Don't get knocked out by a buy-in

Don't get knocked out by a buy-in

Sep 01, 2007

Gary I. Glassman, CPA
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.

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 and look under Web Exclusives: "Does Practice Ownership Pay?")

What to ask before buying in
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.