Building a successful practice requires mastering a variety of skills, and practicing high-quality medicine is only one piece of the ownership puzzle. Other key areas to master include negotiating with vendors, understanding the employee benefit programs your staff needs, managing your finances, and most importantly, building a cohesive team-oriented culture. As you build your practice, developing strong relationships with your associate veterinarians is critical to the health of your practice. The underlying associate-veterinarian relationships will become more essential when an owner looks to sell the hospital.
With a significant doctor shortage, associate veterinarians have become harder to satisfy and retain. Building both loyalty and protection for the practice is essential. We will explore thoughts on how to build long-term relationships with your associates and provide a market update on buyer expectations for associate veterinarians when an owner looks to sell.
In this piece, we will cover the full range of Associate Veterinarian issues including:
- Understanding your Associates’ Goals
- Hospital Protections – non-competition and non-solicitation provisions
- Sales Process – Communications with Associates
- Sale Process – Associate Veterinarian Economics
Understanding your Associates’ Goals
As an owner, it is important to be proactive in understanding each associate veterinarian’s goals and priorities in shaping their benefits, continuing education, and pay to meet their goals. Today’s veterinarians’ goals are varied and may include looking to maximize their income, more work/life balance, and mentorship and skill development. There is no need to treat them all equally if their goals and skills differ. Some thoughts on associate compensation include:
- Targeted Continuing Education – paying for skills training that supports revenue growth pays dividends. For example, paying for ultrasound or hands-on dental training can expand skills but may cost $4000+. Asking an associate to commit to staying with the practice for 12-24 months after the expensive training is reasonable (with a commitment to pay some money back if they leave early).
- Vacation time – veterinarians want free time and especially if they are on production pay, offering more than 2 weeks helps show an owner cares (even if they only work 4 days a week!)
- Production Pay – the percentage is around 20-21% for associates, and with annual price increases, the doctor receives an implied raise. One thought is to move production pay up one percent every 2-3 years (capping at 23%) to provide incentives for longevity.
- Employee benefits – offering healthcare and making a contribution toward the cost is an important benefit. Note that the contribution levels tend to vary by region with the largest contributions being seen in higher cost markets (northeast, west coast), and lower contributions in the south and Midwest.
As an owner, it is important to have a direct conversation with each associate and not assume you know their priorities (since those can and do change). Tailoring benefits and pay packages is important, and talking through each associate’s priorities is key to demonstrating an owner’s support for the individual associate. The team will talk to each other, so it is important to emphasize to each veterinarian that their packages have nuanced differences based on seniority and individual preferences
Hospital Protections – non-competition and non-solicitation provisions
While an owner needs to tailor compensation to the individual associate, it is important for the hospital’s success to obtain a non-competition and non-solicitation agreement from each veterinarian. No one likes these provisions, but they are essential to protect your business and every buyer will require them. When hiring a new veterinarian to the practice, you are providing the associate veterinarian staff access to your existing clients, training, and marketing support for them to grow their skills and income.
Asking for a ‘reasonable’ non-compete and non-solicit should be explained in the context of what you are providing to them – especially for a new graduate. The specific terms of non-competes vary by geography. The key non-compete terms are (i) the radius around the hospital for which the associate cannot practice (“Territory”) and (ii) the duration after employment terminates that they need to refrain from practicing in the Territory.
In a densely populated area like New York City, the Territory can be 30 blocks in each direction. In densely populated suburbs a 5-7 mile Territory is reasonable. In more rural areas, up to a 20-mile Territory can be justified. For a reasonable non-compete, we would advise you to look at the distance that 80% of your clients travel to your clinic from and double that radius. So, if 80% of your clients live within 3 miles, then a 6-mile non-compete is reasonable.
The duration is usually a sticking point. A minimum of one year and up to two years can be justified for successful practices that provide a lot of training, mentoring, and access to clients.
Finally, having a non-solicitation provision is important. If an associate leaves the clinic, you do not want them to be able to proactively contact clients and have the clients follow your associate. There are a lot of nuances to negotiating a non-solicit that a good attorney can assist with.
Sale Process – Communication to Associate Veterinarians
In advance of a sale process, it is important to have contracts in place with your associate veterinarians that detail the expectations you have of them (number of days they work), the pay and benefits they are entitled to, as well as the non-compete and non-solicitation restrictions. If these contracts are not in place before you start a process, there needs to be time allocated in the deal process for getting your associates educated on the buyer’s expectations for a contract. We do not see sale transactions consummated without associate veterinarian contracts in place, therefore, having them in place prior to the start of the process demonstrates the associates already understand why these agreements are necessary.
Communication to your associates and staff in a transaction process is the area which causes many veterinarians the most angst and concern (often needlessly). This process requires intentional decision-making and depends on your hospital culture and the owner’s risk tolerance. We have seen owners disclose their plans to sell very early in the process — before a buyer is selected. In these situations, it has usually worked out well because the owner knew their culture, and their staff understood the owner’s priorities and goals. If an owner is unsure as to when they should communicate, it usually means they should wait because the culture is unlikely to support early disclosure.
At Ackerman Group, we recommend communications happen sometime after a buyer is selected and the legal documents are mostly final, leading to more certainty a deal will be closed. Some staff will be disappointed that they were not ‘included’ in the process, but the reality is – it is the owner’s decision on who to sell to.
The key to any sale transition is thoughtful, clear, and consistent communication. As you move through your sale process, make intentional decisions on hospital staff communication strategy, and coordinate those interactions with the buyers and your advisors. Practice owners usually communicate with their associate veterinarians first, but only if they have confidence they will not ‘leak’ this information to the rest of the staff. The number one thing buyers want is associate/staff stability, and buyers will work very hard to make sure there are no glitches in a transition (especially payroll and benefits).
The key pieces of communications include:
- If you are retaining ownership in the clinic or buyer equity, then you are ‘taking in a partner’ and not selling the whole business (which usually feels better to doctors/staff).
- Most owners stay on as medical directors and have multi-year commitments, so it is important to highlight that the owner is not leaving and will keep day-to-day leadership.
- Remind staff that a corporate group does not have ‘replacement staff and veterinarians’ waiting to replace them. The buyer is typically excited about the success of the hospital and the staff are part of that success – therefore the team will have jobs going forward.
- Finally, the terms of a seller’s employment agreement are typically more stringent in terms of non-compete duration and distance – which can be important to communicate to the associate veterinarians.
The Sale Process – Associate Veterinarian Economics
With the challenges of recruiting veterinarians and pricing for veterinary practices remaining strong, it has become routine for buyers to expect specific retention incentives for associate veterinarians from practice owners looking to sell. It is also in the interest of sellers to provide these incentives, especially when they want to slow down or stop practicing, or there are earnouts or other deferred compensation based on practice performance. If the retention incentives work properly, any veterinarians who are hired post-close are not replacements for departing associates, but rather drive growth and can allow a seller to slow down sooner than their contractual requirements.
We have seen different owners have varying emotions around providing retention incentives to associate veterinarians. The staff did not take the financial risk or dedicate the hours of management that an owner invests in the practice. These retention incentives are a small percentage of the purchase price and are necessary to drive a sales transaction to conclusion. Especially in two or three doctor practices, one associate leaving can derail the sale process. Owner contributions to these incentives have become the norm in today’s sale and employment markets.
Retention incentives take different forms with cash being the most popular, and top-performing associates being provided ownership in the practice becoming more common. In addition, some groups want to provide TopCo equity (ownership in the buyer’s parent company) to associates in addition to cash. All of these incentives are designed to create loyalty, align incentives, and continue the success of the practice once the owner has sold all or most of the business.
Cash: This form of retention is the easiest to understand and explain to associates. Typically cash incentives are paid over time with some dollars at closing, and additional money paid at one, two, and even three years post-closing. The dollar amounts depend on the size of the practice, the importance of the associate veterinarians, and the goals of the seller. In some situations, the buyer may contribute to these cash incentives as there are many nuances to the structure and payment terms that need to be negotiated with both the associates and the buyer.
Equity ownership in the practice: A handful of buyers focus on joint ventures, and those consolidators will look to provide an opportunity for ownership for strong producing, long-term (at least 3 years) associates that are interested. Each group has a different ‘flavor’ for these buy-ins and how they are structured. The key considerations include:
- Taxes – the ‘gifting’ of equity usually provides a taxable gain to the recipient, therefore requiring some creative structures to ensure there is no tax bill due. Otherwise, associates have equity but also a current tax bill (and no cash).
- Purchase – some groups want associates to invest some cash in exchange for their equity and will help the associate secure a loan to pay for most of the purchase price. Many times, the buyout prices will be at a discount to the seller’s purchase price (at current multiples, the economics rarely make sense for an associate to pay full value), and in those cases, the associate may sell the equity in the future at a discounted value as well. In some circumstances, owners will be selling to associates at a discount and also financing that sale.
- Profit Interests in the Hospital – certain groups will provide ‘profit interests’ which are similar to stock options to an associate. In these cases, the associate receives their go-forward share of profit distributions. Upon sale (depending upon how the profit interest was structured) may only receive value related to the increase in value of the hospital, above the value at the time of sale. There are a handful of different approaches to these profit interests which are complex but work well as there is no taxation to the associate at the time of the grant.
- TopCo Equity – granting of equity interests, units or shares in the parent company will typically create taxable income for the Associate. Sometimes these grants are combined with cash to provide the cash to pay taxes. Select groups provide ‘profit interests’ in the parent company (not the hospital) to associates which provides an upside on the current valuation of the entire business to the associates. These profit interests require no current tax payments. The profit interests typically vest over time to provide an incentive to stay at the practice and have buyback provisions if they depart. We have seen TopCo equity used for veterinarians and even some key staff. It is important to understand the timing and potential return of a likely recapitalization or sale of the buyer to understand how long the ‘hold period’ on the TopCo equity is likely to be.
It is important to match the appropriate retention incentive with each associate based on their goals and contribution to the hospital. We see different approaches within the same transaction, depending on the buyer.
Summary
Practice owners have taken the risk of starting (or buying) a practice, and when an owner looks to exit, the rewards of years of hard work will be realized. With the valuations of practices high and the shortage of associate veterinarians, it will be important for a seller to recognize the importance of the associate veterinarians to ensure a financial return on the high purchase price for the buyer.
Each practice requires a customized solution to associate veterinarian communication and retention incentives based on the seller’s goals, the buyer’s approach, and the individual associate veterinarian’s desires. Having expert guidance to help navigate these issues will ensure a successful transaction.