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Buying A Veterinary Practice

How A Long Term Associate With No Contract To Buy Can Make Your Practice Unsellable

Jan 2, 2015 3:20:00 PM

airplane-house-unsellable_0Years ago, you decided it was time to take in an associate but you didn’t know whether things would work out, so you both decided to work together without a written contract for a while. It's the old, “Come on in and work with me for a while, see if we like each other... then we'll work something out later on.” It's an undefined, non-contractual based association between two doctors.

Because neither the owner nor the associate knows how or when the associate will buy-in, whether the associate will be credited with their contribution to the growth of the practice, the method for determining practice value, etc. the failure rate for this kind of professional relationship is approximately 85%-90%. In spite of this grim statistic, the head in the sand approach continues to remain the first choice among many veterinarians who want to believe that the potentially disastrous results from an undefined relationship can't or won't happen to them – or if it does, it will have no effect on the value of their practice.

This is often the result of a misconception about what constitutes practice value. The value of a practice is in the relationship between the doctor and the patients, not the equipment and facility. Practice owners think that they are saving money by not spending money on a contract, but instead, this decision to leave the relationship undefined almost always loses them a fortune.  A relationship with a non-contractual associate can go from months to years without the owner realizing that the longer an associate is without an agreement stays in the practice, the more dangerous the situation becomes. Even though the owner may own the equipment and perhaps the office building, the associate, by building a strong relationship with your patient base and your staff, may be gaining ownership value in the practice without having to pay for it.

Owners may be in for a rude awakening when the day finally comes to discuss a transfer of ownership. The owner may now discover that the associate either does not want to buy the practice or wants a substantially discounted price. The associate often feels they already have a relationship with most of the clients and patients and do not desire to buy that part of the practice with where they have already established patient goodwill. The associate may feel that the owner has made a fortune all these years off of their labor and that a substantial discount is well deserved.

Where does that leave the prospective seller? The disadvantages of having an associate without an agreement are numerous.

  1. The associate may have acquired a patient following that would justify, in his mind, starting a practice in your area. Each day that the associate adds another patient to his/her following, they obtain a stronger position. Your practice may become the launching pad for a competitor practice.

  2. If the associate refuses to buy the practice in the future, the marketability of your practice is severely compromised as any other purchaser candidate would be concerned that the patients would go with the associate if they relocated to another office nearby. It’s very likely that no one else will buy your practice because they will fear that the associate will move down the street and take most of the patients with him (and probably most of the staff).

  3. The value of your practice is instantly and devastatingly compromised if you become disabled or die because it opens the door to graveside negotiations with your spouse. It is doubtful that your practice could be sold for 30% of its fair market value under those circumstances. The associate will be in a prime position to “negotiate” a great deal. He will feel that he can set the practice price and terms (which will most likely be much less than the value you had in mind) and you will have no choice.

  4. Less dramatic but equally problematic is a circumstance where the associate leaves for another opportunity with a nearby competing practice. The associate can make a list of your current patients and move to another office nearby and take many of your patients and staff with him to the new location. The associate can solicit your staff and persuade them to leave the practice for a better opportunity with him/her. If the associate can persuade the staff to leave, they can solicit all of your patients.

Many practices today are selling for $500,000 to $1,000,000. To risk losing that substantial amount of money and increasing the likelihood of a failed associateship is not worth the risk.   The key is to make sure the associateship does not fail.  If it does, the practice usually loses about $200,000 a year in income when the associate leaves and moves down the street. This amounts to an income loss of $4,000,000 over the next 20 years! In addition to that, the fair market value of the practice drops by an average of 30% when the practice is eventually sold (which can amount to $200,000 to $400,000 or so lost for the practice owner.

In summary, you need to research the associate’s needs and goals and commit to a method or a time for them acquiring equity in your practice and ask for a commitment from them. You need to have a written contract with the associate outlining each party's rights, responsibilities. You need to make a commitment to the associate's future in the practice and the associate needs to make a commitment to you as to what he or she would try to contribute to your practice?

When you eliminate the ambiguities in your relationship, a most profitable associateship and eventual practice transfer can be structured.  In your relationship, if you do not know where you are going, the chances of you getting there are nonexistent.

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