Business Briefs: Should You Buy Minority Shares in a Large Veterinary Practice?

Although the global corporate buying frenzy—and the high premium valuations once offered to sellers—has cooled with the economy, many associates are still being presented with opportunities to acquire minority equity stakes in large practices, whether independently owned or part of multipractice corporate groups. But is this a smart financial move?

An associate typically purchases a minority interest in a practice or a corporate entity in hopes that the value of the shares will appreciate, providing a solid investment. Sometimes, each shareholder receives dividends representing some of the company’s profits. This can sound like an attractive offer and feel like a reward for your dedication and hard work.

Financial Realities and Risks

Dividends are distributions of profit. They are often paid out quarterly if the practice’s board of directors or majority owners decide to provide them. However, practices commonly retain profits to reinvest in equipment or purchase additional practices. If an associate is counting on these distributions to fund their purchase of shares, they might experience financial stress. Additionally, as demand for services wanes in some regions and expenses rise, decreased profits might result in declining share values. In some cases, distributions might cease. Therefore, it is important to assess the risks and benefits of purchasing shares with accounting and legal professionals.

When practices offer minority interests to long-term associates who are proven revenue producers with strong client bases, the goal might be to retain talent. When an independently owned practice sells small percentages of shares (2-5%) to the associates, they often have sights on a future or pending corporate sale and want to cement their workforce. Sometimes, legal language prevents associates from selling these recently purchased shares to the incoming corporation. If the minority shareholder chooses to leave the practice, their investment might be forfeited or subject to a predetermined low value.

It is common for minority shares to be illiquid, meaning they are very difficult or impossible to sell or “cash out.” Sometimes, they are “vested,” and the associate doesn’t own them until they have satisfied a term of additional employment at a practice. In these cases, shares might be granted as a retention or signing bonus with a vesting schedule.

According to an article in VIN News, “Many equity contracts come with so-called repurchase rights, notes Anthony A. Mahan, an attorney focused on veterinary law. These allow the consolidator to buy back shares at nominal or predetermined prices before a liquidity event such as a sale to another consolidator.”

Shareholder agreements, regardless of the percentage of equity, generally include a strong and lengthy noncompetition clause, preventing doctors from practicing near that clinic’s location if they leave their position. Departing owners are often subject to noncompete terms for as long as five years.

Making an Informed Decision

When considering whether to purchase or accept minority shares in a practice, it is imperative to utilize professional guidance. Consider whether you wish to stay at the practice for the entirety of your career, even if it undergoes a change of ownership control or a diminished culture. You must also determine if you can afford to lose the money you invest, should you need to move unexpectedly or leave practice for medical reasons. In addition, the stratospheric multiples that large corporations paid to acquire veterinary practices are now fueling financial difficulties, with some underperforming practices being shuttered or sold at reduced value so parent corporations can repay their private equity investors.

While practice ownership can be the path to financial success, you must be diligent in evaluating the opportunities that arise to ensure they are financially beneficial.

Related Reading

• The Corporatization of Equine Practice
• Business Briefs: Are Practice Owners More Satisfied Than Associates?
• Business Briefs: Creating a Succession Plan for Your Equine Practice

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