All's fair in love and veterinary practice partnerships

Any veterinarian who's even remotely considering entering into a partnership needs to start watching the CBS television series The Good Wife.

The program is primarily about a philandering Illinois gubernatorial candidate and his estranged spouse, who has returned to law practice to support their children, of whom she has custody. But the program has a number of subplots, the most compelling for me being the ongoing fight for control of the law firm where "the good wife" works as a fourth-year associate.

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So why would a veterinarian be interested in this subplot? Because it reveals considerably more truth than fiction regarding how professional partners often treat each other when their firm hits a bump in the road.

The Good Wife nicely summarizes most of the typical disputes partners get into in any professional, practice-based business. It doesn't matter whether the partnership is in corporate form, an LLC or otherwise—partnership is a challenge. The show also points out the weaknesses and vulnerabilities of minority partners.

Buying in with hope

When a veterinary practice offers to allow an associate or other veterinarian to buy into the business, a multitude of legal and mental expectations come into play among all parties. One assumption is that all partners—who most commonly are also practitioners—will work as hard as possible to further the general interests of the practice. It's also taken as an article of faith that profits will be shared on a pro-rata basis according to the ownership share each partner holds. Finally, everybody also figures that each partner will be fairly compensated for his or her work in the role of employee.

Of course, as I like to say, "the courthouse is located at the intersection of assumption and disappointment." Litigation among frustrated partners happens every day. It happens on television. And it can happen at your veterinary hospital.

Assumptions vs. reality

Let's first consider what's not assumption but indisputable reality. First, the fact is that in order to buy in, a professional must actually buy his or her way in. This means there's a financial price that's required of the new partner, one that's paid in exchange for the package of rights he or she will acquire as part owner of the practice.

Second, a buy-in is not a buyout. This means that when an associate purchases an equity interest in a veterinary practice, she's a part owner, not the owner. She has no power to make key decisions independently or to steer the ship at all without the consent of one or more of the others.

This is where assumptions come in. Once the new partner buys in, she expects that she'll be treated fairly and equitably and be rewarded commensurately with her ownership share. But as a minority owner, she can't make that happen. So what might happen?

The other partners get bold. If there's one owner with more than 50 percent of the business, or any combination of partners who collectively own that much, they usually can borrow money, purchase equipment, hire consultants and build new buildings without getting approval from any of the other minority partners. When the controlling partner decides to borrow a large sum to create something along the lines of a Veterinary Economics Hospital of the Year, there could well be a subsequent reduction in the net end-of-year profit distributed to the remaining partners.

The seasoned partners probably have bank accounts that can handle that reduced income. But what about the new partner who's still paying off the loan that allowed her to become a partner in the first place? She may not be in a position to forego the expected income stream like the others.

The other partners get greedy. Partner salaries don't necessarily stay the same over time, even if they appear to be equitable when a new partner enters the picture. When the principal partner, or several more senior partners, in a practice face unexpected financial obligations or investment plan disappointments, they may feel the need to do whatever it takes to come up with more money.

One way to generate more bottom-line revenue is to control expenses, and that might mean no raises for minority partners. This puts the minority partners in a tough spot. When the majority ownership votes to freeze or lower a minority partner's salary, he can object and he can complain. But what he can't do is muster enough voting power to change the decision.

And while an associate veterinarian can quit, a minority partner probably can't—he needs to stay to protect his buy-in investment as well as the viability of his profit distribution from the partnership. For him it's a losing situation. For the majority partner or controlling partners, it's a real win. For every dollar saved in the minority partner's reduced salary, the majority ownership receives—well, the majority: 51 cents or more, depending on how much of the practice they own.

The opportunistic sellout. Imagine this scenario: An older veterinarian sells 25 percent of his practice to a long-term associate. The following year he decides to sell out to a corporate veterinary chain. The 75 percent owner has the power to sell his shares at half of their fair market value and take the balance in deferred salary for a phantom "consulting" position.

The big corporation then tells the 25 percent partner it wants her shares at the same valuation. If the minority shareholder won't sell out at the same bargain-basement price, the new corporate owner can effectively force her hand by threatening to defer profit distributions on her ownership indefinitely or slash her salary.

Business is business

This is the same sort of chicanery you'll enjoy watching unfold on The Good Wife. But don't be confused into thinking that these minority partnership woes happen only in medium-sized law firms on TV. Handicapped minority shareholders are—and always have been—a reality of life in business. And veterinary practice is a business.

Truth is, when it comes to the risks that go along with a junior position in a professional practice, size really doesn't matter. Majority owners—or even cadres of other like-minded minority owners—can take advantage of a minority partner no matter how big or small the group practice might be.

Still not convinced that the fantasy world of The Good Wife mirrors real life? Consider this drama: On May 28, 2012, the venerable white-shoe New York law firm of Dewey and LeBoeuf filed for bankruptcy after its senior equity partners expanded the firm to 26 offices across the globe and accumulated a staff of 1,400 attorneys.

According to The New York Times and The Wall Street Journal, senior partners had not only leveraged the firm into excessive debt, but they also set up a salary and bonus structure that provided luxurious payouts to a small number of senior partners and a far smaller compensation arrangement for all of the other minority partners. Of course, those junior partners had paid handsomely for the right to buy in through years of toil as associates and large financial capital contributions.

In a recent interview, William Henderson, JD, a law professor at Indiana University, discussed how this could happen at such a prestigious firm: "Because the partnership lacks any shared cultural values ... money became the core value holding the firm together," he said. "Money is a weak glue."

Dr. Christopher Allen is president of the Associates in Veterinary Law PC, which provides legal and consulting services to veterinarians. Call (607) 754-1510 or email info@veterinarylaw.com.