Diving into a veterinary partnership? Check out these 9 FAQs first

Partnership is experiencing a renaissance in veterinary practice ownership. And although partnerships can run into unanticipated problems, they can also work well. As is the case in any complicated relationship, the odds favor partnerships whose participants think, plan, brainstorm and cooperate with a flexible outlook from the very start.

If you're pondering shared ownership of a veterinary clinic, here are answers to frequently asked questions about partnerships: 

1. Why is partnership popular again? There are a number of possible reasons: (a) Veterinary clinical science has become much more sophisticated, requiring greater startup costs for equipment and supplies. It's easier to gather capital and obtain financing if a practice is started or purchased by two or more DVMs. (b) The complexity of the science tends to make recent graduates want to have a second doctor to share the heavy lifting of evaluating cases and dealing with confused clients. (c) In areas not served by an emergency practice, partnership cuts on-call duty in half.

2. Is partnership a good way to practice? It depends on your goals as a veterinarian. If your main objective is to limit your management headaches and be fairly certain of consistent income, you might be better off joining a corporate-owned chain of practices or negotiating a long-term associate contract for yourself. However, if you aim to transform hard work and long hours into equity that can someday help fund your retirement, partnership is one route.

Photo source: Getty Images3. Does a friend or classmate make a good partner? Possibly. The problem with partnering with friends is that it's difficult to be objective in assessing the business prowess and personal spending/saving philosophy of someone close to you. Often, the best partners are those who recognize a shared goal of building a high-quality practice that's consistently profitable. Enjoying someone's company is not a persuasive reason to go into business with that individual. And business disagreements turn personal quickly when friendship is in the mix.

4. Isn't it easier and cheaper for our practice to operate as a general partnership? Very rarely, and alternatives don't need to be costly. In a general partnership, all partners are legally liable for all obligations of the partnership. Limited-liability companies (LLCs), C-corporations and S-corporations limit participant liability, and they don't need to be expensive to form or maintain.

5. How can we save money forming a business entity? LLCs and corporations each have their unique costs of formation; the key is knowing where to spend your money in the formation process. Creating a business entity should not be expensive, and I often recommend that DVMs do the formation work themselves rather than spending lots of money on legal fees. Companies such as BizFilings.com and LegalZoom do a great job filing the paperwork necessary to form a veterinary LLC. Their fees are far lower than a typical attorney's. They also may be able to act as the business's registered agent if it's required by state law.

6. Where should we spend our money in forming our LLC or corporation? Even if you go online to use a corporation-forming company to file the partnership formation documents, I strongly recommend that you and your partners use a qualified attorney or business consultant to assist in creating the document that forms the “constitution” of the business entity: the operating agreement (in an LLC) or the bylaws and shareholder agreements (in a corporation).

These documents are the “constitution” because they lay out the precise steps involved in decision-making and decision execution (both when the partners are in agreement and when they're not). The operating agreement or corresponding corporate documents provide the rules that determine “control.”

Consider this example: Three veterinarians each put $50,000 into a fledgling practice. The leasehold improvements, supplies and basic equipment end up costing approximately $100,000, so there's still $50,000 in the bank. Dr. A wants to leave the cash there in case revenue is occasionally weak, so that payroll will have a cushion. Classmates B and C each love diagnostic imaging and think the practice should buy a $50,000 piece of equipment-they'll worry about payroll if a problem comes up.

If their LLC requires unanimity in order to make large expenditures, the money stays in the bank. If it does not address the issue, all B and C need to do is vote together and use their majority to mandate that the purchase be made.

7. How can we prepare for those sorts of problems? The “constitution” of the business entity needs to be hammered out before the doctors commit financial capital, whether that capital is cash, equipment, inventory or a building. Once the capital is contributed, it can be tough to get it back in an expeditious manner if negotiations among the partners stall or collapse.

If the partnership seeks out solid legal or business consulting advice simultaneously with creating the LLC or corporation, no time is lost and all goals can be achieved. The clinic space can be negotiated, supply accounts established, bank financing obtained and other key details pursued as the partners address the control structure of the new veterinary business. This way, the clinic is on track to open as soon as the operating agreement or bylaws/shareholder agreements are finalized.

8. What will the consultant or lawyer do for the partners during negotiations? The fill-in-the-blank forms supplied by companies like BizFilings.com are great, but they are only a starting point. It's nearly impossible for a typical veterinarian to understand all the boilerplate language in these forms. Most of it is template, pure and simple. Yet buried in there are spots where important information needs to be included. The LLC or corporate advisor should force the partners to come to grips with decisions such as these:

> Can the partners be required to pony up extra money if payroll is short?

> Who will have check-writing authority?

> Will big checks require multiple signatures?

> If a partner dies, does his or her family get to vote that partner's shares? If there are no veterinarians in the family, can they sell to a licensed stranger?

> How many partners are required to approve hiring an associate?

> Will partners be allowed to borrow against their equity in the LLC?

9. Are these decisions so important as to risk having the partnership collapse at the start? My belief has always been that if partners can't face difficult decisions at the beginning of their relationship, there isn't much hope for them to do so amicably when money is short, a partner dies or one of the owners demands that the clinic hire his or her deadbeat sibling.

Partnering to own a practice can be fraught with downsides, but anticipation and preparation can sidestep some of these problems.  

Christopher J. Allen, DVM, JD is president of the Associates in Veterinary Law P.C., which provides legal and consulting services exclusively to veterinarians. He can be reached via e-mail at info@veterinarylaw.com.