An honest discussion about business partnerships
Like it or not, going into business with someone else is becoming more and more common and the ‘do it all on my own’ breed of business owner is becoming rare – and there are good reasons why. Of course with this trend it also becomes very important for younger vets thinking about business ownership to give serious consideration about what ‘partnership means’.
So why are vets less likely to go it on their own now days?
Firstly, buying an established practice is more expensive. In the recent years, higher demand for practices fueled by corporate buy outs has increased the selling price. Highly profitable smaller practices are often selling for more than $1 million but banks are reluctant to loan over a million to a new business owner. This makes the option to buy a very profitable practice on your own more difficult. Add to that the fact that a younger vet may want ownership of a larger practice, then this makes it virtually impossible for them to be the sole purchaser.
Secondly, the changing demographic of veterinarians being mainly women means that flexibility of hours becomes more important when one considers childcare. It is very difficult to juggle childcare and a full time veterinary job and this can be alleviated by going into business with someone who understands and is supportive of flexible hours.
Ok, so now that we know why this is more common, what does ‘partnership’ actually mean? We find the term is used very loosely but doing it in different ways, or the wrong way can have serious implications.
The traditional partnership is what most people envisage when going into business with other people, and this simply means that a group of 2 or more people decide to work together and own a business together. In fact there is no requirement for any legal documents, simply the fact that you run a business together is enough to bind you together at the hip legally – and this can be very dangerous if no contracts are put together by a lawyer because under this arrangement you are jointly liable for all your business partners decisions to the extent that you can even lose personal assets if your partner makes a serious mistake. Knowing this you may be surprised that this is still a very common way of doing business.
If you already operate a business under such an arrangement then don’t panic, you just have to make 100% sure that you have a good lawyer draft up a ‘partnership agreement’ that protects you – and if you are buying or starting a business with a traditional partnership structure please don’t be silly and do it without a partnership agreement in place.
Often we are told by a buyer that they are becoming ‘partners’ when in fact the structure of the business does not really suit a traditional partnership. For example if they are buying into a company, then they are becoming shareholders, not partners – and the distinction is very important because a shareholder arrangement has a much safer and more formal structure than a traditional partnership.
A third way you can go into business with someone else is by forming a ‘unit trust’. For the purposes of this article, we will treat a unit trust in a very similar manner to a company, but instead of being called a partner or shareholder, you are called a unit holder.
Partnerships, shareholders and unit holders form the most common ways of running a business together. And with each of these you need to make sure you have a partnership agreement, shareholders agreement or unit holders agreement drafted by a lawyer. With a partnership it would be crazy not to! However with the other 2 types of arrangement one often forgets to do this because these structures already have a nice set of formal rules in place to protect you – so why bother? This brings us to give thought to the aspects of joint business owners where business owners have to be aligned and set a second layer of rules that are suitable specifically to them. Here are a few examples of what needs to be covered by these agreements:
What happens if your business partner becomes permanently disabled? A veterinary practice that is busy for 2 vets would be impossible for you to run on your own. Yes you could employ people, but you alone will be left holding the baby whilst your disabled partner still gets the same share as you in the profits and has the same rights as you regarding business decisions, which equipment to buy and how many people you can employ to help you. This would not be favorable in most cases and legally an agreement can deal with this by insisting the owners have the correct insurance and that they need to exit at market value if they are no longer able to work.
What happens if your business partner dies or gets divorced? You may get on well with them but suddenly find yourself owning a business with their former spouse or family members who you never knew existed – not an ideal scenario, so rules have to be put in place to deal with this.
Finally to give you some insight into the last and least scientific part of doing business together – we cannot stress enough the importance of alignment of business owners. Going into business with someone is like a marriage, you see them every day and you work with them every day. You are going to make decisions jointly with them and you are going to disagree on a lot of things – the relationship needs to withstand this. Choose your partners carefully, make sure that you are culturally aligned, that you want a similar future for the business, that your work ethic is similar and that your approach to re-investment and risk is similar. In spite of the best legal agreements, even the most profitable businesses will become unprofitable if the owners spend most of their time fighting.
