While it may seem like more and more veterinary practices are being purchased by corporate groups, there are still many privately owned practices… and many veterinarians who are interested in practice ownership. If you love the privately owned practice where you work as an associate and have dreams of one day being a business owner yourself, consider an associate buy-in.
What is an associate buy-in?
Also known as a phased buy-in, an associate buy-in occurs when a practice owner and associate agree that the associate will buy a percentage of the practice over a predetermined period. After this time, the associate becomes a partner or buys out the owner’s remaining interest and assumes practice ownership. While the initial associate employment agreement may mention the potential for ownership, a formal buy-in agreement prepared by an experienced attorney is important to ensure the transition is negotiated properly.
Before you purchase the practice you’re working for, keep the following considerations in mind.
1: Will this be a good partnership fit?
Being offered the opportunity to buy into a practice is an exciting prospect, but don’t get stuck in a situation you aren’t happy with. Ensure the practice itself and your potential co-ownership responsibilities are a good fit. Ask yourself:
- Do you and the practice owner have a good relationship?
- Do you agree with the practice’s standards of care?
- Are you comfortable with the practice culture and business philosophy?
- Are you prepared for the financial risk practice ownership presents?
- Are you willing and able to fulfill co-ownership management responsibilities?
2: Do your due diligence.
Evaluate all aspects of the practice to ensure the information the seller—your employer—has provided is accurate. Be sure to:
- Review tax returns, bank statements, financial statements, profit-and-loss statements, and practice collections for at least the past two years. Also evaluate ongoing expenses, assets, and liabilities. Get the help of a certified public accountant (CPA) for this.
- Evaluate real estate and equipment lease agreements and vendor contracts. Ensure federal and state licensing requirements are met, and check for liens against the practice’s assets.
- Look into how the practice is managed, if the equipment is up-to-date and in good working order, and if the patient base has been represented accurately.
3: Ask for a veterinary-specific practice valuation.
Coming to an agreement about a fair purchase price is critical to avoid disagreements and potential lingering animosity. Ensure you and the owner agree on a non-biased, veterinary practice valuation specialist to determine the practice’s value.
A lot goes into a veterinary practice’s value, including:
- Location
- Revenue
- Assets
- Practice stability
- Goodwill and reputation
- Growth potential
Be sure that you’re getting a fair price, and that you understand how the valuation specialist determined that price.
4: Think about the deal structure and financing.
You and your employer need to agree on the deal structure and financing terms. As an associate buying into a practice, you’d typically pay a portion of the initial purchase price—usually 10% to 20%—upfront and the remainder over time depending on the promissory note terms.
Seller versus institutional financing
In some cases, the practice owner finances the buy-in, which usually involves a first lien position on the owner’s practice assets. This option may not be preferred by the practice owner because if the associate defaults, the bank can foreclose on the entire practice.
Sweat Equity
One structuring option is for the associate’s contribution to the practice over a predetermined time period to factor into how much ownership interest he or she receives.
Different structuring options may be preferred by different parties because of potential tax benefits. Work with an attorney or tax professional to determine the option that’s most advantageous to both parties.
5: Have the agreements drafted by an attorney.
Once the business terms are established, appropriate agreements must be drafted to execute the buy-in. These generally include:
- Purchase agreement — The purchase agreement sets forth the buy-in terms, such as ownership interest percentage, purchase price, loan contingencies, practice liabilities, due diligence, practice representations, and indemnifications.
- Partnership agreement — The partnership agreement addresses how the practice will be managed and who will be responsible for the practice operations. This agreement also should address the practice owner’s exit strategy.
- Employee agreement — Employee agreements should be drafted for each veterinarian. They should describe how the veterinarian will be compensated and what benefits they will receive. These agreements also should set forth the established restrictive covenants the veterinarian must comply with in case of termination.
6: Think about any potential restrictive covenants.
During the negotiating process, restrictive covenants should be addressed. While many view them as negative, restrictive covenants can protect a co-owner if the departing co-owner decides to compete with the practice.
Purchasing a practice is a huge undertaking. If you’re an associate interested in purchasing a practice, lean on the National Veterinary Law Group at Mandelbaum Barrett PC for help.