As a veterinary practice owner, making all the decisions about your business has probably become second nature. If you’re considering entering a joint venture (JV), however, be prepared to give up some of that decision making power. Ask yourself key questions, like: At this stage in my career, am I ready to hand over some control to someone else, while still being an owner? Do I believe a corporate partner can help to grow and improve my practice? If so, should I participate in the upside of that growth? Is my practice still growing or poised to grow (so that it makes sense to retain a level of ownership)? Joint venture partnerships require much consideration; to join or not to join a complex decision and only makes sense in the right situation with the right partner.
What is a joint venture (JV)?
First, let’s clearly define a joint venture and what it entails. In the veterinary world, it occurs when a corporate buyer purchases a majority stake in your practice, usually anywhere from 55 to 80 percent of the business. The current owner(s) of the practice retain the remaining 20 to 45 percent. To summarize, the practice owner becomes partners with the corporate buyer in owning the business, where the buyer has the majority stake.
When does a joint venture make sense?
While other structures can work as well, here are the typical scenarios where it is most common for a joint venture to be proposed:
- You’re ready to sell, but you want at least five more years to continue practicing. Why have the buyer own 100 percent of your hard work over your remaining working life when you can share in the growth and upside?
- Your practice has multiple owners with different retirement horizons. Joint ventures work when there is a 65+ year-old partner and a partner under 58 who wants to keep practicing. The older, retiring owner sells while the younger owner becomes the joint venture partner.
- You’re a one or two-doctor practice with strong revenue or demographics to attract corporate buyers. In these instances, to garner corporate buyer interest will typically involve entering a joint venture to mitigate the risk of the small number of DVMs at the hospital.
- Your hospital is growing fast, where continuing to participate in a JV makes financial sense.
I’m considering a joint venture. What questions should I be asking?
Joint ventures work in different ways depending on the buyer and their business model. Below are some key questions to think through with buyers to protect your interests:
Decision Making: Do you, as a minority owner, have any decision-making power? The legal documents in a JV generally give a lot of control to the buyer. However, practically speaking, you have more informal and hands-on control as the on-site leader than what those legal documents define. Some groups provide the DVM partner with veto power through super-majority approval on key issues.
Management Fees: Is the buyer charging you fees for their services? The purchasing group is likely helping your practice with accounting, HR, vendor contracting, recruiting, and more. What is the fee structure and how does it impact your profits?
Put or Sale Right: When can you sell your ownership, and in what circumstances? Is your ownership sale solely reliant on the buyer’s recapitalization (sale), or do you have a right to sell at other times? How much control over exit timing do you have? Does the buyer have a right to require a sale of the remaining JV portion at your retirement or at a future point in time? How is the valuation determined?
Responsibilities: What is your day-to-day role at the practice once you are a minority partner? Are you still supporting the practice manager on staffing and people issues, or does the buyer provide this support? Are you the medical leader? We recommend defining clearly your roles and responsibilities once the JV is in place.
Distributions: As a minority owner in the practice, there should be regular profit distributions to you. How frequently do these distributions occur? What level of reporting and what metrics are provided on the hospital’s performance? What level of reporting is required to determine earnings and valuation at exit?
In today’s market, there are more and more corporate buyers that offer some form of joint venture or ‘synthetic’ joint venture. The answers purchasing groups give to the questions above will vary. As a general forewarning in any practice sale, the post-Closing reality sometimes differs from the pre-Closing sales pitch.
A final note, whether you enter a JV or sell 100 percent of your practice: After closing, you are still the on-site leader that staff will look to day-in and day-out. Like we mentioned earlier, in this leadership role, you have an important level of informal control and authority that may not be defined in any legal documents. Plus, with the current DVM shortage, you are irreplaceable – buyers know this and want to keep you motivated. These two factors work to your advantage, where collaborating well with your joint venture partner will usually lead to decisions that you agree with and will benefit the practice’s growth. After the sale occurs, it’s in every party’s best interest to maximize the practice’s management and profitability, since this will determine everyone’s profit distributions and future sale price. Keep this information in mind regardless of your practice’s sale structure.
Joint ventures can work well for all parties in the right situation. The decision to pursue a JV is made much easier if your goals are clear. For those who are unsure how long they want to work post-Closing, we usually encourage you to consider a joint venture to maximize the number of buyers interested in your practice and so you can explore all options. Joint ventures are more complex to navigate than a 100% sale since, in a JV, you’re taking on some level of risk by retaining ownership. As a seller, it’s critical to consult an experienced advisor who understands the nuances of the various business models when considering a joint venture.
Ackerman Group guides veterinary owners in customized corporate practice sales. To learn more about what we do, or to receive guidance tailored to the sale of your practice, contact us to get started.