Practice Buy-In: Is It Right for You?
You have worked in a practice that has been a good fit for several years. You enjoy your coworkers, the clients, and the community, and the practice’s quality of medicine aligns with your personal philosophies. The practice owner is not ready to give up ownership entirely but is considering a partner—and you have been offered the opportunity to buy a portion of the practice, frequently referred to as a buy-in. How do you determine whether this is the right opportunity?
Following is a checklist of the typical steps involved in a buy-in transaction.
1 Appraise the Practice
The practice owner must establish the practice value because he or she cannot commit to a transaction until the value is known. Ideally, a credentialed veterinary practice appraiser would determine the value.
The practice value is determined by its profitability. The more profitable a practice, the more valuable, and it is important that the buyer, the owner, and the practice manager understand this. The determined practice value includes the inventory, furniture, fixtures, equipment, and goodwill but not the checking account, debts, or liabilities.
Recognizing that you are not buying a portion of the practice but rather a portion of the entity that owns the practice is important. Most business owners create an entity (eg, corporation, limited liability company) to own the business. The entity then owns the practice plus other assets (eg, checking accounts, emergency fund, client accounts receivable) and also liabilities (eg, leases, loans, accounts payable). The value of the entity for a buy-in (eg, equity value) equals the sum of the assets minus the sum of the liabilities. When considering a buy-in, understanding the difference between the value of the practice and the value of the entity that owns the practice is essential.
As a new owner, you would be entitled to a share of practice earnings, but you are also accepting responsibility for a share of the practice’s debt.
Most buy-in opportunities do not include the real estate. If you are given the opportunity to buy into the real estate, you should get a separate commercial real estate appraisal.
Buying & Selling
- 71% of WellMP associates and team members hired a veterinary practice appraiser for their most recent practice valuation.
- 64% have had the practice valued in the past 1 to 3 years.
- 45% plan to sell to a current or future associate or to a current co-owner.
- Those selling a veterinary practice listed the following as their top considerations before agreeing to the sale:
- A smooth transition for clients and team members
- Team job security
SOURCE: Benchmarks 2016: A Study of Well-Managed Practices. Columbus, OH: WTA Veterinary Consultants & Advanstar Publishing; 2016:97-99.
2 Evaluate the Deal
When the purchase price is set, the buyer should test the value with an accurate purchase feasibility analysis. This analysis objectively assesses the cash flows associated with investing in the practice (ie, will future profits pay the acquisition debt and taxes?). Because the analysis is based on the realities of the practice’s financial operation, it provides a solid foundation for assessing the opportunity.
Similar to the practice appraisal, the analysis begins with an assessment of the practice’s true profitability, followed by a determination of future cash flow to the buyer that takes into account making the loan payments and paying the associated income taxes. If the purchase is feasible (eg, there is enough cash to pay the debt and the taxes), the purchase price is fair market value; if not, negotiations can be based on practice data instead of another appraisal.
Leading Veterinary Lenders
Some of the leading veterinary lenders include:
- Bank of America Practice Solutions
- Calico Financial
- First Professional Practice
- Live Oak Bank
- Wells Fargo Practice Finance
3 Investigate the Financing Options
Traditionally, the seller provides the financing. Most loans cover a 10-year term with market-based interest rates. The seller’s attorney drafts the promissory note and associated security document. You may need a life insurance policy to cover the loan amount for worst-case protection.
Many lenders now provide veterinary buy-in financing. If obtaining outside financing, pay attention to the security required for the loan. Sometimes the entire practice may be required even though the buyer is purchasing only a portion, which the majority owner may find unpalatable, necessitating seller financing.
4 Plan Ahead
Plan how the practice will be operated following the buy-in. Cooperation among owners is important for the practice’s future, regardless of the percentage of each ownership. Good communication and financial transparency are key to the long-term success of a practice with multiple owners.
Creating an owner-operating agreement, also referred to as a buy-sell agreement, shareholders agreement, or partnership agreement, is a significant step. This document provides the foundation for co-ownership and for dealing with any unknowns. If the practice already has multiple owners, this is a good time to review and update the current agreement.
Working with a veterinary attorney to create this document is important because he or she will not only have extensive experience in creating such documents but also will likely have experience in failed partnerships, which can be helpful. Do not skip over the content of the operating agreement—the details are important.
Doing Due Diligence
- Do both the current owner and potential buyer share a common goal and vision for the practice direction?
- Will the financials be adequately transparent following the sale to allow the buyer to assess the practice’s financial health?
- Could any outstanding judgments, lawsuits, or liens on the practice or the potential new partner impact the practice’s financial wellbeing?
- What system of checks and balances is or will be in place to prevent commingling of funds between owners’ personal and practice accounts?
- How will compensation, including benefits, be distributed equitably among partners? Assigning equitable values not only to the benefits but also to the time and talent each owner brings to the practice is necessary.
- Will annual earnings be sufficiently accessible to service the buyer’s debt and tax liability? Access is especially important for an owner who is buying less than 50% ownership.
- How will the role and responsibilities of a new partial owner change after the sale? What will be his or her level of influence in key decision-making?
- When the current owner decides he or she no longer wants any ownership, will the new owner be given the opportunity to purchase the remaining portion? What is the target timeline? How will the value of the extra portion be determined?
5 Ready, Set, Go
Once the buyer understands and feels comfortable with the costs and benefits of ownership and has agreed with the current owner on the operating agreement, both should agree on a timeline and start drawing up the formal purchase agreements. Put the plan into action, and congratulations on becoming a practice owner will be in order!
Now, invest in your new role and start expanding your knowledge to include communication, team management, and business management skills. Help is available (see Resources); the veterinary industry offers many quality practice management books, journals, conferences, seminars, and organizations to guide you on your ownership journey.
1Work with veterinary appraisers, lenders, and attorneys when buying into a practice because they have specialized experience and can be extra helpful during the transaction.
2Be sure the buyer and the current owner make a detailed plan for how the partnership will work, the changes to practice operations that may be necessary, and how each owner will be compensated.