Don't get knocked out by a buy-in

So you want to be a contender in the marketplace for veterinary care. You've found a practice you love and you're at your fighting weight. You know that the ultimate way to practice high-quality veterinary medicine is to share the privileges of ownership. You're ready to buy in.

Gary I. Glassman, CPA

Hold on there, Ali. You're about to enter into an important partnership. And business partnerships require good communication and the appropriate documentation to protect your interests. So consider these issues first.

The starting bell

The number one question you should ask yourself is this: Do you share the same medical and business philosophies as your potential partner?

Ideally, partnerships are long-term. When the arrangement is good, life is good. When partnerships go bad, they can go really bad, just like with marriage and divorce. Common ground from a medical and financial perspective is like credit in the bank—you can draw from it over the years to get through the rocky times with your partner.

The papers

Get the proper legal agreements, such as an employment contract and buy-sell agreement, in place before you proceed with the buy-in. Many of the provisions in these documents are critical to deciding whether you even want to go through with the transaction. And there's much more at stake than just the purchase price. Here's a look at the key agreements:

The employment agreement. A partner employment agreement is similar to an associate employment agreement. It addresses compensation, fringe benefits, termination provisions, and a noncompete covenant if these clauses are enforceable in your state. Make sure the provisions are fair and equitable—here are a few examples of good ones:

• Veterinary service production pay at 20 percent to 22 percent

• Management pay at 1 percent to 3 percent of gross sales

• Return on investment pay at 12 percent of practice valuation

• Health insurance, three to four weeks of vacation, and a retirement plan such as a 401(k).

Red flags to watch for: unfair noncompete terms and termination clauses that don't call for justification or a supermajority decision by all partners.

The agreement on veterinary pay should take into consideration differences in production levels based on work schedules or performance. With regard to management pay, the agreement should say who will handle different management duties and how partners will be compensated for their time away from seeing clients and patients. Return on investment is what I call the "dividend" payment that comes with the privilege of ownership. (For more on owner compensation, see "Pay Partners Fairly" in the March 2006 issue of Veterinary Economics.)

The practice's cash flow determines the return on investment—and also influences the value of the practice. Most associates use their return on investment to finance the buy-in, so you need to know what that portion of your income will be so you have an idea of whether you can afford the buy-in. (For a more detailed explanation of how to perform these calculations, visit www.vetecon.com and look under Web Exclusives: "Does Practice Ownership Pay?")

The employment agreement should also address circumstances the owners might face. For example, suppose an owner experiences an extended illness. A fair provision would state that while she's out, she would not receive veterinary or management compensation because she's not generating revenue or performing management duties. This allows the practice to hire relief help without financial strain. The owner would, however, still receive her return on investment.

What to ask before buying in

The buy-sell agreement. This document addresses the transfer of your practice-ownership interest in the event of a death, disability, loss of license, or partnership dissolution. One of the most important components is a statement of the practice's value, which should be in the document at all times. Watch out for a provision that calls for a valuation at the time of an event. Usually during transitions or unexpected circumstances, emotions run high and people have a hard time agreeing. If all partners know the value at all times, things go much more smoothly. (For a list of what should be included in a buy-sell agreement, visit www.vetecon.com and look under Web Exclusives: "Checklist for a Buy-Sell Agreement.")

As an associate buying in, don't be surprised if the valuation used to determine your interest is your purchase price until your portion is fully paid for. In other words, if the practice is growing (client numbers and revenue increase every year), you might think this appreciation in value would affect you as you go along—but your investment won't really start to increase in value until you pay off your note. However, to determine your 12 percent return on investment, the current value will be utilized—which translates to a bigger dollar amount.

Here's a warning story: One doctor I know accepted an owner's buy-in offer without independently verifying the facts. She couldn't earn enough cash to make a reasonable wage and pay off the practice note, and three years later, after finally seeking consultation, she became so disgruntled that she left the practice and requested all her money back, which made for a messy "divorce."

But you know better. Tricky provisions and lack of experience won't knock you off balance. With the right preparation, you'll be standing tall when the buy-in bell sounds.

Veterinary Economics Editorial Advisory Board member Gary I. Glassman, CPA, will be helping associates prepare for practice ownership at CVC Central in Kansas City, Mo., Sept. 17. If you can't make that, Denise Tumblin, CPA, will speak on transitioning into ownership at the Progress in Practice seminars at CVC West, Oct. 18 and 19 in San Diego. Visit www.thecvc.com to learn more.