An associate buy-in is an important part of the evolution of many practices. Although we hear that owners should begin planning their exit strategies the day they become practice owners, the reality is that this early planning is the exception rather than the rule. For many owners, the easiest transition is selling a piece of the practice to valued associates several years before the owners plans to retire. These associates generally start with a minority share of the business (<50% ownership), and many ultimately will become majority owners in the future. A partial interest sale can be a win-win situation for both the practice owner and the ownership-minded associate.
There are many reasons to sell a partial interest of the practice to one or more associates. The most common reason is for succession planning. Ideally, practice owners will begin planning how to sell the practice many years before actually being ready to do so. In a perfect situation, the owner has a valued associate, who already has an existing relationship with the practice, the clients and the staff, as a potential buyer for the practice.
However, the timing isn't always right. You can't always hire the perfect associate 3-5 years before you wish to retire, with the hope that they will want to buy the practice from you when you are ready to sell. If you aren't ready to retire, but you already have the perfect buyer on your staff, it may be a good strategic plan to offer a piece of the practice now. By doing so, it is more likely that this associate will stay and become a future buyer for the rest of the hospital, thus assuring you of a succession plan when you retire.
Perhaps you are a sole owner and you are tired of the day-to-day responsibilities of owning/managing a practice and you just want "to be a doctor". By selling a portion of your practice, you can gradually transition management responsibilities to your partner as part of the process of your succession plan.
Did you hire an associate with a promise that they would have an opportunity to become an owner "someday" but that day never comes? Associates who are interested in ownership do not like to have carrots dangling in front of them for a long time. It is very likely you will lose this associate if another ownership opportunity comes along. By selling a partial interest in the practice now, you can help to "lock in" that valuable associate, rather than lose them to your empty promises or worse - to a competitor.
There are many other reasons for sharing the responsibility and risk that are inherent in practice ownership. Once you have made the decision to take on a partner, it is time to consider how much to sell and on what terms.
From an associate perspective, practice ownership provides many advantages over being an employee. However, those advantages also go hand-in-hand with increased responsibility and increased risk. Understanding these responsibilities and risks is a critical part of the process if you are considering ownership in a practice. Being an owner offers the possibility of many benefits, from increased financial return to increased work flexibility, to guiding the philosophies of the practice. Becoming an owner is a unique financial opportunity that every veterinarian should strongly consider.
However, running a business is not why you went to school. The veterinary industry is far too competitive in today's world to hang out your shingle and have business success. You must have at least some interest in leadership, human resources, customer service, finance, and marketing, to name a few. Just as a veterinarian takes on a wide variety of specialties (a dermatologist, cardiologist, internist, dentist, surgeon, etc.), so too does the practice owner have to become a "Jack (or Jill) of all trades" from a business perspective. While you don't have to be an expert in everything, you need to "know what you don't know" so that you can find trusted advisors to help you in the process.
If ownership interests you, having a long transition before you take the ownership role entirely on your shoulders can be a huge benefit. By purchasing a partial interest in a practice, you can work together with the existing owner to develop your leadership style and to learn the responsibilities needed to maintain and grow a successful practice. This allows you to assume new responsibilities gradually and with your partner as a mentor, which significantly reduces your relative risk of becoming a practice owner.
Many associates feel that practice ownership is not attainable financially because of the high student loan debt they carry. The reality is that, if a practice is valued appropriately, ownership is a very attainable financial goal, even with a high student loan burden. In fact, owning a profitable practice will help you pay off that debt more quickly than you can as an associate. Don't let money be the deciding factor!
How much of the business should be offered for sale?
This can be a very difficult decision and this is where the interests of the owner and the associate can differ. From a purely financial/business perspective, it is in the best interest of the owner to sell a relatively small percentage of the practice, while for the associate, there is a financial advantage to buying as big a piece as possible.
From a strictly financial point of view, you have to consider that you are essentially "giving away" a share of your practice. As a result, you will likely want to sell the smallest piece you can, in order to secure the associate as a partner.
Why? As the owner, you can distribute profit to yourself as you see fit. If you take on a partner, you will have to distribute their share of the profit according to their ownership percentage. For instance, if you currently have $100,000 per year of profit, you may take as much or as little of this profit as you choose as a distribution to yourself. If you take on an associate as a 40% partner, they now have the right to $40,000 of the profits. From this profit, they will turn around and pay you for the purchase of their 40%. In the end, you will likely get close to the same amount of money you had before, but you will have given up 40% of the equity in your practice.
So, why would you want to do this? For all the reasons stated above. Selling a partial interest is not done to gain money - it is for all of the other reasons. Still, the financial side is an important factor. So sell as little as possible.
The best perspective for you to have is that the sale now of partial interest is securing you a future buyer for the rest of the hospital. Even though the current percentage you are selling will essentially be a "wash" from a financial perspective, you are essentially buying your own succession plan. You also are securing a smooth transition, which will help ensure that the practice you built will continue to operate. If you sell 5%, don't think of it as "giving away" 5%, think of it as "securing a buyer for the remaining 95%".
The reality is that the profits of the company provide you with the means to pay for your buy-in loan. Assuming the practice continues to maintain or increase profit, all of the money to pay for your buy-in comes from profit you will receive as an owner. It does not come from your normal compensation for clinical duties. Therefore, an associate can continue to make student loan payments, car payments, house payments, etc., while financing the purchase of the hospital.
There is inherent risk to this plan, however. What if profits decline? The payments for the practice will still be due, even if profit distributions go down. What if new equipment needs to be purchased or there are substantial unexpected repairs? While there can be some protections built in to the partnership agreement concerning decision-making for capital investments, there is no guaranteed level of profit distributions.
In the best-case scenario, you will purchase a portion of the business from the existing owner. Your share of the profits of the business will pay for the purchase. With ongoing growth of the business, you will also have additional profit distributions that you will be able to keep. The result is that you will have gained equity in the practice while not losing any of your normal clinical compensation.
In the worst-case scenario, profits will decline and you will be on the hook for your payments. Because of that, it is important that you not "bite off more than you can chew". While there may be a desire to "get as much as you can", you have to remember the downside potential as well as the upside potential.
All practice owners eventually will exit practice ownership. Having an orderly ownership transition plan in place provides peace of mind and can ensure the practice's longevity and continued success.