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.
- Clauses clearly indicating whether each term is meant to be binding or not binding so misunderstandings between the parties are less likely
- Clause stating that any term that is not explicitly stated as binding is non-binding
- 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.
- 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.
- Date by which this business exploration must be completed
- Do not include:
- 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
- A deposit or fee to be paid before entering into negotiations because non-refundable fees tend to make writing binding
- 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.
Succession planning. Two words when placed together make your heart race in light of the decades spent building this hospital from the ground. Who am I going to sell to? How am I going to sell? What do I value my practice at? When is a good time to sell? These questions can raise fear and anxiety in the mind of the owner in finding the appropriate buyer and may ultimately inhibit the practice owner from making the best business decision for the hospital. At the end of a veterinarian’s career, their hospital is the culmination of their perseverance and life-long hard work; it’s only natural to want to protect what has taken them years to build. Creating a succession plan can help alleviate some of the stress associated with the uncertainty of the hospital’s future.
For sake of this article, let’s assume your retirement looks conceivable in the near future and you’re ready to sell your practice. You have spoken with your financial advisor and together have looked into your personal and business funds, health, alternative investments and activities, timing, and other crucial factors relating to your future. Together you both come to the conclusion that retirement is an undoubtable option. You are now able to step back from the pinnacle of your career and delve into your next step, determining who to sell your practice to. Several options include a current associate that you have developed a mentorship with, a new associate or group of associates, a corporation, or non-veterinarians. Though this last option may not be legal in all states.
Let’s talk about that current associate, the one who has been diligently working at your hospital for many years and seems to be a very good candidate as a practice owner. As an astute colleague once outlined in a lecture on the veterinary profession: a great veterinarian handles their free time well, self-motivates, keeps enthusiastic about the veterinary industry, strives to advance every day, and lastly is loyal to your hospital.1 With some mentorship, a great veterinarian can become a successful business owner as well!
Mentorship, a Partnership:
Many practitioners see the word ‘mentorship’ and cringe at the fact that this is more of a time commitment than it may be worth or that the associate may not be competent and may require handholding through day-to-day activities. In a recent survey of AAHA-accredited practices, 74.08% of practices did not have a mentorship-like program in place. Most of these practices (60.78%) stated their reason for lack of mentorship was due to a lack of resources and guidance.2 Mentorship at the most basic level means as the senior veterinarian you have experience and knowledge more valuable and desirable than what that the junior veterinarian has gained from their years in practice. It is important to note though, this does differ from a supervisor that praises or punishes for behavior that does or does not fit into the practice’s operations. As a practice owner, you have already set in place a mentorship within your hospital by encouraging continuing education, allowing room for advancement within the hospital, or supporting personal and/or professional goals within the work place. Taking your relationship from the aforementioned to a true mentorship increases associate satisfaction and work productivity.
As a practice owner, you have either purchased your hospital from someone else or built it from the foundation up. You have worked in the industry for a very long time and have the confidence that younger veterinarians envy. A current associate may see the opportunity to become a practice owner as a dream come true, but in the end those are some very big shoes to fill. Through mentoring you can tailor your assistance to an associate’s needs and help them feel better suited for practice ownership through pre-determining your desired outcomes, clearly defining expectations, establishing benchmarks to track progression, and scheduling routine assessments.2
As we all know, within the work place you cannot anticipate quality work without outlining employee expectations. Putting this principle into practice, your first aim should be to setup expectations and create goals for each party involved. The protégé naturally wants to build confidence with the veterinary, business, and management sectors of your company. From the AAHA-hospital survey above, when veterinarians without mentorship programs in place were asked if they would create one within their hospital, 70% said it was “likely” or “highly likely.” Additionally, 63% of mentors stated it was a positive experience as well as decreased associate turnover rate and increased productivity of practice members.2 Not only does mentorship help the mentee become more confident within the hospital, but the mentor benefits by having a better work environment.
Many of you have probably heard the phrase “Happy wife, happy life!” This is applicable within the work place as well. Within the respective Gallup Studies, they reference “the presence of positive emotional states and positive appraisals of the worker and his or her relationships within the workplace accentuate worker performance and quality of life.”3 In essence, happy worker equals better work performance. Better work performance equals profit. Profit makes a happy business and business owner as well as a higher selling price. Cha-ching!
Lastly, your part as the mentor is to prepare your associate mentally for ownership. We all remember before veterinary school, being excited to start on this new adventure and hearing from veterinarians about how much stress the career entailed. You looked at them and said, “I can manage my stress well! There’s nothing I can’t handle!” But then veterinary school started. Your personal health went out the window as you devoted more hours to the books than you are willing to admit. You were constantly presented with “know all the things,” yet there was simply not enough time to know everything. Nothing before veterinary school prepared you better for that stress than veterinary school itself. Well, the same goes for owning a practice, as you can all recall! But it doesn’t mean you, as the mentor, can’t do everything in your ability to prepare them for the stress. You’re in a position to prepare that associate for the next exciting step in their life not only by supplementing their veterinary and management skills, but also by preparing them for the mental challenges. You have the chance to forewarn them of the challenges ahead and prepare them so it feels manageable when it occurs. This additionally opens up a new side to your relationship where you can connect with them on a personal level. As Dr. Charlotte Lacroix DVM, JD likes to say: your associate is about to become your veterinary spouse. Get to know each other on a deeper level. Do they have the right communication style and business mindset to succeed? When faced with a challenge do they rollover on their back in submission or do they dig their heels into the ground and say, “Come at me”? With your knowledge and assistance they will be well on their way to owning and operating a successful practice.
What if you are in the position where you are the sole veterinarian or you do not see your current associates as having the aptitude or desire to run your business? Then it’s time to search for a buyer! This buyer can come in the form of: a new associate, a corporation, or a non-veterinarian (once again, not legal in all states).
Hiring a New Associate:
In most recent years, buyouts from one owner to the next are the most common practice sale options.4 As a practice owner, you have likely hired many employees and know how to evaluate associates as being a good fit to your practice. Hiring with the intention of finding someone to take your own spot may seem frightening, but it’s important to hire an associate that embodies the traits that are important to you. Creating an outline of traits that are important can help facilitate an easier transition. For example: style of medicine, interest in the profession and promoting not only your hospital but veterinary medicine in general, ability to use their free time efficiently, enthusiastic and focused in the face of stress, self-motivated, and quick learners, are a few possibilities. If you find a veterinarian that doesn’t make you happy in most of these areas, it just may not be a good fit for you. Don’t force it and don’t settle! There are plenty of fish in the sea. In fact, in an article published by JAVMA last year, Melisa Edwards, VP of Veterinary Practice Finance at Bank of America, stated that for every practice on the market there are five to ten pre-qualified borrowers!4
Secondly, many people may not want to run a business and that’s okay. However, a growing percentage of graduating students are becoming more interested in the idea of being a practice owner. Thanks to the assistance of business educated veterinarians (such as Dr. Charlotte Lacroix at Ohio State, Michigan State, and University of Pennsylvania, and Dr. James Clark at UC Davis) and active Veterinary Business Management Associations, veterinary schools and clubs across the nation are placing more emphasis on students becoming more comfortable with business and legal issues within the veterinary field. Within my graduating class of 2016 at UC Davis, an in-class quick survey revealed about 40-50% wanted to own a practice within five to ten years of graduating. Graduates are coming out more prepared and less fearful about taking on this huge commitment.
Debt is the last topic I wanted to broach, as it is something that bothers senior veterinarians about new graduates. When new graduates are looking for a job, they need to be very aware of their finances; one poor move could leave them broke and unable to put food on their own table. I can assure you, most of us are plenty conscious and aware of this. Many lectures, discussions, and meetings have been available to us to manage this mountain of debt. Due to this fact, most are familiar with creating budgets and have made debt summaries and plans to reference for once we graduate. For those who are interested in purchasing a hospital, a personal business plan may be a good place to start. Within the business plan should be a budget that involves setting money aside in savings to use as a down payment for the practice. Additionally, the repayment programs available to new graduates makes debt of veterinary school and looking into owning a hospital within five to seven years of graduating very possible!
Many new veterinarians may be unaware of the program called Pay As You Earn (PAYE) available to recent veterinary graduates for loan repayment. This program works by allowing the student to make payments of 10% of their salary per year for twenty ears on a principal amount in which the interest does not capitalize (only capitalizes once as they enter repayment at six months after graduating). At the end of the 20 years, the outstanding balance is forgiven. The catch is that the amount that is unpaid is taxed as income. At $205,000 in debt and a starting practice salary of $71,000 with a modest salary growth of 3.5% with PAYE the total loan payments made over twenty years is about $160,000. The tax payment at the end of those twenty years would be just short of $120,000.5 What I am telling you is this: I just took at twenty year loan for $205,000 at 1.8% interest rate to be a veterinarian. Granted this doesn’t address any potential salary jump that comes with being a practice owner, but this is something to monitor as times goes on. My main point here is that owning a business will be just another repayment program that many graduates are completely willing to take on, especially for those eager for the challenge!
In an article by Wells Fargo, “tomorrow’s practice owners are placing a greater emphasis on quality of life. They want to have a more regulated schedule in their workday, they appreciate a work environment that can afford the latest in diagnostic equipment, and many do not want to practice solo. … This change in outlook is driving a trend towards group practices with shared costs and responsibilities.” 6 As a practice seller, working on a purchase agreement with multiple people may be more of a hassle, but it also could provide a quicker practice payout period as two or three associates split the cost that may take a single practitioner fifteen to twenty years to pay off. Additionally, there is a wide, but false assumption that high-grossing or multi-owner practices can only be sold to corporate entities.4 Advantages of multiple-associate practices include shared overhead including leverage of debt, time, and stress; more efficient use of equipment and staff with more services, greater revenue, and more profit; and shared emergency and leave coverage. Disadvantages include having to plan ahead more, sharing the same vision, and taking blame for other’s actions including shared liabilities. 7
VCA Antech Inc., Blue Pearl, National Veterinary Associates, Banfield Pet Hospital, Veterinary Specialists of North America, PetVet Care Centers, and Community Veterinary Partners are some examples of veterinary corporations, to name a few. With corporation buy-outs, this may look very attractive to the practice seller. These corporations have much more financial power to purchase a hospital in a lump-sum sale. There is absolutely no way an associate or even multiple-associate buy-ins can compete with this. In a situation in which money is needed immediately and there is no time for a five to fifteen year payout, corporate sale may be the best option. That being said, some corporations require the practice seller to work within the company for a certain amount of years. It is important for you as the seller to be informed about your decision. Hiring a transactional lawyer with experience in corporate veterinary sale would be advantageous!
Hiring the Right People
Once you have decided it is time to sell your practice, it’s time to start looking into hiring professionals with veterinary practice sale experience. The first step is to hire an appraiser to determine the purchase price point of your practice. Appraisal of a small business depends on the proportion of the value that is based on assets versus intangible assets offset by liabilities. In the veterinary community, intangible assets (or goodwill) due to the value clients bring to each hospital is most valuable. Hospitals are signing employee agreement contracts with non-compete clauses for this reason specifically. Other factors that enter into the massive equation of what your practice values at include, but are not limited to earnings (gross revenue minus operating expenses), geographic location and demographics, value of inventory, equipment, practice goodwill (how long it has been operating, capital structure, agreements, advertising, durability, size, potential for further growth), professional goodwill (including the experience, skills, reputation, earning power, etc. of veterinarians working there), client return rate, average client transaction rate, ratio of professional services to inventory sales, etc. The list is enormous, which is why appraisal numbers can vary between appraisers that have been practicing for decades. In the end, the appraisal is an estimate, which makes it very important for the buyer to hire an appraiser to also evaluate the appraisal that the seller has had completed as to minimize conflict of interest.
There are several different types of lawyers, but the ones that are important to you in selling a practice are transactional lawyers. Dr. Charlotte Lacroix has been working as a transactional lawyer for eighteen years within the veterinary field. It is her job to work with practice owners to create or edit legal documents that are (or are not) present within the hospital as well as to assist in purchase sales. With the legal advice from a lawyer and the value of the practice in hand, a proper Purchase Agreement and other associated legal documents can be created for the sale of the practice to be completed.
The last people that are crucial to the sale of a practice are tax advisors and accountants. As you may suspect this is a very complex topic to cover in the breadth of this paper. Purchase sales in regards to taxes differ in relation to what type of business entity is being sold, whether it is a sole proprietorship, partnership, LLC, S corporation, or C corporation. As to prevent treating taxes like a patient treated with steroids and antibiotics, I will leave it at this: hire a tax advisor and consult with your accountant!
As the seller, working with your lawyer is imperative to determine the structure of the practice sale. If you are selling to a corporation this could very likely be a cash transaction, but more realistically if you are selling to an associate, this will be in the form of a cash and loan buy-in. Loans can come from the bank or even be financed through the owner of the practice, which is called ‘vested’ or ‘sweat’ equity in that the amount the buyer owes to the seller is taken from the salary of the buyer and paid out to the seller. For someone interested in sole ownership in the future, this is a slow-moving process that allows the new veterinarian to learn under the wing of an experienced practice owner while working towards owning his or her own practice.
If you, as the seller, own the land the practice sits on, another question to ask yourself is whether or not you should the real estate with the practice? This may not always be an option for the buyer as it increases the price they will need to pay, but should always be answered before entering the realm of practice sales. That being said, within the Well’s Fargo article referenced earlier “young doctors [are] purchasing a building, not just a practice. According to Dr. Branam, because interest rates for financing are still so low, more graduates are choosing to purchase commercial real estate and become a landlord in addition to running their practice, generating cash flow and financial fluidity.” 3
Lastly, another thing to consider when selling your practice is the well-being of your current employees and how they will be treated once the practice moves into new hands. Depending on your relationship with the employees as well as the structure of the practice sale, retainment agreements are beneficial to the buyer and are generally a requirement as a sale to a corporation. Additionally, the buyer naturally would like the employees to be under non-compete agreements as to guarantee their newly purchased goodwill will not leave as soon as the practice is under their jurisdiction.
Emergency Succession Planning:
In emergency succession planning, there should to be one person assigned as the executor. This person should have a good grasp on the flow of the hospital, be able to follow through with your emergency succession plan you’ve created, and be trustworthy. Regardless if this is a current worker or a family member, you and the executor should meet well before an emergency plan has been created to determine if they are a good fit for this position. Once you have found a willing executor, it is time to determine the direction of the practice. This direction can go towards selling the practice immediately with the proper legal documents and hired professionals in place, or towards handing down/selling the practice to a colleague. If you’re in the ideal situation of being co-owners, do you want to distribute the remainder of your practice evenly between the shareholders or sell to a new person? Regardless of your intentions, having thought through a plan and spoken with the proper professionals to contour a plan to your needs, those following you will be put in a much better place in case of an emergency.
For owners interested in maintaining their business, starting with creating an organizational chart will give the executor a place to start. This chart should state new job positions for the various parts of the hospital. New roles and job requirements will need to be created or be reorganized. Will the supervising technician now take over scheduling or will the executor do this? Will you hire a practice manager to cover the financial tasks the previous owner did or will the new executor do this, as well? In the end, general daily occurrences within a clinic should be written up like a Standard Operating Procedure (SOP). Someone should ideally be able to come in after you and pick up a binder with directions to keep a hospital running while the general emergency is being dealt with. If you are in the state of being in a sole proprietorship, more work may be necessary to find a new veterinarian. Of course in this situation, the option of selling the hospital immediately may be more appealing, but this should also be addressed with the executor, even if the executor is a spouse.
Lastly, once the executor is aware of their responsibilities this will need to be placed into writing, especially if the executor is not the spouse or family of the initial owner. Upon death, properties of the one who passed are kept as ownership of the spouse or closest family members. Contacting a legal representative to create this plan before an emergency occurs will remove the stress and possible legal battles that may occur in case you pass away unexpectedly. Unfortunately, an outline of this plan is much greater than what can be addressed within this article, but speaking with legal and financial advisors will help create a plan tailored to your needs.
Well, there you have it, folks. I know your brain may be burning and your eyes sore, but succession planning isn’t a small topic! Hiring the proper professionals can help you get more information and coverage during a practice sale. Regardless of your intentions as a practice owner, you are going to have to stop working at some point. Through reading this article hopefully you have thought about ways to make it more graceful and less stressful on yourself and those around you. By making a plan, you have outlined your goals of retirement as well as created a back-up plan in case of emergency so your family can receive benefit from the value you have created. Succession planning does not have to be a demanding experience. By hiring the correct professionals and working with a buyer you trust, this process can be seamless and simple.