Future partners: Do your homework

Last in a three-part series

Veterinarians who are preparing to enter into partnerships are usually thinking one main thought, "We are going to make such great money and I can't wait to be able to share the workload."

The concept sounds enticing. Partnership offers the potential to havea second person on board who is legitimately interested in the financialwelfare of the practice and is not hanging around just for the paycheck.

Partnership sings the siren's song of opportunity to develop a largeclient base and always have another person to fall back on when the workloadgets really heavy. And oh, yes, let's not forget all that money.

Fantasy, reality

Let's briefly explore the fantasy and reality. A fairytale veterinarypartnership is entered into by two or more enthusiastic, hardworking doctorswho want to equally share in the development of a growing business. Theyeach want to derive the maximum satisfaction from practice while limitingthe downsides of endless hours, constant management responsibilities andno guaranteed second practitioner to help out during emergency situations.Each partner believes that the other partner will surely do more than hisor her share of the work; perhaps because both were previously associatesin the same practice, because they were lab partners in veterinary schoolor for some other reason. Finally, fledgling veterinary partnerships seemto be most commonly entered into by doctors who are relatively young.

Partnership realities frequently don't manifest themselves until somewhatlater. In the words of a real estate developer I work with, "time isthe killer of all deals," and indeed it is. The passage of time equalsthe unfolding of change and with it the development of new priorities andnew realities in the lives of the partners.

Mellows with age

Partners, as they age, do more scrupulous counting of their own overtimeand holiday emergency work than they did when possessing boundless energy.Partners get involved romantically with co-workers and sometimes with partnersat other veterinary practices. Sometimes they get involved with the spousesof their own partners.

Mostly however, as partners get older they get more tired and less enthusiastic.Frequently they do each of those things while they simultaneously becomeless flexible and more cranky. The passage of time and inevitable changeare the immutable realities that make early partnership planning so criticallyimportant.

Compensating factors

There are several key steps which can be undertaken in forming a partnershipwhich serve to compensate for later change.

As we discussed in last month's installment of this series, joint ownershipof a professional practice can be structured in several different ways.

A simple partnership can be established in which all partners are jointlyand severally liable for partnership obligations. A professional corporationmay be formed with each ownership interest being represented by a percentageownership of stock or a professional limited liability company or limitedliability partnership can exist with liability protections similar to thoseavailable in the corporate form.

Each form of doing business has its own positives and negatives, butthey have one important thing in common. Properly designed, each can providefor smooth adjustments in the business relationship between the partnersand for accommodations to the inevitable changes in the lives of the partners.

Partnership agreement

In a simple partnership, the partners can enter into a partnership agreementwhich lays out in detail the rights and obligations of each partner in theevent of changing circumstances.

It sets forth what is involved in the process of arriving at a big decision(such as changing locations or hiring a new associate or taking on an additionalpartner.) It should also lay out what process is to be followed if the partnersare deadlocked in opposition to each other on such an important issue.

In a professional corporation there are bylaws which spell out how corporatedecision are made and how disagreements are accommodated and resolved. Frequentlythe bylaws are supplemented with a shareholders' agreement which providesfor special rights and obligations of the shareholders (partners) with respectto each other and with respect to the business itself. Such a documentmight, for example, limit the right to sell an interest in the businessor to leave the business interest to another by assignment or will.

Limited liability companies and limited liability partnerships have adocument known as an operating agreement which specifies, if properly drafted,how decisions are made and by whom, what is involved in the decision toborrow or spend large sums of money and a host of other business issues.

Each category of business organization should have some type of documentwhich can specify a system of problem resolution. These documents shouldbe extremely detailed from the very beginning. They should be prepared atthe formation of the new partnership, not amended later when one or moreof the partners has already experienced a life change.

In addition to the shareholder, partnership or operating agreement, partnersneed another document to fully protect them. Partners need to recognizethat they are not just owners, they are probably also employees of theirbusiness. As such, their rights and obligations as an employee need to bespelled out. That employee role is, or should be, viewed as entirely separatefrom the ownership status of the veterinarian/partner.

Typical problems

Here are some typical problems which arise when a partnership fails torequire that a clear and specific employment agreement be signed by eachemployee/partner:

Dr. A and Dr. B are equal shareholders in AB Veterinary Hospital P.C.There is enough practice work for 2.5 veterinarians, so they decide to hirean associate. Dr. A keeps showing up for a full week of work, increasingthe amount of time he spends on practice building and management tasks.Dr. B decides to spend Wednesday and Friday afternoons doing relief workacross town. If compensation to each shareholder is calculated, based ona 50/50 split, it won't take long for A to begin to feel resentful. Evenif they each get the same salary under the terms of a simple, unsophisticatedemployment agreement, there is really nothing stopping B from earning extracash on the side during "work time." Unfortunately, A's shareof the associate's pay is effectively financing B's side job. Just imaginehow Dr. A will feel when Dr. B buys an ownership interest in the hospitalwhere he does relief work and begins using company time to manage a competingpractice.

I know what you're thinking; "My partner would never do anythingas outrageous as that." I'm thinking something different; "There'snothing in this example that I haven't already seen happen."

Future partners, do your homework.