How veterinary practice ownership is like a Manhattan brownstone
My wife and I recently decided to buy an apartment in Manhattan. As someone who has never had business partners, the experience was eye-opening. Ordinarily, buying a place to live has little to do with business partnerships, but in New York City, the two are closely linked. And the relationship is eerily analogous to that which exists in many multiple-owner veterinary practices.
Most apartments in New York City are now organized as housing cooperatives, or co-ops, which means you aren’t really buying real estate when you purchase one. Rather, you are buying stock in a closely held corporation. The shares you own entitle you to a percentage share of the “say” in how the building is run, as well as the right to occupy and possibly sublet your individual piece of the corporation’s asset (i.e., the building in which you live).
After learning more about this ownership structure, I realized that the lessons I was learning could be used as a teaching analogy for veterinarians considering joining a practice as a part owner. I’ve discovered that there is a lot to consider when you pony up a lot of money for a dwelling you don’t actually own, and the same goes for buying a minority (less than 50 percent) stake in a veterinary hospital. Follow me as I take you through the surprising and somewhat scary similarities:
Huge investment of money and trust
For most homeowners, their dwelling is the biggest investment they will ever make, so they will naturally fuss and fret over the price, the anticipated maintenance costs and the future of the neighborhood. A co-op apartment and a minority ownership in a veterinary clinic are also major financial commitments, but they don’t carry the high degree of certainty and comfort associated with purchasing a single-family home. Here’s why:
If my co-op board of directors makes bad spending decisions, such as overpaying the super and doorman, I have no veto power unless I own 50.1 percent of the shares. Similarly, if your three partners gang up on you and vote to build a costly new clinic that isn’t justified by the practice’s gross revenue, you simply have to hop on board for the ride (and potential wreck).
If my co-op decides to perform a top-to-bottom foyer renovation in my building, the majority shareholders can vote to obligate all apartment owners to pay an extra $350 per month in maintenance fees for the next 10 years. Screaming and howling at the co-op board meetings will get me nowhere, much like vociferously objecting won’t help if your veterinary practice partners vote to borrow $200,000 for new imaging equipment the clinic doesn’t need. Your objections will be overridden and you will have to contribute 15 percent of the equipment’s purchase price, commensurate with your 15 percent ownership of the practice.
Poor business decisions resulting in a weak corporate balance sheet may leave you stuck holding onto your shares for lack of an available buyer. Even if the practice bylaws mandate that your partners must buy you out when requested, the value of your shares may have dropped way below what you paid for them once you obtain an objective outside appraisal.
More than just money at stake
A lot of co-ops in New York City have either a no-pet rule or a pet size limitation, and I’m hoping my building doesn’t follow suit. I want to be able to have a dog, but as one of 135 apartment owners, I don’t have the power to prevent such a change. Minority shareholders in a veterinary practice are in the same boat.
Once you’ve paid in (or committed to enough borrowing) to buy a 20 percent stake in a veterinary practice, you have voting rights but not enough to prevent a major policy shift in the way the practice does business or provides services. For example, if a majority of shareholders votes for all DVMs to be on call once a week, you can either work the new hours or try to find a buyer for your shares.
Where co-ops have it better
Minority owners in animal hospitals frequently have one handicap that isn’t shared by co-op apartment owners. If, for whatever reason, my wife and I eventually decide we’ve had enough of co-op ownership, we can sell out and are free to look for a single-family house in Staten Island we can actually own.
As a minority shareholder in a veterinary clinic, you might have to move a significant distance away if you want to keep practicing veterinary medicine. Most minority practice owners have at least as long and as broad a noncompete clause in their employment or shareholder contracts as run-of-the-mill associates.
Thus, the disappointment of a sour business relationship can mean more than economic loss. It can also mean a potentially dramatic lifestyle change. The departing minority owner may face having to put her kids in a new school, asking her husband to obtain a job transfer and having to sell her dwelling (which hopefully isn’t a poorly managed co-op apartment).
Do your due diligence
Now, don’t interpret my thoughts on minority share ownership as a recommendation to own a practice 50-50 with a partner. That scenario carries heaps of issues that are outside the scope of this month’s column. What I am suggesting, however, is that DVMs take a second, a third or even a fourth look at the minutiae of a minority clinic shareholder offer. Due to the aforementioned reasons, appropriate due diligence is critical.
The ultimate outcome of the decision to buy a minority stake in a practice is often determined by the forethought and risk aversion of the potential buyer. This is true whether the offer to buy in is made by a mentor, a classmate, a group of DVMs you barely know or a non-DVM-controlled corporation.