Negotiating Lease Agreements

Imagine you’re a practice owner, and your practice currently has a 12-year history of consistently grossing $1.5 million—and is actually on track to earn upwards of $2 million this year! You have three exam rooms and three certified veterinary technicians, and you’ve just hired an ambitious associate veterinarian to bring your total up to three full-time associates, with plenty of support staff. Your practice’s operations are clearly excellent and the camaraderie is there but, you’re ready. You’ve decided that enough of your life has been dedicated to the prosperity of your practice and you want to enjoy the remainder of your life with your family. You have made the decision to sell your practice.

You meet with an attorney, create your practice’s profile, and garner the attention of many corporate consolidators (CC) and private contractors (PC). Prior to entertaining any offers, your attorney asks you about your plans, including whether you’d like to remain involved in the practice, post-sale. You respond, “I think I want to retire altogether. I love my practice and my staff, and I’ll visit from time to time, but I’m pretty sure I want to spend the rest of my time with my family.” Your attorney then asks about the property and you are at a loss; you thought that once you sold the practice, the property would be sold, too. Your attorney informs you that this is not the case and sends you home with homework to complete, something you haven’t had to do in quite some time. Now you have to ponder about what you want to do with your real estate if you sell your practice.  

Do you want to relinquish or retain ownership of the real estate?

This is the first question that any facility owner who also owns the property needs to answer because this will dictate what language will be used in letters of intent (LOI). You’ll need to determine whether you want to retain the ownership of the property and lease it to the future buyer or sell the property.

If you’re looking to relinquish ownership of the real estate, then you’ll need to determine how and when this will change hands—and if this is your plan, then the remainder of this article will be purely informational. On the other hand, if you want to continue to retain ownership of the property and become a landlord, then    you should continue reading.

As a third scenario, if you currently lease your property from a third-party landlord, then your responsibility is to inform the buyer about your current lease’s terms and help to facilitate the transfer of the contract from your name to theirs.

What’s the composition of the lease?

Assuming, from this point on, that you’re the owner of your property and you want to lease it to the buyer, here’s what might happen next. Typically, the buyer will present you with a drafted lease with their terms—which likely represents their interests—and you will have to negotiate from there. Since this will be a steady stream of income for you, we’ve provided you with information to maximize the revenue you’ll receive.

For clarification purposes:

“Buyer”/“Tenant” = Buyer of your practice; “Seller”/”You” = Practice Seller & Property Owner/Landlord

Lease Terms & Renewals

When discussing the value of a lease to buyers, you’ll have to think long term, literally. Most buyers, especially the CCs, express interest in having an initial 10- to 15-year lease to retain a firm grasp on the practice’s property and to ensure longevity. This may differ for PCs. You could add more value to the lease by giving the buyer options to renew at five or ten-year increments. This assures continued operations for the practice, allows for early renewal negotiations, and makes it easier for you to refinance the property, if need be. Now, depending upon your terms, you should determine how much you will charge the buyer for rent. Typically, rent is calculated as the sum of the base rent and additional rent, but you should also consider the valuation of your property. That’s because the fair market value (FMV) of your property may help to drive the base rent that you set for the buyer.

Fair Market Value

Agreeing to a base rent can represent a risk for both you and the buyer. Here’s why. Your initial lease term would be dictated by the FMV or, rather, the price your property would sell for on the open market; however, the FMV excludes the value your practice adds to the property. Zach Goldman, owner of the real estate investment trust (REIT) company, Handin Holdings, states that the valuation of a piece of real estate is therefore equal parts of art and science. It involves noting the global picture along with (1) the structure of the specific building, (2) the real estate market of the area, (3) the quality of the practice’s operations, and (4) the economic reliability of the tenants (i.e., will they be able to pay rent).

Plus, how you value your property isn’t necessarily how others will perceive its value. As a practicing veterinarian and owner of the practice, you’ve undoubtedly worked tirelessly to ensure the prosperity of your clinic. The sacrifices you’ve made and the time you’ve spent developing the practice to bring it where it is today, though, doesn’t necessarily add much value to the property itself. Daniel Feinberg, vice president of finance at the REIT company, TerraVet Solutions, notes that a common misconception they face when speaking to veterinary practice owners is that they are often infusing their personal experiences into the property value. He advises all future practice sellers to work with REITs, like TerraVet, to help determine the value of their properties from an objective lens; this way, as a seller, you can work on adding value to your property prior to entertaining offers.

Once you’ve appropriately valued your property, you can then determine how much you should charge for your initial term of the buyer’s lease. We advise that you read the terms of the lease provided by the buyer very carefully; CCs will typically request a “reset to FMV” once it’s time for them to renew their lease. This can effectively eliminate cash flow certainty during the renewal periods and, clearly, this does not always work in your favor. Whether or not this will be advantageous to you is highly dependent upon a number of factors, including your geographic location. Typically, if an FMV reset is included, then an appraisal will be needed. If you aren’t sure whether this would negatively or positively impact you, you could create appraisal rules and limitations to include within your lease. You’ll want to answer questions that add clarity to and substantiates the FMV reset; these are questions such as:

  • What appraisal method will be used and who will be conducting the appraisal? Your choice or buyer’s choice?
  • How will the future rent be determined? Will it be based on the property’s best or highest value?
  • Will the FMV-based rent take into consideration the practice’s value?

These are only a few questions that will need to be answered and you can find more information by contacting your real estate attorney or a REIT company.

Base Rent

Base rent is the amount charged to the buyer to simply occupy the premises. It can be calculated in a variety of ways, with the two most common methods being the following:

  1. Based upon a percentage of a tenant’s gross revenues: This will complicate the lease because the lease parties need to agree on (a) the method used to calculate the practice’s gross revenues; and (b) a process to resolve disagreements.
  2. Based on dollars per square feet, with “square feet” able to be defined in a number of ways: Most commonly, leases charge a dollar per foot of either the “rentable space” or the “rented space.” The former results in a higher rent, but will likely be refuted—and, therefore, the latter will be more easily accepted. No matter what standard is used, you will need to clearly define square footage.

Whether you choose the first or second option to calculate base rent, you will likely need to negotiate specific.

“Additional rent,” meanwhile, comprises all other costs, usually related to the facility’s operations, that your buyer is required to pay you in addition to the base rent. Such costs could be a security deposit (often one to three months’ rent) and reimbursing the landlord for property taxes (monthly or quarterly).  In most cases, the buyer doesn’t pay the property taxes directly; this would typically be handled by you and then you would be reimbursed by the buyer. You could, however, require the buyer to pay you an estimate of property taxes monthly or quarterly in advance, subject to an annual reconciliation mechanism. This would consolidate the buyer’s payments while concurrently allowing you to receive a portion of the property tax amount in advance.

Types of Net Leases

Briefly, net leases help to define the relationship and responsibilities between the buyer and seller. The type of net lease—single, double, or triple—determines whether the buyer will pay, in addition to the rent, any of the following three expenses: property taxes, property insurance premiums or maintenance costs. You can equate the type of lease with the amount of responsibility, in addition to the rent, that the buyer will have. Single net lease requires the buyer to be responsible for property taxes, a double net lease will require the buyer to pay for taxes and insurance premiums, and a triple net lease will require the buyer to pay for all three additional expenses.

The goal is to minimize your responsibilities as a landlord as much as possible. Therefore, most leases are triple net leases. Reducing your responsibilities increases the likelihood that the buyer will negotiate with you on topics like rent during the initial term of the lease, liability insurance requirements, and a host of other things. Your best option would be to require a triple net expenses lease while only being required to cover the maintenance and replacement costs of the property’s structural components, such as a roof replacement or maintenance of the property’s foundation.

Annual Rent Escalations

Rent increases can be considered the norm in most veterinary practice leases today. These escalations are usually based on the Consumer Price Index (CPI), produced by the Bureau of Labor Statistics (BLS), which is essentially an average price measured over a time range. The CPI allows for you to adjust the buyer’s rent to accommodate the price change of the current real estate market. Most commonly, the escalation is represented by a percentage increase over a specified period of time. Although you are able to determine a percentage and offer it within the lease, we typically see a two to three percent increase annually. You can think of this as a compounding scheme whereas you will establish the base rent for the initial year of the lease, and each year after the buyer will pay an additional percentage. To illustrate, here is an example:

You’ll have the buyer pay a base rate of $25,000 annually during your initial ten-year lease. However, you will add the caveat that states how there will be a two percent escalation that will be applied to the base rate annually. This type of increase would result in the tenant paying nearly an additional $41,000 at the conclusion of their ten-year lease term.

This provides a better, more stable and predictable method of forecasting what income you will receive from the buyer. Ideally, you’ll consider their rent in conjunction with the buyer’s responsibilities as a tenant, so you need to also consider what kind of net lease you’d prefer for the buyer to have.

Financial Reports

In addition to your lease, you can also request an annual financial report of the practice. While most landlords don’t request this information, there are many reasons why you should. Annual financial reports allow for you to gauge the operations of the practice and determine whether the buyer will be financially self-sustaining. When requesting the financial reports from the buyer, they should typically provide you with a balance sheet, profit and loss statement, and a statement that acknowledges any changes in the financial position as well as any supplemental details to explain the change. These combined reports will provide an overall view of the financial well-being of the buyer, as well as assure you of their financial stability throughout the lease term(s).

The Guaranty

This seems like a very clear and straightforward issue, right? We generally assume that the buyer will provide the guaranty, but who exactly is the buyer? In this day and age when most of the CCs are owned by a larger corporate parent, you have to ensure that the buyer who is purchasing your practice can provide a guaranty for your lease. The company backing your lease could range from, say, Midwestern Pet Hospital, a single hospital with a limited, regional reach, to Animal Hospital Operations, a generally well-known company with multiple hospital ownerships. If you did your due diligence, you would discover that Animal Hospital Operations is owned by Krispy Kreme, a company with the financial assets to assure you they are committed.

In order for Krispy Kreme to provide you with stability, using that example, you would need to confirm that their name is listed in the lease agreement. In comparison, a review of financial statements shows that Midwestern Pet Hospital has had a fluctuating history of financial stability and only within the past three years has begun producing competitive revenue. Which buyer would you choose to back your lease? You’d likely selected Krispy Kreme and rightfully so. The point here is that you should always ensure that the buyer can either provide a corporate guaranty from their parent company or can provide enough evidence to convince you that they can uphold tenant responsibilities and, essentially, foot the bill.

Assignments

An assignment clause in a lease essentially allows for the tenant to transfer the lease, and all associated tenant responsibilities, to a different entity. However, this is typically an area that you as the landlord will want to specify and limit. Commonly, CCs like to freely transfer their leases to any affiliated entities, which would almost certainly diminish the value of your property for multiple reasons. First, if the buyer was allowed to sublet or freely assign the lease, then they would receive the revenue generated from the sublet, not you. Second, if the tenant isn’t up to par, then the value of the property itself could be driven downward. Therefore, it’s in your best interest to add provisions to prevent this free assignment. For example, you can negotiate by stating that the buyer can only assign their lease to a guarantor with a net worth that is equal to or greater than the existing guarantor. This ensures that your property’s value does not decrease and that the tenant responsibilities are financially accounted for.

Are there any outstanding rights of first refusal or offer (ROFR/ROFO) with your real estate?

The ROFR and ROFO concept can be off-putting for many buyers and could severely diminish the quantity of offers you may receive. To explain, there are many variations on a theme when discussing ROFRs and ROFOs, but they all center on the fact that, as the seller, if you receive an offer to purchase the property, you are legally bound and required to send notice of the full offer to whomever holds the ROFR/ROFO. If the offer is incomplete or if you don’t give the holder sufficient notice of the offer, you have now made yourself, as the seller, vulnerable to one of two scenarios:

  • being sued for failing to protect the rights of the ROFR holder
  • losing the interest of the buyer because the ROFR holder didn’t respond or didn’t receive the notice of the full offer with enough time to respond

In some instances, there’s the ROFO, which is currently defined as “an offer made in good-faith” by the seller. This means that the seller will inform the holder of a reasonable offer before any official listing of the property or entertaining of such offer. The holder can either refuse or accept the offer. With a right of first refusal, the ROFR holder can opt to match or counter the buyer’s offer. This leaves you vulnerable to losing your initial buyer’s interest because the buyer won’t, or can’t, raise their offer to purchase the estate. Your practice facility’s future is subject to the demands of the holder. You can choose to accept their offer or remain the landlord. As you can see, the impact of the ROFO/ROFR can be quite significant; therefore, you should carefully review any and all documents for such a clause.

What are your expectations of the buyer?

As a practice owner preparing for the next step, it is important that you think about your lease, your practice, and your future, post-sale. You have to determine what responsibilities you are expecting the buyer to take on and be willing to negotiate those from the very beginning. Knowing what terms of your lease are non-negotiable from your perspective before you begin the bidding process could prove to be advantageous because you can provide them with your terms and negotiate from there. With respect to the lease obligations, the buyers can’t change the terms of the deal or alter the purchase price later in the process because you’ve already informed them of your lease terms and have negotiated the obligations at the start. Informing your buyers of what the lease terms are in the beginning and having that full transparency gives you the most leverage to guide the conversation how you see fit.

So, what does all of this mean?

There are numerous points to consider prior to the sale of your practice to prepare you for negotiations.  The process of selling your practice can be long, and it can easily be extended if you have not addressed your personal, practice and/or property needs. Many sellers are not prepared to deal with a facility lease when they sell their practice, but doing your homework now can give you the knowledge and confidence to negotiate a lease with your buyer that will benefit you for years to come.

WORKS CITED:

  1. Lacroix, Charlotte. “Property Lease Dangers, Part I” | Real Estate, 2012, Veterinary Business Advisors, Inc. http://veterinarybusinessadvisors.com/wp-content/uploads/2016/07/Property_Lease_Dangers_Part-1_2012.pdf
  2. Lacroix, Charlotte. “Property Lease Dangers, Part II” | Real Estate, 2012, Veterinary Business Advisors, Inc. http://veterinarybusinessadvisors.com/wp-content/uploads/2016/07/Property_Lease_Dangers_Part-2_2012.pdf
  3. Lacroix, Charlotte. “Negotiating a Commercial Lease” | Real Estate, 2018, Veterinary Business Advisors, Inc. https://veterinarybusinessadvisors.com/negotiating-a-commercial-lease/
  4. Gosfield, Gregory G. “A primer on real estate options.” Real Property, Probate and Trust Journal (2000): 129-195.
  5. Ackerman, Lowell, ed. Blackwell’s five-minute veterinary practice management consult. John Wiley & Sons, 2013.
  6. Bank, LiveOak. “Veterinary Acquisition Due Diligence.” Veterinary Practice Acquisitions | Due Diligence Services | Mergers, 2017, www.veterinariancpas.com/acquisition-due-diligence.htm
  7. Stein, Joshua “The Most Important Issue in Every Ground Lease: Rent Resets and Redeterminations, Fair Market and Otherwise” New York State Bar Association | Real Estate, 2018, http://www.nysba.org/WorkArea/DownloadAsset.aspx?id=86403
  8. McCormick, David; Mamalis, Leslie. “Monitoring Practice Profitability” Veterinary Hospital Managers Association 2013 Annual Conference, https://cdn.ymaws.com/www.vhma.org/resource/resmgr/imported/MonitoringPracticeProfitablityfinal.pdf
  9. Bank, Live Oak. “Veterinary Practice Acquisitions Guide 2018” Veterinary Practice Acquisitions | Acquisitions, 2018, https://www.liveoakbank.com/wp-content/themes/LOB2017/assets/downloads/Live-Oak-Bank_Vet-Acquisition-Guide.pdf
  10.  US Bureau of Labor Statistics. “Writing an Escalation Contract Using the Consumer Price Index”. Real Estate. November 2012. Beyond the Numbers, Volume 1, Number 19. https://www.bls.gov/opub/btn/volume-1/pdf/writing-an-escalation-contract-using-the-consumer-price-index.pdf

Should You Invest in Training and Career Development for Your Employees?

Should you invest in employee training and career development while we are still waiting for the economy to turn around?  Despite economic uncertainty, business savvy Practice Owners know that learning matters and is the key to survival, recovery and future growth.  What are the factors that influence a Practice’s need for providing training/career development?

  • Work environment and workflow changes.
  • The need for different types of jobs.
  • Advancements in technology.
  • Limited opportunity for advancement without certain skills.
  • Organizational philosophy and culture.

Aligning training and career development plans with the strategic goals of the organization is a win-win for all concerned.  A career development path provides employees with an ongoing mechanism to enhance their skills and knowledge, which leads to mastering their jobs and enhancing professional development. Creating a career development path increases employee engagement (a critical driver of business success) and has a direct impact on the entire Practice by improving morale, job/career satisfaction, motivation, retention, productivity, and responsiveness in meeting the Practice’s short term, as well as, long term business objectives. All of these factors have a positive impact on the Practice’s bottom line.

Do you know what really motivates today’s employees?  The top three internal motivators that provide deep personal satisfaction are as follows:

  • Autonomy – the amount of control and discretion in how the work is performed (focus is on the outcomes/results, not the process; decision making)
  • Mastery – to become more efficient and effective at performing a task (the opportunity to learn; teach and educate)
  • Purpose –  the desire to support something larger than ourselves (achieving personal goals, your ‘passion’ in life)

How would you rate job satisfaction at your Practice? Do your employees experience enjoyment as a result of performing the work itself?  Would the following top drivers for job satisfaction be available within your organization?

  • Opportunities to apply one’s talents?
  • Opportunities to succeed?
  • Opportunities to learn?

An additional benefit of investing in training and career development reinforces to your employees that the Practice is concerned with their well-being by providing an avenue to reach individual, personal career goals while growing the Practice.

You may have been thinking about this value proposition of investing in training/career development for your employees and your Practice and wondering what major elements need to be addressed. When framing the dimensions of creating training and career development plans, you should follow these guidelines:

  • Review the Practice’s functional organization chart in support of your mission statement and goals.
    • Analyze the needs of the Practice – do you have the right skill sets in the right positions to advance and sustain your business?
    • Do your employees have the requirements to meet the challenges or are there gaps in their skill levels to perform current or future positions?
    • Are you developing high potential (‘A’ players) employees for your bench strength succession planning?
  • Determine the employee development budget.
    • Plan a realistic budget in which you use internal resources, such as cross-training or web based training (lower costs, convenience).
    • Evaluate the need for specialized training and its impact on the bottom line.
    • Don’t forget competency training that does not necessarily involve technical skills.
  • Create a career development plan for the employee with information obtained in active, participatory discussions with the employee in line with the needs of the Practice.
    • Prepare large but attainable goals with established timeframes to meet the goals.
    • Establish the resources that will be needed in order to reach the goals.
    • Consider impact on staffing so that employees have the opportunity to receive the training/education (don’t plan empty actions).
    • Link the goals to the employee’s performance appraisal (essential component of performance reviews is employee development).
    • Consistently encourage employees to achieve and demonstrate established goals (give him/her the opportunity to use the new skill set).
  • Determine the types of tools/resources that could be used for development purposes (be creative).
    • On the job training.
    • Certification training.
    • E-learning/online training, webcasts.
    • CE, Seminars.
    • Cross-training, lunch & learns, knowledge sharing.
    • Mentoring.
    • Job rotation.
    • Internships, externships.
  • Monitor the employee’s performance in order to evaluate and provide feedback on knowledge gain and skill mastery.
    • Supervisors/Managers are accountable for planning/supporting the employee’s need for time off and the use of other avenues to assist the employee in achieving individual goals as well as the Practice’s goals.

Training and career development are strategic drivers for your Practices’ growth. Think about it as a positive, joint venture. The Practice reaps the benefit of an enhanced expertise that was not in place before and which allows the operations to function more efficiently. At the same time, the employee has satisfied an internal motivator.

State-Law Savvy: How to Find and Follow State Employment Laws

Employment laws have been created to protect workers from wrongdoing in the workplace, addressing issues such as the following:

  • minimum wage requirements
  • protection from discrimination
  • workplace safety
  • child labor laws
  • workers’ compensation

These laws have been constructed to protect both the employee and the employer. In the United States, the relationship between employer and employee is known as a “master-servant” situation because the employee is expected to perform specified duties under the auspices of the employer. Labor laws have been created to prevent employers from abusing their power. These laws continue to be created and modified with the changing times.

Two good examples of employment laws created to balance the master-servant relationship include the following:

  • Fair Labor Standards Act (FLSA)
  • Age Discrimination in Employment Act

They aren’t the only laws providing this balance, but are good examples of the kinds of laws created to help ensure that employers cannot discriminate against their employees or otherwise abuse their position. The goal is not to create laws that simply favor the employee over the employers, but to create a more balanced and equal relationship. For example, employers are protected in that if they don’t believe a person is capable of doing a particular job, they are not required to hire the person. They also do not have  to keep someone indefinitely who isn’t performing to a reasonably-established standard.

There are federal laws addressing each of these topics, and states also make their own laws, as well. States cannot create laws that contradict existing federal laws, and if no relevant state law exists, then the corresponding federal rule applies.

Next, we will address state laws in two different but equally important ways:

  • how to discover what the laws are in your state
  • how to best follow those state-specific laws

Finding State-Specific Employment Law Information

You can find answers to questions about employment law, in general, through the United States Department of Labor. There are also links to state-specific law information. Ways to contact this federal agency include:

U.S. Department of Labor
AGENCY NAME
OFFICE NUMBER

200 Constitution Ave NW
Washington, DC 20210

The U.S. Department of Labor may direct you to an agency in your own state to get the state-specific answers you need, so you will often find answers more quickly by going directly to your State Labor Office; you can find a comprehensive contact list here: https://www.dol.gov/whd/contacts/state_of.htm

Another way to find this information is to talk to an attorney well versed in your state’s employment laws. This is often the best way to understand how a particular law applies to your specific situation.

Following State-Specific Employment Laws

Step one to following any law, of course, is to thoroughly understand that law and its implications. You will also need to investigate how your specific situation fits into applicable laws.

Here’s just one example of an employment law that differs from state to state: final paycheck laws. Because the FLSA does not address this issue at all, you need to look to state laws to find out how and when you must issue a final paycheck to an employee leaving your practice. Does it matter, for example, whether the employee was fired or if he or she quit? Sometimes, yes. Sometimes, no. It depends upon the law in your state.

Regarding finally paychecks, four states currently have varying laws on this topic: Alabama, Florida, Georgia and Mississippi. In Missouri, no law exists about when you must give a final paycheck to an employee who quits, but a fired one must receive it immediately. In Ohio, no state law dictates when a fired employee gets his or her last paycheck, but one who quits must receive it by the first day of the month for wages earned in the first half of the prior month, or on the fifteenth of the month if wages were earned in the second half of the previous month.

So, by examining just one state employment law in six different states, it’s easy to see the wide variety inherent in today’s laws. When someone leaves your practice, how vacation time payout is handled is also subject to varying state laws. Some states have no laws whatsoever on the subject. Others say accrued vacation time must be paid out, while others state that it must be paid out if the employee agrees to certain conditions—and, for example, in Maryland, employers can create a written policy that states they don’t pay out for accrued vacation at all. If employees are notified of this policy when first hired, this policy can stand.

Here’s an example of one type of employment law that is covered by federal law, in which a state is allowed to offer more to employees, but not less: minimum wage laws. You can find information about each state’s laws at the U.S. Department of Labor’s site (https://www.dol.gov/whd/minwage/america.htm) via a color-coded map that indicates how that state’s laws compare to the federal standard. Hover your mouse over your state to see the current rate for you and click on your state to find more detailed information about applicable laws.

For example, in 2018, the federal wage law is $7.25. Click on Nevada in the map described above, and you can see that they have established a two-tiered system. If an employer doesn’t offer health insurance benefits, the minimum wage is $8.25, with premium pay required on days that exceed eight hours or weeks that exceed 40. However, if the employer does offer health insurance benefits and the employee accepts them, then the minimum wage is the same as the federal rate of $7.25.

Meanwhile in Missouri, they have established a minimum wage rate of $7.85, with no daily premium pay requirements, and premium pay is only required if an employee works more than 40 hours per week. Employees who work for a retail or service business with gross annual sales of less than half a million dollars per year, though, are not required to receive more than the federal minimum wage rate. And, if an employee works in a “seasonal amusement or recreation” business, premium pay is not required until “after 52 hours.”

In Arizona, the minimum wage is $10.50 per hour. In Oregon, it is $10.75, with premium pay after 40 hours – and, if someone works in “nonfarm canneries, driers, or packing plants and in mills, factories or manufacturing establishments (excluding sawmills, planning mills, shingle mills, and logging camps)”, premium pay is required after ten hours in a day.

Not all examples apply to veterinary practices, of course, and the point of these examples is to show how widely state laws can vary. So, it’s wise to fully use the resources available to you through government offices and websites and, when needed, through advice of employment attorneys. Laws can change, so make sure that your practice is state-savvy for this year’s laws.

Following State Laws: Vital for Practice Success

Because employment laws are created to help maintain a healthy balance between employer and employee, carefully following them helps you to create and/or maintain a healthy work environment for everyone in the practice. Conversely, by not following these laws, you’ll open your practice up to a significant risk for lawsuits.

 

Compensation Best Practices in 2018

It would be so simple if practice owners could open a fortune cookie for each one of their employees and find the method by which to fairly compensate them.  While there are commonly accepted methods of compensation, their implementation in veterinary practices varies because different entrepreneurs have different business goals.  Also, “fairness” is a relative term that introduces variability into an equation that might otherwise be consistent from practice to practice.  This article describes the factors that practice owners should consider when determining compensation for veterinarians and paraprofessional staff.

Benchmarks

Below is a table that provides a snapshot of current key indicators available for small animal companion practices.  It is not meant to be all-inclusive, but rather to provide some guidelines that enable managers to take the practice’s compensation pulse. They can then determine if the practice is on track for the next year or needs to perform some diagnostics to prevent a fiscal derailment.

Name of Key Indicator Key Indicator Comments Where Found
Total revenue per doctor Less than $450K       10.1%

450K-500K               4.5%

500K-550K               10.1%

550K-600K               14.6%

600K-650K               15.8%

650K-700K               9.0%

700K-750K               5.6%

750K-800K               5.6%

800K-850K               10.1%

850K-900K               3.4%

More than 900K       11.2%

Medical hours only The Well-Managed Practice Benchmarks Study (2017)
Percentage of gross income for paraprofessional staff compensation 22.5% (wages only)

0.6% (retirement)

1.4% (payroll taxes)

24.5% (total cost)

 

  The Well-Managed Practice Benchmarks Study (2017)
Percentage of gross income for veterinary compensation 21% (blended rate) Wages The Well-Managed Practice Benchmarks Study (2017)
Name of Key Indicator Key Indicator Comments Where Found
Average starting salary for a veterinary associate $66,800

 

With < 1 year of experience (excludes benefits) The Well-Managed Practice Benchmarks Study (2017)
Average student debt $166,714

 

The average of 2017 veterinary school graduates with loan debt DVM360 – Where DVMs fit in the U.S. Student Debt Crisis
Average amount of employee’s healthcare cost paid by a Well-Managed Practice 67%   The Well-Managed Practice Benchmarks Study (2017)
Associate compensation ranges (%) for private practices

 

Blended rate: 16-22%

Split rate: 22-26% for services, 4-8% for products

  The Well-Managed Practice Benchmarks Study (2017)
Starting compensation ranges for (hourly rate):

Hospital Administrator

 

Practice Manager

 

Receptionist

 

Credentialed Technician

 

Veterinary Assistant

 

Median        75th Percentile

 

$29.65              $35.10

 

$21.65              $22.80

 

$12.00              $13.00

 

$15.00              $16.00

 

$11.50              $12.50

Median and 75th Percentile ranges as benchmark The Well-Managed Practice Benchmarks Study (2017)
On average, full-time support staff to doctor ratio

 

4.2 All staff members The Well-Managed Practice Benchmarks Study (2017)
On average, veterinary technician/assistant to doctor ratio 1.9 Includes credentialed technicians, non-credentialed technicians, and veterinary assistants only The Well-Managed Practice Benchmarks Study (2017)
Name of Key Indicator Key Indicator Comments Where Found
Average profit margin 9.9%   NCVEI Update – New Insights in Practice Growth- Karen Felsted presented at NAVC 2011
Debunking The Myths Of Base Salary And Production Percentages Why pro sal can work for your practice Each of the debunked myths gives practical tips to follow to include the links for dvm360.com (ProSal) and PayScale.com Veterinary Economics March 2010 – Squashing Pro Sal Myths
Percentage of practices using compensation method for associates Fixed Salary – 21.4%

Base + Percent of Production – 56.4%

Percent of Production – 18%

Hourly – 3.8%

  The Well-Managed Practice Benchmarks Study (2017)
Total compensation worksheet   How you calculate your pay ranges affect your bottom line DVM360 Dec. 2011 – ProSal Total Compensation Worksheet
Crediting doctor’s production   What should be credited to the doctor and what should be credited to the practice DVM360 Nov. 2013– Crediting Doctor’s Production Worksheet

DVM360 July 2005 – Giving Away a Fortune

2010 Veterinary Economics State of the Industry Study   Quantifies compensation methods, how satisfied the owners are, how happy the associates are DVM360 August 2010 – Veterinary compensation conundrum

  

Veterinary Compensation

Many periodicals and books discuss the factors one should consider in establishing a compensation policy for veterinarians. Of particular importance is the question of whether compensation should consist of a fixed salary, a percentage of the revenue generated by the veterinarian and collected by the practice (i.e., commission-based), or a combination of the two. If a commission-based component is present, it is also important to consider how the revenue figure will be calculated. Will it be limited to revenues generated from professional services, or will it include revenues generated from items like over-the-counter medications and foods?    Percentages can also vary in relation to the magnitude of the revenue number that is generated.  Implementing compensation systems in practice requires attention to the details of production calculation and timing of payment. The key to remember is there is NO one size fits all when determining the appropriate compensation for veterinary and non-veterinary staff.  There are numerous factors that go into assessing the actual method used for compensation, which often requires the assistance of an advisor.

National starting salary information is generally published annually in the Journal of the AVMA. (See: Employment, starting salaries, and educational indebtedness of year-2013 graduates of US veterinary medical colleges, October 1, 2013, Vol. 243, No. 7, Pages 983-987; Employment of male and female graduates of US veterinary medical colleges,  JAVMA October 1, 2011, Vol. 239, No. 7, Pages 953-957.) See also the latest biennial edition of the American Animal Hospital Association’s Compensation and Benefits-An In-Depth Look and the AVMA’s Economic Report on Veterinarians and Veterinary Practices (Wise, J., Center for Information Management, AVMA, Shaumberg, IL (Tel: 847-925-8070). Two periodicals, Veterinary Economics and Veterinary Hospital Management Association Newsletter, also regularly publish helpful articles. In addition, Wutchiett Tumblin and Veterinary Economics published Benchmarks 2013 Well Managed Practices.

Paraprofessional Compensation

 Paraprofessionals are often compensated on an hourly basis and the industry has yet to develop widely adopted performance-based compensation models. Paraprofessionals generally report low job satisfaction and high turnover rates. In the 2016 NAVTA Demographic Survey, 38% of veterinary technicians left the practice due to insufficient pay, 20% due to lack of respect from an employer, 20% from burnout and 14% because of the lack of benefits. Full time technicians reported a salary between $15-20 per hour, while part-time technicians reported $14-16 per hour. After taxes, even the well-paid veterinary technicians are only slightly above what is considered the poverty line for a family of four in the United States ($24,300).

According to the United States Bureau of Labor Statistics, the median pay for veterinary technicians was $16.06 per hour in 2017. By comparison, a JAVMA published study on Jan. 1, 2016 of certified veterinary technician specialists reported that the weighted mean pay rate in 2013 was $23.50 per hour.

In AAHA’s 2016 Compensation & Benefits survey, average veterinary employee turnover was 21%.  In Veterinary Economics 2010 Benchmarks survey of Well Managed Practices, turnover was 26% for receptionists, 21% for assistants, and 44% for ward attendants. To compare with the national workforce, Compdata’s Annual Compensation Survey showed that national average turnover was 18.7% in 2008 and 15.9% in 2010.  The chart above can be helpful to calculate a practice’s turnover expenses. Turnover is a pervasive and expensive problem that can be mitigated by learning how to properly motivate employees.

Managing Social Media Behavior at Your Veterinary Practice

Originally Published by Today’s Veterinary Business, December 2018

Use of the internet, particularly social media, can be a double-edged sword, especially in the workplace. On the plus side, it can be a wonderful vehicle for marketing your practice and otherwise connecting with clients and potential clients. On the darker side, what happens when an employee posts content that can have a negative impact on the practice? Should you respond? If so, how should you respond? If a post is offensive, do you have the option of disciplining, even firing, that employee?

Because people in general are so openly sharing thoughts and opinions on social media, it’s not surprising that many experts believe that terminations based on employees posting inappropriate content will continue to increase. Handling this type of issue at your practice can be challenging for your human resource team, given that this is a fairly new type of problem to tackle – but, finding the right approach is crucial, given that just one post has the potential to blow up into a public relations and human resource disaster.

So, how do you respond to, say, a sexist-sounding post on an employee’s page? Although you don’t want to over-react or react emotionally in the moment, and you don’t want to micro-manage your employees, here’s the crux of the situation, distilled into just one sentence. How much potential damage could a particular post have on your practice’s reputation?

What’s important is that you respond fairly, not allowing one person who, say, has a knack of being humorous in his or her posts more leeway for the same type of material that another employee posts in a more serious manner. And, if you choose not to respond, be aware that you’re still really responding – giving the message that you either are fine with the posts or you aren’t concerned with the messaging. And, although a non-response is sometimes the right choice, in today’s business environment, your practice could also be harmed by this more passive approach.

What You Can – and Cannot – Do

At a minimum, you should create a policy about your employees’ use of social media while at work. Be clear about what an employee can and cannot do, and then consistently adhere to that policy. You have the option of banning social media use entirely while on the job. If, of course, someone’s job includes posting for the practice, you’ll have to clearly delineate what is and isn’t permissible during work hours.

However, you cannot ban employees from talking about work-related issues online when they aren’t at work, and they are legally permitted to discuss topics with one another on social media that fall within protected concerted guidelines. Employees can, for example, discuss their dissatisfaction about management style at the practice, how much they’re getting paid and so forth on Facebook or Twitter, as just two examples.

Employees are not protected and can be fired, though, when they discuss these issues online with someone outside of the practice, as this no longer falls into the category of co-worker dialogue about the workplace. They can also be terminated for sharing information that is deemed confidential, including but not limited to trade secrets.

Employees aren’t protected when talking about a workplace topic that isn’t related to employment terms. If someone calls a manager “lazy,” that communication may ultimately be protected. If the employee posts, though, that the manager is “fat,” then that may open the employee up for termination. Or if an employee posts that “my veterinary office is full of ugly people,” this is leaving the realm of employment-related discussions.

It can be difficult to discern when a post crosses the line, so your practice may need help with an attorney experienced in this type of law to determine legalities of particular posts. Note that laws can differ by state so, if your company has practices in more than one of them, you may not be able to make blanket social media policies. Employee protection is especially strong in California, Colorado, Louisiana, New York and North Dakota. Also, be aware that employee protection about social media postings applies to unionized as well as non-unionized employees.

Hate Speech and Protected Classes

You can fire employees who engage in hate speech. Sometimes a post clearly contains hate speech, while at other times, it is borderline. Hate speech is defined as communication that has no purpose or meaning other than expressing a feeling of hatred for a particular group, perhaps focused on race, ethnicity or gender, sexual orientation, national origin, religion and so forth.

When Creating a Social Media Policy for Your Practice

Your policy should contain clear guidelines about what is and isn’t permitted while at work, and also explicitly state that trade secrets and the like must remain confidential. The policy should ask employees to not use social media to post defamatory material that could create a hostile work environment. It is also reasonable to ask them to preface any social media remarks made about the practice online with a disclaimer that you don’t represent your employer’s point of view. It makes good sense to be proactive, too, and run your social media policy past your practice’s attorney.

As a creative solution, some companies are providing social media breaks for their employees throughout the day, perhaps 15 minutes in length, a couple of times per day. This can give everyone a chance to relax and refresh their minds. The goal isn’t to completely restrict your employees from ever using social media (which isn’t do-able, anyhow) but to encourage moderate use in appropriate ways. If you want to use this strategy, outline specifics in your social media policy.

Sharing Your Social Media Policy with Employees

How you share the news about your social media policy can go a long way in determining how well it is received. For example, you could pick a day to get some pizzas for your employees, and use that as an occasion to have a discussion on your social media policy. Explain why having the policy is so important in today’s times, and educate them on the problems that can arise when this form of communication isn’t appropriately used.

As you share the role that social media and its messaging plays in your practice’s culture and values, using a helpful approach is more likely to be successful than leaving the impression that you don’t trust your employees and plan to monitor their every message. And sometimes, by simply educating employees on privacy setting options in social media, you can help to prevent an unpleasant situation.

Share examples of appropriate/acceptable posts and ones that cross the line, and be open to questions, concerns and employee feedback. Getting employees to buy into your policy is a big step forward.

Monitoring Social Media

In general, avoid monitoring a specific employee’s social media accounts to watch for inappropriate comments. If you’re aware of a controversial comment, let that employee know how you plan to investigate and then review the situation with him or her. Then do exactly that.

When you follow up with the employee, get his or her side of the story. In some cases, the comment is so inflammatory that termination may be the only response. Other times, what the employee has to say may provide context that allows for lesser forms of discipline. Remember to be consistent and to follow up appropriately with everyone involved at the practice. As needed, update your social media policy and share it with all of your employees.

To view article on Today’s Veterinary Business, click here.