If you plan on selling your veterinary practice, one way to do so is through an associate buy-in. This method can allow for a seamless practice transition, provided you have informed legal representation. That’s where Mahan Law can assist you.
Our veterinary attorneys are well-versed in all aspects of practice ownership, including associate buy-ins. Whether you hope to form a partnership or retire, we will work strategically to help you achieve your goals. Contact us today to arrange a consultation.
How Does a Veterinary Associate Buy-In Work?
A buy-in occurs when the practice owner and associate agree for the associate to buy a percentage of the practice over an agreed-upon period, often referred to as a phased buy-in. For example, the associate agrees to buy 10 percent annually over five years. Then, the associate becomes a partner or buys out the owner’s remaining interest and takes over ownership.
Although the initial associate employment agreement may discuss the potential for ownership, the parties should enter a formal buy-in agreement. In any event, it takes an attorney experienced in veterinary transitions to negotiate and prepare an agreement between the parties. Factors to be considered and included in the buy-in contract include:
Structure of the Financial Arrangements
The agreement must ensure that both parties receive fair compensation. Once they agree on a purchase price, the associate and the owner must agree on the buy-in percentage. The parties can use various formulas to determine compensation during the buy-in phase. For example, the associate may make an upfront payment and pay the remaining balance in monthly, quarterly, or annual installments. Also, the agreement must specify how each party will be compensated for their work during the buy-in phase, including salaries, benefits, and bonuses. Notably, the associate’s compensation will increase as their ownership percentage increases.
If the veterinary practice owner owns the building that houses the practice, the contract must specify whether the associate will also buy the real estate. The purchase can occur at the beginning of the buy-in process, within a certain number of years, or when the buy-in period ends.
At the time of the final sale, the associate will likely need to obtain financing for the remaining balance. Because the associate will own the practice, they can use the assets as collateral for a bank loan.
Suppose the owner or associate changes their mind before the buy-in is complete. Perhaps the associate no longer wants the practice, the owner regrets selling to the associate, or both parties determine they don’t work well together and want out of the contract. The contract should include a provision that allows either party to cancel the buy-in agreement.
The contract should include an agreed-upon method for resolving disputes. During the buy-in period, the associate is a minority owner, and the majority owner has veto power over business decisions. The intended agreement may fall apart if parties disagree about the direction of the practice and the majority owner abuses their veto power. As such, the parties can agree to resolve disputes through mediation or mandatory arbitration rather than going to court.
Valuing a Veterinary Practice in an Associate Buy-In
Practice owners and associates have competing interests: owners want to maximize their return on investment, and associates want to avoid overpaying for the practice. An associate may believe they are entitled to a price reduction because they have contributed to the value of the practice. On the other hand, the owner has assumed the risk of ownership while paying the associate a salary and benefits. Ultimately, the owner must determine whether the associate has helped to increase revenue and grow the practice. In any event, the parties should enlist the services of a professional appraiser to arrive at a fair value for the practice and the associate’s contributions.
Pros and Cons of an Associate Buy-In
An associate buy-in can benefit both parties. The owner can mentor the associate and ensure they provide quality care to people’s pets and animals. This will protect the practice’s reputation and brand and make the practice transition an easy one. An associate buy-in also works well for an associate with little experience running a practice and eliminates the cost of starting a new veterinary practice.
But there is a downside, particularly for the owner. While the seller still has majority ownership of the practice, they must share ownership duties and decision-making while maintaining the legal and financial risk of practice ownership. If things don’t work out as planned, the owner will be left to deal with the fallout.
Contact An Experienced Veterinary Attorney
At Mahan Law, we have decades of experience advising veterinary professionals on selling and buying practices. Our attorneys regularly prepare buy-in agreements that clarify the right and obligations of both parties and mitigate the tax consequences for each. When you become our client, we will work to ensure a smooth practice transition. Contact us today to get started.
Mahan Law advises veterinary professionals around the country on associate buy-ins.