sign, indicating agreement. Sounds simple, right? Unfortunately, when the LOI is not clearly written, misunderstandings and complications can arise from the ambiguity if parties interpret the language differently. One party may intend the letter to be completely non-binding, while the other may want parts or all of it to be legally binding. If the deal falls through when parties had different expectations, litigation may ensue.
Dr. Jeanie Lock worked for Dr. Bill Manor at Allgood Animal Clinic from the time she was 15 until she was accepted to veterinary school. Dr. Manor was a great mentor and teacher and, before Dr. Lock went to vet school, they talked about her someday becoming a partner in his practice and eventually taking over when he wanted to retire. So, when she graduated from veterinary school, she returned to work at Allgood. She figured it would take two to three years for her to develop her surgical and diagnostic skills, and assumed that when Dr. Moore turned 60 (in three years), he would bring up the partnership deal. Because she hated to negotiate, she decided to wait and trust Dr. Manor to bring up the subject when he was ready.
Three years passed. Then five. By this point, Dr. Lock was no closer to becoming a partner than when she signed on. Plus, around that time, another associate at the practice quit to spend more time at home with her new baby. In response, Dr. Manor hired a new, younger associate as a replacement, one who wanted to own his own practice someday. Suddenly, Dr. Lock felt threatened. If she didn’t make a claim on the practice soon, this new practitioner could become the partner! So, she wrote Dr. Manor a letter asking if he still wanted her to be his partner; if so, she wanted that in writing.
Dr. Manor therefore wrote a letter of intent, not using an attorney to create or review the language used. Both signed the letter, which stated that, within a month, he would hire a purchase appraiser to determine the value of the practice. Dr. Manor agreed to not consider any other buyers, while Dr. Lock agreed to not consider buying into another practice – and to keep any information learned about the practice confidential.
Dr. Manor hired a business appraiser almost immediately. The appraiser, though, worked at a glacial pace and was perpetually six months away from finishing the valuation. This dragged out for a year and a half before Dr. Manor fired him, hiring a more specialized veterinary appraiser. Though the new appraiser was more efficient, the process was still arduous. Two years after the doctors signed the letter of intent, there was still no purchase price, which held up the rest of the process.
Both doctors were frustrated with how slowly things had progressed. Dr. Lock wondered if Dr. Manor would ever sell her the practice; frankly, she was no longer even sure she wanted it. After seven years of working at a fast-paced, high-revenue veterinary practice with 15-minute appointment slots, she was burning out. Ultimately, Dr. Lock informed Dr. Manor she was not interested in the partnership anymore. A week later, she gave notice that she was leaving completely.
Dr. Manor felt betrayed and sued Dr. Lock for the cost of the practice appraisal. The basis of his suit? He had spent time and money hiring advisors because he had relied on Dr. Lock to purchase an interest in his practice. He felt she made a commitment for which she should be held accountable, and he used the letter of intent as evidence. Dr. Lock insisted that the letter didn’t require her to pay for the appraisal; that she was free to pull out of the negotiations at any time; and that the letter was only meant to help them move the process along. It was not, Dr. Lock stated, a formal binding document.
Ultimately, the situation did not turn out like either veterinarian had hoped. Originally, the letter of intent had helped them to establish their desires to pursue partnership and outline a basic plan. However, when the deal fell through, there were questions about whether or not the agreement was binding; if so, what were the obligations? What would happen if either of the doctors broke those obligations? Who was entitled to damages?
Letter of Intent Basics
When clearly constructed, the letter of intent can be a useful business tool. It can provide psychological comfort that a deal is moving forward, it can provide documentation to lenders and/or consultants, and it can get the parties thinking about the specific details of the proposed business deal. In veterinary medicine, these documents are most often used when negotiating a buy-in or when contemplating the sale or merger of a practice.
The letter of intent often includes some, but never all, of the specific terms of the potential business arrangement. Which terms are included vary with the purpose of the letter. Below are some terms that might be included in a letter of intent:
- Pre-employment letter of intent
- Approximate start date
- Contract term
- Working hours
- Buy-in information
- Terms of practice sale
- Percent of ownership that is being considered
- The purchase price, if known
- If the purchase price is unknown:
- The date that consultants or appraisers would be hired, and/or lenders approached
- The date the books would be closed for appraisers to examine
- The method by which a purchase price would be determined (fair market value, excess earnings, feasibility analysis)
- How the purchase price would be paid
- Whether it is an asset or stock sale
- If it is a stock sale, what type
- Whether or not the real estate would be sold along with the practice
- Whether a non-compete would be required of the parties
- Approximate closing date
Binding versus Non-Binding
Typically, the parties do not intend most of the terms listed above to be binding because they are still negotiating the terms of the deal. However, they may choose to include several types of binding clauses, such as:
- Exclusivity or “no shop” clauses that keep the buyer from seeking out other sellers or the seller from seeking out other buyers
- Confidentiality clauses that keep employees from sharing the terms of their negotiations with other candidates and/or that keep a potential buyer from using the information they learn through negotiations to help a competing practice
- Good faith negotiation clauses where parties establish a “contract to bargain”; this does not guarantee a contract will be reached but it does keep both parties from renouncing the deal, abandoning negotiations or insisting on conditions that do not conform to the preliminary agreement. “Good faith” is largely an abstract, undefined concept but can be loosely defined as “honesty of intention to abstain from taking any unconscientious advantage of another, even through technicalities of law”
- Expense sharing will be included if the parties intend to split the cost of hiring appraisers and/or other professionals to help facilitate negotiations
- Contract prerequisite clauses, wherein parties may require one another to perform certain acts before the final contract can be drafted; these may include performing appraisals, releasing financial information or signing a release for background checks
Sometimes, a letter of intent will inadvertently create obligations on the parties. Whether explicitly stated or implied, the letter may do the following:
- The letter itself may imply a duty to negotiate in good faith even without a “good faith” clause. If so, then the parties have to show that they made genuine efforts to negotiate over a reasonable period of time.
- If the letter contains too many important terms of the final contract, then the courts may hold that any remaining details were a mere formality and that an enforceable contract existed. The courts may then penalize parties for not completing the contract terms.
- One party may sue for damages if heavily relying upon the other party’s firm promise to make a deal and no deal is made. Examples might include someone relocating because of a letter of intent regarding employment or taking out a loan for purchasing a practice.
A disgruntled party might use any or all of the above to file suit. When cases come to trial because of vague letters of intent, the courts’ decisions tend to vary widely with the facts presented. Thus, it is difficult to anticipate how the court will find in a particular instance.
It takes careful drafting to get the benefits of the letter of intent while also avoiding undesirable or unintended legal baggage. To maximize the usefulness of a letter of intent and limit the downside of their misuse, veterinarians contemplating a business arrangement should consider the following four steps:
Consult with an attorney: Because letters of intent must be balanced somewhere between no agreement at all and a full-fledged contract, precise drafting is required. Plenty of heartache, time, and money can be saved by having an attorney draft the letter in the first place.
Don’t make the letter sound like a contract: The more the letter of intent looks like, sounds like, and has enough terms to make a contract, the more likely a court will hold it to be one.
1. Clauses clearly indicating whether each term is meant to be binding or not binding so misunderstandings between the parties are less likely
2. Clause stating that any term that is not explicitly stated as binding is non-binding
4. A list of any and all steps that must be accomplished before the parties can consider a final, definitive agreement. Expressly state any terms that are still unresolved. This allows you to show, if the process is interrupted, that negotiations were not complete.
3. Hypothetical language using words like “understanding,” “would” and “should”; this can help to give the impression that the current agreement is not definite and may change given additional information or events.
4. Date by which this business exploration must be completed
Do not include:
1. Too many material terms of the potential contract, because the courts may find the LOI is essentially an enforceable contract; this defeats the entire purpose of an LOI
2. A deposit or fee to be paid before entering into negotiations because non-refundable fees tend to make writing binding
3. Definitive language including words like “agree,” “will,” or “shall,” which may imply that the referenced terms are definite and decided upon
Match your actions to your words: Acting like the letter of intent makes the potential contract a “done deal” may indicate to a court that a contract already existed. If parts of the agreement that a party was not bound to complete before the final contract actually are fulfilled, the court may interpret that as “done deal” behavior. Examples include:
- purchasing employee benefits, when considering a hire
- moving to the new place of employment, when considering a new job
- turning over keys or stock certificates, when considering selling your practice
- taking out a loan for purchase, when considering buying a practice
As you progress, record your efforts to comply with the binding terms of the letter and any reasons that you decide to discontinue negotiations. This helps to show that you were negotiating in good faith.
If things fall through, stay professional:
- This will likely be a very emotionally charged time, but resist the urge to take this business situation personally. Avoid confrontations, and have a neutral witness present if you need to discuss the matter with the other party. If the other party starts acting inappropriately, disengage and do not respond in kind.
- If you decide to re-engage in another round of negotiations with the same party, create a period of time between negotiations to allow both parties to think about and process the information exchanged. This break may allow parties to recover from difficult, sometimes hurtful discussions.
Letters of intent are important tools because they help veterinarians who are interested in business relationships lay down the foundations for subsequent negotiations. However, veterinarians should be aware of potential negative consequences. For best results, consult with an attorney, and use caution and common sense so that a letter of intent can serve as a vehicle for progress, and so that you can avoid legal potholes.
Ahhhhhh, you did it! Relaxing on the beach enjoying your first vacation since you opened your veterinary practice a decade ago. You start thinking about how far you have come building your business from the ground up and finally reaching the point where you can take some time off to relax and recharge. The water looks so blue and inviting. You wade into the shallow waters taking in the sights: the sun, the clouds, the birds, the waves, the shark fin…shark fin!? You quickly scramble out of the water, thinking, “I should have taken shark week more seriously!” Naturally you identify the shark, from the safety of the shoreline, as a bull shark, one of the most aggressive sharks in the ocean! What if that shark had attacked you and left you unable to run the practice? You go back to your beach chair and piña colada (with an umbrella, of course) and get to thinking. What would happen to your business if tragedy stuck? How would your family, employees, and business you worked so hard to build handle your loss? These types of questions are not fun to think about but need to be a serious consideration for any small business owner. Emergency succession planning is crucial for preventing terrible consequences in the event of the loss of a sole practice owner. Every business should have a plan in place to protect the business and the people behind the business.
What is Emergency Succession Planning? Why is it Important?
Emergency succession planning involves creating a strategy that outlines how to keep a business functioning normally if the sole owner dies or becomes incapacitated. Emergency succession planning differs from typical succession planning in that the latter entails the transfer of ownership of a business over time in a preplanned fashion. Emergency succession planning focuses on the immediate loss of an owner without the luxury of a transition period and helps to prevent uncertainty for your business, your team, and your family.
If a sole owner dies or becomes incapacitated without a clear plan, the practice can fall into chaos. In some cases, the comradery of the individuals working in the practice keeps the business afloat, but the unnecessary scrambling, stress, and confusion coupled with loss of leadership still triggers instability in all aspects of the business (Scheidegger, 2016). Team members may be put into situations where they are forced to take on roles that they are not qualified for, have no training in, or simply do not wish to perform.
The last, and arguably most important, consideration for a practice owner is his or her family. Depending upon the structure of the practice, the family may become responsible for any outstanding debts related to the business. Another financial consideration is the family’s dependence on the income from the owner of the practice. An emergency succession plan ensures the future of the business you worked so hard to build, supports your employees who have been instrumental in getting your practice to where it is, and gives your family some peace of mind during the grieving process.
Why Owners Avoid Emergency Succession Planning
No one enjoys thinking about his or her untimely death or incapacitation. In fact: “Fewer than 30% of small business owners have a succession plan” (Pasha, 2014). Veterinary practice owners are no exception in avoiding this issue. After spending years building and growing the practice, an owner does not want to accept that someday the practice will no longer be under his or her ownership (Robaton, 2016).
Plus, there is the issue of time. Most owners of small businesses are extremely busy individuals managing a practice, handling caseloads, and finding time to spend with family. Given all your responsibilities it becomes hard to find the time to sit down and think about what you want to happen to your business if something were to happen to you (Robaton, 2016). It is much easier to think, “Well, that will never happen to me!” and move on with the day to day tasks of running a successful veterinary practice.
Lastly, emergency succession planning may not have been on your radar until you saw this article. Busy business owners are usually thinking of the now of the practice and of creating a more successful future, not about their possible demise.
Although it’s understandable that it is difficult to focus on this subject, it’s important to become educated on this topic and take the time to create an emergency succession plan for your practice. Your business and the ones who support you – and those you support – will greatly appreciate it!
There are a few key ways to ensure protection and support for your family in the event of your untimely death or incapacitation. A life insurance policy is one critical way to guarantee financial support (Pasha, 2014) while disability insurance is another means to shield your family from financial struggles if you become incapacitated.
In your absence, do you want a trusted associate to take over ownership of the practice? Do you want the practice sold and, if so, to whom? In many cases transferring the business into a living trust is the preferred option. This option also leaves specific instructions for the trustee(s) to follow the owner’s wishes for the practice (Estate Planning for Small Business Owners, n.d.). Developing an emergency succession plan based on your vision will help to secure the future of your business. Below is a list of some general structures for emergency succession planning (Small Business and Planning for Death and Incapacity, n.d.):
- Have an established successor
- Transfer the business to a trust (as discussed briefly above)
- Grant power of attorney to an individual
- Create an advisory committee to make decisions
- Create employee stock ownership
There are multiple documents that define and characterize a veterinary practice that should be gathered or created for an emergency succession plan. This documentation includes organizational charts, strategic plans, standard operating procedures, and employee job descriptions. An organizational chart gives a clear picture of all the different positions at your practice and the reporting structure. This will demonstrate how changing one person’s role will trickle through the practice. For example, if your reporting structure from the top down is Owner –> Practice Manager –> Hospital Administrator –> Head Technician and Head Receptionist, and the practice manager will step into your role if you were to die or become incapacitated, then you must consider who will take over the open practice manager position. Visualizing your practice structure will assist in creating an emergency succession plan.
The new leadership will use the strategic plan for the business to know where the practice is heading and will help them to continue moving towards its goals. Standard operating procedures will specifically describe how all clinic duties should be executed. Lastly, employee job descriptions for all staff make roles more clear in the event that positions are shuffled during the implementation of the emergency succession plan. All of these documents will decrease confusion if the emergency succession plan were ever needed.
Part of your emergency succession plan is a detailed job description and task list of all of your duties as sole owner (Price, n.d.). First, this will help you fully understand all of the roles you play in the business so you are better prepared to generate an emergency succession plan. Second, this provides a useful guide for the individual(s) taking over the business. The description should clearly define each task, how to complete the task, and what information is needed to ensure completion the task (Price, n.d.). For example, if paying the electric bill is the sole owner’s responsibility, the description should include how the bill is paid including specific details such as the payment route, how and when the bill is received, and other pertinent information.
The gap analysis for an emergency succession plan is done by comparing the job description and task list you made for yourself, the owner, versus what we call the “no owner drill.” Imagine what tasks would not be done if you did not show up to the practice for a day, a week, a month, and a year. Any tasks that are not in the owner job description of tasks – the gaps – need to be added to the owner job description and/or task list. By performing this gap analysis, you will lessen the odds of forgetting an important aspect of the owner’s role in the practice.
Another crucial document to construct is a list all companies, vendors, and other individuals who work with the practice. The contact list should clearly define the organization/person’s name, the service(s) they provide, and their contact information (Price, n.d.). Having an easily accessible and user friendly list is critical during the rapid transition of the practice; it is always better to give more information than less.
The permanent absence of the sole owner will be emotionally difficult for the staff and the clients. It is prudent to have a communication plan to let the staff, clients, and other important individuals know that the practice will be continuing to run despite the loss or incapacitation of the owner (Price, n.d.). A communication plan should be drafted to relay timely, factual information to staff and clients, including changes that will be taking place to keep the clinic operational.
Your Succession Planning Team
It is now time to assemble your team of professionals who will bring your plan to life. Accountants and trust and estate lawyers will all be necessary to generate this plan (Robaton 2016). These professionals will use their knowledge and expertise in taxation and legal matters to form the most efficient and financially sound emergency succession plan for your business. Sharing your goals with these professionals will allow them to tailor a plan that meets all of your expectations.
It may be worthwhile to have important members of your team, especially the individuals you are hoping to have run your practice, part of these discussions. Start thinking about which employees you would trust to take on different roles if something were to happen to you. Do you have a practice manager who could work independently of you to keep the business open and running? Which members of your practice do you envision taking on leadership roles in your absence? It is not only important to determine which individuals you would like to take on these roles but to also discuss it with them in advance. Maybe an employee who you thought would do great in a specific role would not be comfortable performing that task (Price, n.d.). Preventing surprises is the main reason to have an emergency succession plan, so do not make it a secret. You don’t want to have someone step into a role in an emergency unaware of even being in the plan!
Once the emergency succession plan is prepared and shared, it is time to train the employees (Price, n.d.). Are you the only member of the practice who knows the security system code? Are you the only one who knows how to submit payroll? If so, then it is time to start training employees on these protocols – and any other relevant ones. These team members can then get clarification on their potential duties and ask for more training on tasks they do not feel fully prepared to perform.
Finally, practice makes perfect! This can be done by taking a short- to medium-length leave from the business to see how smoothly the emergency succession plan is implemented. This is not only a great excuse for a vacation, but an excellent way to perform a gap analysis of the plan. Your team will also appreciate having a less stressful environment to practice the plan.
It’s an Ongoing Affair
An emergency succession plan is a fluid document that should be reviewed annually (Price, n.d.). Businesses, personnel, and job descriptions change over time. The ever-changing business needs have to be reflected in the emergency succession plan because it is not useful to have an outdated plan!
Overall, emergency succession planning may not be fun but is necessary to protect any business in the event of the incapacitation or death of its owner. Taking the time to make these decisions can alleviate a large amount of stress and uncertainty if the unthinkable were to happen. Below you will find a simplified checklist of the steps to preparing an emergency succession plan.
Emergency Succession Planning Checklist
Define Personal Goals
Define Business Goals
Create/Gather Organizational Chart
Create/Gather Strategic Plan
Create/Gather Standard Operating Procedures
Create/Gather Employee Job Descriptions
Create/Gather Owner Job Description and Owner Task List
Perform Gap Analysis: Owner Job Description/Owner Task List against “No Owner Drill”
Create Contact List
Create Communication Plan
Assemble the Team
Write the Plan
Schedule Regular Reviews and Updates of the Plan
Estate Planning for Small Business Owners: What Documents Do You Need? (n.d.). Retrieved September 30, 2016, from http://jagracelaw.com/estate-planning-for-small-business-owners/
Pasha, N. (2014, February 25). What Happens When a Business Owner Dies? Three Steps to Cheat Death. Retrieved September 30, 2016, from http://www.pashalaw.com/business-owner-dies/
Price, M. L., et al. (n.d.). Emergency Succession Planning Toolkit. Retrieved September 30, 2016, from http://www.leadingtransitions.com/pdfs/ETIToolkit_4.pdf
Robaton, A. (2016, March 15). Avoiding this can sink a biz…but doesn’t have to. Retrieved September 30th, 2016, from http://www.cnbc.com/2015/03/02/most-small-business-owners-arent-planning-ahead.html
Scheidegger, J. (2016, January 12). When Tragedy Strikes, Does the Practice Die? Retrieved September 30, 2016, from http://veterinarybusiness.dvm360.com/when-tragedy-strikes-does-practice-die
Small Business and Planning for Death and Incapacity. (n.d.). Retrieved September 30, 2016, from http://business-law.lawyers.com/small-business-law/small-business-and-planning-for-death-and-incapacity.html
Veterinary medicine is among the most unique careers in the world, with an incredible breadth and depth of knowledge shared among veterinarians. Over the course of a veterinarian’s career, he or she may learn about everything from alpaca anatomy to zoonoses like Zika. He or she will likely become a skillful problem solver, while also honing skills in marketing, organizational psychology, and business management. The latter can be one of the greatest challenges for veterinarians, particularly with private practice ownership. Very little formal training is available in a veterinarian’s initial education. Knowledge on how to run a business must be sought out by the individual. It is no wonder, then, that by the time he or she becomes familiar with the daily ins and outs of practice ownership, the veterinarian is often ready to transfer ownership to a successor in favor of retirement. That usually doesn’t provide stress relief, though, because transitioning ownership of one’s practice can be a source of immense stress, especially when there is no previously identified structure for a succession plan in the veterinary clinic. This paper aims to fill that knowledge gap, and lay out a pathway for practice owners to bring in partners who will, when time comes for retirement, be fully prepared to take over (Gage, 2004).
The path to partnership in veterinary medicine can be designed to resemble strategies already successfully employed by law firms. This paper will use a structure laid out by Nick Jarrett-Kerr as the basis for selecting and fostering a partnership in a veterinary setting; this structure is a five-step process used to promote partners within a firm (Jarrett-Kerr, 2011).
Step One: Define the ideal candidate
Before a veterinarian can begin fostering a mentor/mentee relationship with his or her future successor, this individual must first be identified. It is tempting to employ favoritism or use the concept of seniority when selecting someone to become one’s partner; however, the following characteristics are critical in selecting a partner who will continue to successfully manage one’s practice after retirement.
The ideal candidate must be a skillful veterinarian, with excellent communication skills and emotional intelligence. Additionally, a candidate for partner must be entrepreneurial, with relationship and practice management experience, a dependable leader who gets along with others in the practice. Finally, this person must employ tactful conflict management skills (Freedman, 2016).
Step Two: Assess critically important areas of performance (CAP)
There are many models available to borrow from other fields to assess the performance of a candidate, once the person who resembles the ideal image described in step one has been identified. An example of this is the Performance T. This model highlights important areas of performance in a sequential order (the “crossbar”), which depend upon the partner’s ability to contribute to the clinic from a technical aspect. In this case, the T model (see figure 1) would demonstrate the need for a potential partner to employ excellent client relationship management, have respect for the clinic and its role in the community, demonstrate financial and business acumen, effectively manage the clinic staff, and have a vision to continue developing the clinic’s business model. Each area rests upon the veterinarian’s ability to communicate effectively and provide superior medicine to patients.
Figure 1. The Performance T model adapted for veterinary medicine.
To effectively assess the candidate’s success in these areas, a list of competencies is beneficial. While the particular competencies will likely vary on a practice by practice basis, there are a number of examples available on the Partnership Profile Assessment (Table 1). The goal of these competencies is to define which skills the candidate must have in order to be successful in each of the CAPs.
Step Three: Define the criteria for measuring competence
To determine if a veterinarian’s potential successor meets the required competencies defined in step two, there must be clear criteria laid out for measuring competence. Criteria can be quantitative, such as hours worked, gross revenue generation, clients seen per day, or average client transactions. They may also be qualitative, such as contribution to the practice based on client or coworker feedback. There are also prospective measures, which consider the potential future impact of the candidate’s current investment such as CE attendance or marketing efforts, and finally surrogate measures such as the mentorship time invested in the candidate, which are expected to create a more qualified candidate, but such relationships cannot actually be proven. The particular criteria that are important to a veterinarian’s practice will vary on a case by case basis; however, it is critical that this system of metrics be constructed before the initiation of the partnership process to facilitate constructive discussions. This systematic approach also ensures that assessments are fair among individuals, in the event that multiple predecessors are being evaluated.
Step Four: Outline a thorough assessment process
Creating a method for putting the metrics together and assessing a candidate’s growth and potential is the last key feature in designing the pathway. A partner profile spreadsheet is a valuable tool to evaluate the various criteria in a relatively objective way. The veterinarian can complete the spreadsheet for each meeting (whether they be biannually, quarterly, or more frequent still) or put the onus on the candidate to “prove” competency by providing as many examples of criteria met as possible.
Step Five: Implement the program
The final step is the most vital, but also the most daunting, in the pathway to partnership. This step is where the veterinarian puts planning into practice. The first component of implementation is to identify candidate(s) who have the characteristics desired. It is advisable to begin this process five to ten years prior to the desired retirement age, as the perfect candidate may take some time to discover. At the time of hiring new associates, the veterinarian can inform them of the possibility for practice ownership, and lay out the characteristics being sought. If the associate is interested in entering the pathway, he or she must then meet a minimum qualification requirement that may include hours worked per week, a minimum gross revenue production, and/or a down payment savings plan. If the associate qualifies for the pathway after the first year of employment and expresses an interest, the veterinarian can formally invite this person to begin the progression as a partner candidate. The veterinarian will hold frequent and regular meetings with the candidate over the next three to five years to review performance and progress along the pathway. At these meetings, future plans can be discussed to ensure the candidate’s values are in line with those of the practice, and goals can be established to provide targets the candidate must meet along the way. The score-card and T model that the veterinarian has developed can be used at these meetings to evaluate which benchmarks the candidate is meeting, and where further efforts need to be focused in order to progress. Continual mentorship and counseling from the veterinarian will aid in the growth of the candidate into a suitable partner.
Once the candidate has been consistently meeting and exceeding the criteria laid out, the veterinarian should encourage the candidate to submit a written application for the position of partner. Depending on the needs of the practice, the veterinarian may also request a career plan from the candidate and an explanation of how that plan is beneficial for the practice. The veterinarian will interview the potential predecessor at length. Should the candidate pass through each of these checkpoints, the veterinarian will inform the candidate that the application for partner has been accepted. At this time, compensation must be negotiated.
Compensation of the associate initially will be the same as any other new veterinarian at a practice, and this again differs by case. As the associate prepares to become a partner in the business, though, additional training and responsibilities warrant additional compensation. This pay increase provides an incentive for the learning and dedication of the candidate. It will be tied to the overall performance of the clinic, motivating the candidate to keep the health of the clinic in mind at all times. The compensation model typically used in a veterinary practice is modeled after the eat-what-you-kill method typically seen in American law firms. This means that the majority of a veterinarian’s compensation (associate or partner) will be based on productivity. As more management-oriented goals are assigned to the candidate, however, bonuses may be awarded for meeting or exceeding these goals. Once the candidate becomes a partner, he or she will be entitled to a portion of the profit from the practice, as well.
When that time comes for the candidate to buy into the practice, the veterinarian may consider offering shares at a discount. At this time, it is critical to discuss the veterinarian’s retirement plans. This includes the time at which the new partner will fully buy out the veterinarian, as well as the role the retired veterinarian will take in the practice from that time forward.
Fostering your mentee/partner
In order to foster a relationship with a future partner, a veterinarian must invest significant time into mentoring him or her along the pathway to partnership. It is essential that the veterinarian is clear about intentions with each associate employed and avoids raising false hopes of ownership in associates that he or she does not intend to invest time in. Likewise, criteria for partnership selection must be clear and rigorous, to avoid the perception (or reality) of favoritism.
It is not unusual for the mentee to become well liked by clients of the practice. The goal of fostering a successful future owner mandates such an occurrence. Human nature sometime causes the mentor to become jealous, unfortunately, of client preference for the “newer model.” Such jealousy must be mitigated by honest communication. The mentee and mentor ought to have a level of candor between them that allows free flowing conversations, in order to maintain a healthy relationship that will continue to nurture the mentee (Krames, 2005).
The mentee and his mentor must commit to one other. They must both invest in the program, to the practice, and to a common vision for future growth.
There are really two transition periods in the succession process. The first is transitioning an associate to part owner of the practice. This process is facilitated through the five-step pathway program. The second involves transitioning ownership completely, so that the original owner may retire. It is critical that the veterinarian presents the transfer of ownership to the staff in a way that is positive, and keeps everyone in the loop to help ensure there are no sour feelings among staff. There needs to be dialogue concerning the role of the retired veterinarian, as that individual contributes to the practice culture in a significant way. The new owner may choose to make changes to the culture, staff, or quality of medicine that the former owner disagrees with. The conversation about boundaries must be had ahead of time, so that the new owner’s authority does not become undermined.
Pitfalls (and how to prevent them)
There are a number of pitfalls that veterinarians may succumb to in the process of fostering a successor or transferring ownership of the practice. To ensure a smooth transition, care must be taken to prevent occurrence of potential issues, most of which occur if the veterinarian did not communicate clear expectations or did not adhere to a predetermined timeline. This often results in delayed retirement on the part of the veterinarian, whether that is due to an unwillingness to say goodbye or a poor economy making it financially difficult for retirement to happen. Each of these delays can breed resentment on the part of the mentee, because of career stagnation or the perception or reality of false promises being made.
Sometimes, a frustrated mentee will seek new opportunities to become an owner, and this leaves the veterinarian without a suitable successor. Conversely, the mentee may get cold feet on the deal, or begin to feel incapable of taking on the amount of responsibility expected (Freedman, 2014). The key to preventing these issues from becoming disasters is to ensure that both parties are aware of the timeline of succession, and that both parties commit that timeline. Ongoing open communication is vital. Finally, flexibility on both sides is needed, as plans sometimes need modified. As long as everyone is committed to the growth of the practice, these issues can usually be worked through and the associate can continue on his or her pathway to partnership.
Freedman, E. (2014). Failed Promises, Failed Plans. In (pp. 5). Pennsylvania Bar News.
Freedman, E. (2016). For New Managing Partners. In (pp. 4). Pennsylvania Bar News.
Gage, D. (2004). The partnership charter : how to start out right with your new business partnership (or fix the one you’re in). New York: Basic Books.
Jarrett-Kerr. (2011). Criteria and Guidelines for the Promotion and Admission of Equity Partners. In. Managing Partner Forum: The Remson Group.
Krames, J. A. (2005). Jack Welch and the 4E’s of leadership : how to put GE’s leadership formula to work in your organization (1st ed.). New York: McGraw-Hill.
The landscape of veterinary practice is definitely changing, with corporate buyers investing heavily – and this isn’t a brand new trend. In fact, DVM 360 offers up these examples from 2007:
- Summit Partners, a private equity and venture capital firm, invested $128 million in National Veterinary Associates (NVA); at that point, NVA owned the most freestanding veterinary hospitals in the United States: 99 of them in 29 states.
- VCA Antech, Inc. bought Healthy Pet Corp. and its 44 hospitals for $152.9 million, bringing their holdings to 450+ clinics in the country.
By 2016, approximately ten percent of practices are corporately owned.
Some people, upon hearing these stories, have rung the death knell for single-doctor practices. DVM 360, in the 2007 article, begged to differ, pointing out that VCA Antech – after more than 20 years of being in business – still only owned approximately 450 hospitals out of the country’s 31,000-plus practices.
So, is it possible for you to continue to maintain your own practice, and even compete with the corporate giants? Definitely. Although the percentage of corporately-owned practices has increased, in 2016 there are still 90 percent that are NOT owned by corporations.
The bigger question, really, is how to compete. Before we share strategies, here are reasons why veterinary practices are being seen as attractive investments, and why practice owners sometimes decide to sell to corporations.
Behind-the-Scenes of Corporate Decisions
Reasons that investors like veterinary practices include:
- Veterinarians get paid at time of service, unlike human medicine, where doctors need to wait for insurance reimbursement.
- Malpractice insurance costs are significantly lower than in human medicine and emotional damage payments are still much lower.
- The veterinary industry has grown steadily for more than 40 years, even during five recessions.
Lest this seems like a slam dunk for corporate buyouts, consider this: investors need to buy approximately 50 hospitals before they benefit from consolidated infrastructure. So, even if they were to buy one hospital a month, it would still take more than four years to reach that tipping point.
Selling Your Practice to a Corporate Buyer
Some practice owners, of course, willingly sell to corporate buyers. Advantages of selling include:
- Being offered a good price: if a veterinarian sees an excellent way to maximize profit – and corporate investors often offer top dollar – then it may make sense to sell.
- Speed of transaction: whereas an associate buy-in can take several years, corporate investors can close a deal much more quickly.
- Reducing the challenges of management: if a veterinarian just wants to practice medicine and dislikes business aspects, selling can make good sense.
- Having necessary capital to upgrade facilities and equipment
- Receiving the benefits of collective wisdom
Other potential reasons for selling range from the increasing numbers of baby boomers who are ready to retire without an associate ready to buy to young veterinarians with plenty of student loan debt who don’t want to go even further in debt by buying a practice.
How to Compete
If you don’t want to sell your practice, there are numerous ways you can bolster the strength of your practice to compete with larger practices. At a high level, the answer is to conduct assessments that ensure you’re reducing expenses and maximizing revenue whenever possible. Remember that, although streamlining costs makes sense, your ability to reduce expenses is finite, whereas increasing revenue does not have a ceiling.
Also, review what corporately owned practices do and implement similar procedures at your practice, whenever it makes sense. Here are multiple strategies to consider.
Products and Services
First make sure you’re offering the products and services your community needs. Do you find yourself being asked for a particular service that you don’t offer and are consistently needing to refer potential clients to competitors? If so, should you consider overhauling what you offer?
Is there an under-filled niche service in your community? If so, how feasible is it for your practice to fill that niche? Possibilities include rehabilitation medicine, radiology, ambulatory services, alternative therapies such as acupuncture and much more.
What about your pricing? What are similar practices charging in your area? Unless you offer higher-end services where clients see and appreciate the differentiators, charging more than competitors may cause you to lose business. You don’t want to undercharge, though, because that equals lost revenue and profits, and a discouraging bottom line.
Vendors and Bulk Purchasing
Review your vendors. How “hard” have you negotiated your arrangements? Are you getting the best value possible? Are there early pay options that would provide you with a discount? If not, consider price comparing with other companies that offer similar products and services.
When possible, are you buying in bulk? The Veterinary Cooperative was formed to build purchasing power for independent veterinary hospitals. Members of the cooperative can purchase name brands at a discount because the cooperative negotiates with pharmaceutical companies, equipment manufacturers and more to obtain price breaks available to corporate practices. There are no minimum purchase requirements and the cooperative also issues dividend checks to members.
Take a look at your staff. Do they work efficiently? Is each person doing the job that best fits his or her abilities? Does each person treat clients with respect, causing them to want to come back – and to recommend your practice to their friends and family? Does your staff recommend products that you sell? What performance-based incentive pay can you offer your team when they serve your current clients exceptionally well? For them to help get new clients for your practice? When they come up with an excellent expense reduction or revenue enhancing idea?
How efficient are your processes? Consider conducting time studies where you identify bottlenecks that are reducing efficiencies and costing your practice money.
How do you promote your practice? Is it effective? If so, how can you capitalize on this? If not, are you targeting the right audience? Using the right media? Are your current clients evangelizing for your practice, encouraging others to choose you? If not, why not? How can you partner with local adoption groups and other worthy charities to highlight your practice to your community?
How well are you educating your clients about the importance of regular wellness checks? How much are you empowering your practice team to provide this education to clients? DMV 360 offers literally hundreds of free handouts to give to clients.
If you need to sign a lease for your veterinary practice’s location, here are a few tips to help you to successfully negotiate a commercial lease.
Examine the Premises Carefully
This includes the HVAC, plus electrical and plumbing systems, although even careful due diligence won’t reveal hidden defects, such as ineffective heating in August, flawed AC in February or roof leaks during heavy rains. Do not assume that everything the landlord tells you about the premises is 100% accurate.
A typical veterinary practice lease ranges between 10 and 25 years. So, when you find a suitable facility, prepare and invest for a long-term relationship. Ask for options to renew the contract and make sure you’re clear about when you must give notice to renew. (There are also benefits to long-term relationships for your lessor, given the costs associated with finding new leasees and negotiating leases!)
Two Forms of Rent: Base and Additional
Actual rent payments are usually the sum of the two types.
Base rent is what tenants pay to occupy premises and can be determined in multiple ways. Beware of comparing rentals based on dollars per square feet, as “square feet” can be defined in numerous ways. Landlords can quote a dollar/square foot rent using “rentable square feet” but, because only a portion of space is actually usable by the tenant, true rent is higher.
Base rent can be based on a percentage of the tenant’s gross revenues, but this complicates contracts. How will gross revenues be calculated? How will disagreements be resolved?
Leases typically include annual rent increases. If a tenant has a 10-year lease with a $60,000 flat annual rent lease, the cost would be $600,000 over the lease term. With a 3% escalation clause, though, total rent paid will be $ 687,832.76, a difference of approximately $87,833.
Most leases include payment of additional rents (all amounts outside of base rent), such as the security deposit (often one to three months’ rent) and reimbursing the landlord for property taxes, monthly or quarterly.
Maintenance, Repairs and Other Expenses
In multi-tenant facilities, landlords are responsible for common area maintenance (CAM), which includes sidewalks, stairways between tenant premises, parking lots, outdoor maintenance and so forth. There is no commonly accepted definition of CAM, so it’s open to negotiation. A lessor will want to pass on expenses; as leasee, to minimize CAM. As leasee, beware of the phrase “including but not limited to” because the landlord can add new expense categories and tenants cannot typically audit CAM expenses. Single tenant leases, fortunately, are more straightforward with most expenses paid directly by the tenant, although structural repairs are usually listed as a landlord expense.
Tenants must maintain general liability insurance and casualty insurance covering their furnishings, equipment and other property; sometimes, tenants must keep business interruption insurance sufficient to pay the rent for a year (or more). The tenant must also maintain fire and other casualty insurance on the facility itself in single tenant facilities, whereas multiple tenant facility landlords insure themselves and pass costs to tenants via CAM.
Premises Destruction & Condemnation
If premises are destroyed or damaged by fire or other casualty, leases provide that the landlord uses insurance proceeds to repair them within a deadline. If the deadline can’t be met, the lease can be terminated. Critical issue: can the tenant terminate the lease or only the landlord? Negotiate!
General Rule for Tenant Improvements
They typically require the landlord’s prior consent at the tenant’s expense. Critical issue: can the tenant remove improvements when the lease ends? Again, negotiate wisely!
Lease Assignment & Subletting
Most leases state that tenants can’t assign their lease, or sublet space, without landlord consent. Tenants can try to prohibit unreasonable withholding or delaying consent; tenants with foresight will try to get more freedom to assign the lease if they are also selling the practice.
Indemnification & Liability Limits
Leases almost always require tenants to hold landlords harmless from injury or damage suffered from acts and omissions of tenants – or from premises being defective. Savvy tenants (with leverage) will try to stipulate that the disclaimer doesn’t apply when the landlord was negligent.
Breach & Punishment
Commercial leases usually include long provisions defining default triggers, notice requirements and remedies. Important: lease termination and eviction do not suspend the tenant’s obligation to pay rent and CAM for the remaining term of the lease. Tenant obligation is reduced if the landlord re-rents the premises to a new tenant, but the landlord is not required to do so. Tenant negotiation tip: try to insert a general clause requiring the landlord to mitigate damages.
Note about Tenant Owners
Many leases stipulate that a guarantor’s bankruptcy triggers a tenant default under the lease, which then allows landlords to evict tenants. Tenants may want to try to soften this provision.