Future partners: Do your homework

Future partners: Do your homework

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Nov 01, 2002

Last in a three-part series

Veterinarians who are preparing to enter into partnerships are usually thinking one main thought, "We are going to make such great money and I can't wait to be able to share the workload."

The concept sounds enticing. Partnership offers the potential to have a second person on board who is legitimately interested in the financial welfare of the practice and is not hanging around just for the paycheck.

Partnership sings the siren's song of opportunity to develop a large client base and always have another person to fall back on when the workload gets really heavy. And oh, yes, let's not forget all that money.

Fantasy, reality

Let's briefly explore the fantasy and reality. A fairytale veterinary partnership is entered into by two or more enthusiastic, hardworking doctors who want to equally share in the development of a growing business. They each want to derive the maximum satisfaction from practice while limiting the downsides of endless hours, constant management responsibilities and no guaranteed second practitioner to help out during emergency situations. Each partner believes that the other partner will surely do more than his or her share of the work; perhaps because both were previously associates in the same practice, because they were lab partners in veterinary school or for some other reason. Finally, fledgling veterinary partnerships seem to be most commonly entered into by doctors who are relatively young.

Partnership realities frequently don't manifest themselves until somewhat later. In the words of a real estate developer I work with, "time is the killer of all deals," and indeed it is. The passage of time equals the unfolding of change and with it the development of new priorities and new realities in the lives of the partners.

Mellows with age

Partners, as they age, do more scrupulous counting of their own overtime and holiday emergency work than they did when possessing boundless energy. Partners get involved romantically with co-workers and sometimes with partners at other veterinary practices. Sometimes they get involved with the spouses of their own partners.

Mostly however, as partners get older they get more tired and less enthusiastic. Frequently they do each of those things while they simultaneously become less flexible and more cranky. The passage of time and inevitable change are the immutable realities that make early partnership planning so critically important.

Compensating factors

There are several key steps which can be undertaken in forming a partnership which serve to compensate for later change.

As we discussed in last month's installment of this series, joint ownership of a professional practice can be structured in several different ways.

A simple partnership can be established in which all partners are jointly and severally liable for partnership obligations. A professional corporation may be formed with each ownership interest being represented by a percentage ownership of stock or a professional limited liability company or limited liability partnership can exist with liability protections similar to those available in the corporate form.

Each form of doing business has its own positives and negatives, but they have one important thing in common. Properly designed, each can provide for smooth adjustments in the business relationship between the partners and for accommodations to the inevitable changes in the lives of the partners.

Partnership agreement

In a simple partnership, the partners can enter into a partnership agreement which lays out in detail the rights and obligations of each partner in the event of changing circumstances.

It sets forth what is involved in the process of arriving at a big decision (such as changing locations or hiring a new associate or taking on an additional partner.) It should also lay out what process is to be followed if the partners are deadlocked in opposition to each other on such an important issue.

In a professional corporation there are bylaws which spell out how corporate decision are made and how disagreements are accommodated and resolved. Frequently the bylaws are supplemented with a shareholders' agreement which provides for special rights and obligations of the shareholders (partners) with respect to each other and with respect to the business itself. Such a document might, for example, limit the right to sell an interest in the business or to leave the business interest to another by assignment or will.

Limited liability companies and limited liability partnerships have a document known as an operating agreement which specifies, if properly drafted, how decisions are made and by whom, what is involved in the decision to borrow or spend large sums of money and a host of other business issues.

Each category of business organization should have some type of document which can specify a system of problem resolution. These documents should be extremely detailed from the very beginning. They should be prepared at the formation of the new partnership, not amended later when one or more of the partners has already experienced a life change.

In addition to the shareholder, partnership or operating agreement, partners need another document to fully protect them. Partners need to recognize that they are not just owners, they are probably also employees of their business. As such, their rights and obligations as an employee need to be spelled out. That employee role is, or should be, viewed as entirely separate from the ownership status of the veterinarian/partner.

Typical problems

Here are some typical problems which arise when a partnership fails to require that a clear and specific employment agreement be signed by each employee/partner:

Dr. A and Dr. B are equal shareholders in AB Veterinary Hospital P.C. There is enough practice work for 2.5 veterinarians, so they decide to hire an associate. Dr. A keeps showing up for a full week of work, increasing the amount of time he spends on practice building and management tasks. Dr. B decides to spend Wednesday and Friday afternoons doing relief work across town. If compensation to each shareholder is calculated, based on a 50/50 split, it won't take long for A to begin to feel resentful. Even if they each get the same salary under the terms of a simple, unsophisticated employment agreement, there is really nothing stopping B from earning extra cash on the side during "work time." Unfortunately, A's share of the associate's pay is effectively financing B's side job. Just imagine how Dr. A will feel when Dr. B buys an ownership interest in the hospital where he does relief work and begins using company time to manage a competing practice.

I know what you're thinking; "My partner would never do anything as outrageous as that." I'm thinking something different; "There's nothing in this example that I haven't already seen happen."

Future partners, do your homework.