The Ownership Agreement:
Edward J. Guiducci, J.D.
Tailoring the Agreement to the needs of the Practice and Owners
The negotiations and contracts involved with a veterinary practice ownership agreement cannot be taken lightly. All owners must jointly address and work through key issues to ensure that the terms of the ownership agreement are tailored to the needs of the practice and its owners. Cookie cutter ownership agreements rarely meet the needs of practice owners over the long term.
Owners’ Compensation
Ownership compensation is a very important issue that needs to be negotiated and resolved to the satisfaction of all owners. It is our experience that owners of veterinary practices will not continue as co-owners for an extended period of time if the ownership agreement does not equitably compensate owners for their individual efforts. An equitable compensation structure is based upon the following three factors: 1) personal production of each owner; 2) management compensation based upon services provided; and 3) profit distribution based upon ownership interest. The details of the compensation package will need to be worked out but are several basic structures that are frequently utilized for the personal production that will need to be considered by the owners.
An important element of ownership agreements involves establishing management responsibilities of the owners and the mechanics. The owners need to agree on whether or not business management supervision duties shall be shared equally by the owners or be primarily the responsibility of one owner.
The owners also have to agree on the mechanics of making corporate decisions regarding the veterinary practices. As part of these decisions the owners need to decide under what circumstances one of the owners can make binding decisions for the practice without seeking approval of the other owners. There are two categories of these decisions, day-to-day decisions and non-ordinary course of business that will need to be addressed.
Business Continuation/Exit Strategy Issues
The purpose of business continuation and exit strategy ownership agreement terms is two fold. The co-owners establish under what circumstances a co-owner (or his estate if deceased) would be forced to sell their ownership interest and on what terms. Upon the occurrence of certain triggering events the co-owner is required to sell or offer to sell his ownership interest to the remaining co-owners. The ownership agreement also identifies a formula to value the ownership interest and provides for payment terms that will either require the owners to buy insurance to fund a purchase i.e. life insurance or lump sum buy-out disability insurance or will specify the length of time for the payment of the purchase price and the rate that the unpaid balance will accrue interest upon. It is designed to be mutually beneficial for all parties in order to permit the seller, or if a death situation, for his family to be paid the agreed upon amount over a reasonable period of time. It is also designed to permit the remaining co-owners to continue the practice while paying the seller or his family the value of the ownership interest without causing the practice to fail due to cash flow problems.
Should an owner be subject to a non-competition/non-solicitation
covenant if he leaves?
Restrictive covenants are almost always negotiated as a condition of co-ownership because the co-owners will want to guard against the possibility of a co-owner competing with the practice. Many co-owners view the restrictive covenant as a negative but it is important to remember that a restrictive covenant protects co-owners from other departing co-owner competing with the practice.
In Colorado, restrictive covenants that arise as part of an ownership agreement are enforceable if reasonable in scope (the geographic radius of the restriction) and reasonable in duration. In many restrictive covenants associated with co-ownership, the restriction does not prohibit you from practicing, but instead imposes liquidated money damages as a remedy for violating the restrictive covenant. In many instances, practices do not want to go to the trouble or expense of enforcing a restrictive covenant, but they will use it to penalize a co-owner if he competes with the practice upon leaving.
Business Continuation/Exit Strategy Issues
The purpose of business continuation and exit strategy ownership agreement terms is two fold. First, the co-owners establish under what circumstances a co-owner (or his estate if deceased) would be forced to sell his ownership interest and on what terms. Upon the occurrence of certain triggering events the co-owner is required to sell or offer to sell his ownership interest to the remaining co-owners. Second, the ownership agreement identifies a formula to value the ownership interest and provides for payment terms that will either require the owners to buy insurance to fund a purchase i.e. life insurance or lump sum buy-out disability insurance or will specify the length of time for the payment of the purchase price and the rate that the unpaid balance will accrue interest upon. It is designed to be mutually beneficial for all parties in order to permit the seller, or if a death situation, for his family to be paid the agreed upon amount over a reasonable period of time. It is also designed to permit the remaining co-owners to continue the practice while paying the seller or his family the value of the ownership interest without causing the practice to fail due to cash flow problems.
Summary
A properly structured and tailored ownership agreement is a complicated endeavor. The failure of owners to properly plan and negotiate ownership agreements can lead to an unhappy practice divorce. Knowing what to look out for puts you ahead of the game.