Nonveterinary ownership: A new option for practice owners

Marianne Mallonee was a practice manager in a veterinary hospital near Denver three years ago, sitting in a board meeting listening to the partners talk about exit strategy. They were making a list of associates who might be interested in ownership. The list wasn't very long and her name wasn't on it.

When practice owners talk about exit strategy these days, their voices aren't often filled with hope. The discussion is familiar: Not enough associates are interested in owning a veterinary practice. Money is tight. It's tough to maintain profitability in this economic environment. What will they do when the time comes to retire? Sell to a corporation? Close the doors and walk away?

Mallonee moved to Denver for two reasons—the mountains and the opportunity to become a practice owner in a state where nonveterinarians are allowed to own 49 percent of a veterinary practice. She raised her hand.

"You have an exit strategy sitting right here at the table with you," she said. After all, she was 10 years younger than the four partners and she could bring a good deal of management expertise to the venture. After the meeting she realized something important: Veterinarians who own practices may not intuitively think of team members as potential partners. Nonveterinarians may have to raise their hands to be recognized.

The rules governing ownership by nonveterinarians are complex, fluid, and anything but universal. In some states, like California, Colorado, and Florida, it's relatively easy. In others it's considerably more difficult, and in some it may be impossible. But if you're willing to negotiate the legal maze with the help of a good attorney, bringing one of your team members into partnership may solve your problem and, at the same time, give your best employee a stake in the future.

Communication tool: Talk is cheap-and valuable

Today, Mallonee is a senior partner (owning 15 percent) at Wheat Ridge Animal Hospital northwest of Denver, a 24-hour, 20-doctor, 100-employee, high-tech teaching hospital. When the other three owners invited her to join the partnership, they said, "You're treating this practice as if it were your own; now let's make it your own."

Although the buy-in has created a somewhat uncomfortable debt load for Mallonee, at least right now, she focuses on the mountains and the long run. And she knows she's building something for her future.

"We knew him and trusted him"

Jim Nash, hospital administrator at Community Pet Hospital, also located in a Denver suburb, came into practice ownership through a different kind of arrangement.

Nash was hired at Community Pet Hospital in 2004 with a background in human healthcare administration. During his first annual review, he broached the subject of ownership with his employers, Drs. Wade Smith and Bill Stonehocker. He wanted to be a partner and a part of the hospital's legacy. The seed was planted.

Over the next several years the practice added emergency services and grew, and soon the need for expansion became clear. Drs. Smith and Stonehocker decided to grow by developing satellite facilities. Their method? Create a separate corporation and bring Nash in as a full partner in the new company.

After all, Nash was spearheading the business side of the practice every day. But bringing in a nonveterinarian as an owner broke the mold for the 50-year-old practice. Did the doctors have some trepidation about bringing in a partner without a veterinary degree? In a word, no.

"It wasn't really a concern," Dr. Stonehocker says. "More than anything, our discussions were about whether it would be legal. But we found no legal barriers as long as he didn't own more than 49 percent. A huge deciding factor was that we knew him and trusted him."

Dr. Stonehocker joined Community Pet Hospital in 1987, a time when practice ownership was a widely shared goal among veterinarians. When he was offered the opportunity to buy in, he took it—and appreciated the opportunity, like many in his generation. "When I graduated, everyone wanted to buy in," he says. "As owners, we felt some responsibility to the community. And we had no desire to sell to corporations."

But now interest in ownership isn't as common, Dr. Stonehocker says. When he started to think about an exit strategy, he found himself underwhelmed with offers to buy, despite the practice's growth and success over the years. Which is partly why he and Dr. Smith were so open to bringing on Nash as a partner.

And despite the challenges, ownership was the right choice for him and his partners—both veterinary and nonveterinary. "More and more, a business becomes part of you," he says. "Individuals can exercise a lot more control, particularly over quality, than a corporate entity would. You can guide the practice."

"It needs to be the person you think can take the practice to another level"

As Dr. Stonehocker's story illustrates, veterinarians' desire to buy into practices was a given for many years. "Usually, veterinarians have been so excited about getting in that they didn't focus on getting out," says Colorado attorney Edward J. Guiducci, JD. But now, their need for ideas about getting out is so great that Guiducci has built his law practice partly on exit strategy for veterinarians—and written the book Beyond the Successful Veterinary Practice: Succession Planning and Other Legal Issues (Wiley-Blackwell, 2000).

Guiducci is also spending plenty of hours helping nonveterinarians buy into practices. But he cautions practice owners not to sell to managers "just because you don't have time to work on management."

"The right person is someone you respect," he says. "It needs to be the person you think can take the practice to another level." Guiducci believes organizations like the Veterinary Hospital Managers Association are helping to groom managers to be that kind of person.

If you have a practice manager or a veterinary technician who's a critical asset and to whom you want to make an offer of ownership, Guiducci says, go for it. "The legal issues involved are complicated, but you can make it work," he says.

"Be careful—states are on the fence"

The complications surrounding nonveterinary ownership can be daunting. The law isn't consistent across state lines, and both the law and enforcement can change with a change in the state veterinary board.

So what's the big deal with nonveterinary ownership, anyway? Why are some states so set against it? One of the main philosophical reasons is that these veterinary boards fear that medical decisions won't be made by doctors. This can also be a contentious point in a practice's day-to-day operations. It's extremely important, Guiducci says, for partners in any arrangement involving a nonveterinary owner to establish clear lines between what does and does not constitute a medical decision.

When a veterinarian and a nonveterinarian ask Guiducci to handle their partnership, he begins by researching the laws and enforcement policies in their state. He says the law seems clear in some states but in at least 30 states the laws are "on the fence" (click here for an interactive map detailing nonveterinary ownership possibilities in corporations by state).

Guiducci starts by determining whether the state clearly allows nonveterinary ownership at any level. If not, he goes to the attorney general's office in the state to find out about enforcement and to gauge the disposition of the state veterinary board. One attorney general, for example, told him the rules weren't being enforced but warned him that a change in the board could reverse the trend.

From there, based on the intricacies of the state law, Guiducci begins crafting a potential solution. Generally, the agreement will arrange the finances of the practice to satisfy the state law by dividing along the lines of medical services and services to the practice. In some states, he says, a nonveterinarian can create an "administrative services structure" that provides some of the benefits of ownership. The administrative services entity provides all the scaffolding of the practice, and most of the fees from medical services go to the veterinary professional services corporation. A portion of those fees are then paid to the administrative services corporation.

Some states, however, don't allow the administrative services corporation to own the medical records. And when the practice is sold, the goodwill portion of the sale price is required to go to the veterinary corporation, Guiducci says.

Overall, though, Guiducci thinks the trend is that more and more states are relaxing the prohibition on nonveterinary owners. Whatever prohibitions remain are because of two major issues, he says: the worry that medical decisions will be made by people without medical degrees and the desire to limit ownership by large corporations.

But limiting people like Marianne Mallonee could mean practices will miss out on a partner whose lifelong ambition has been to own a veterinary practice. And, for Mallonee, it could mean missing out on the pride only an owner can feel. "When you're an owner, you know that come hell or high water, you were there and you were responsible for making a difference," she says.

Veterinary Economics special assignments editor John Lofflin is a freelance writer in Kansas City, Mo., and a journalism teacher at Park University in Parkville, Mo.