Going into business with someone else or introducing a business partner? Lets think about an agreement.
Over the last few months we have been doing more veterinary business valuations than ever. These have not been for corporate buys, but rather for private buyers and introduction of business partners.
This is a good thing if we are to consider the sustainability of the profession over the next 20 years because it gives career progression options to younger vets and the possibility for them to earn better than as an employee – we need to keep vets in the profession and its great to see more of them opting for ownership!
So over the next year we are going to give a lot of attention to looking at how to smooth over transitions to ownership for private buyers of veterinary clinics (also read the article below and watch the video where we highlight some of the benefits of private sales).
If you are thinking of selling part of your business to one of your enthusiastic younger vets, or if you are a younger vet thinking of buying into a practice, one of the first things you have to consider is the agreement that gets drawn up between the owners of the business. Always consult a lawyer to have the agreement drafted out because it can be very complex, don’t do it yourself. Depending on the structure of the business, the agreement will have a slightly different name.
- For a company, it will be called a ‘shareholders agreement’
- For a unit trust it will be called a ‘unit holders agreement’
- For a partnership it will be called a ‘partnership agreement’
Regardless of the name, it always serves the same purpose and is essential in all business structure types. We are surprised at how many joint business owners we come across that are working in the absence of any such agreement. If no agreement exists, don’t be embarrassed to ask for one because these agreements protect ALL the owners involved.
The purpose of such agreements in many cases is to catch situations not covered by the law and to override the default laws that come into play if something goes wrong. But why would you want to override the default laws? Surely they are designed to produce the best outcome? Actually in many instances the law is designed to suit businesses that are jointly owned by hundreds of people (like the ones on the stock market) and therefore produce very undesirable outcomes in businesses with only a few owners (most veterinary clinics).
For example: If a vet clinic trading as a company only has two shareholders and there is no agreement, what happens if one of the owners dies in an accident? The two owners may have been best friends, never had an argument and therefore never felt the need to have a formal agreement in place. But one of the owners never married and lived on their own. In their will they left everything to their nieces and nephews, not thinking about the fact that their estate would include half ownership in a booming veterinary practice. The surviving owner now finds themselves having to make business decisions jointly with a group of people they have never met and who have very little interest in running the business. They definitely don’t want to help with work in the business but may be very interested in sharing the profits. The surviving owner can find themselves on their own, without support and unable to even recruit another vet without the permission of the other parties. In fact they may not even be able to give themselves a pay rise – a very bad outcome indeed.
So all agreements at least have to cover this scenario and offer some option for the surviving owners to purchase the business in the event of the others death.
For other scenarios there may be no right or wrong answer, but it is necessary for the prospective owners to sit down and agree what the best outcome would be for all of them if these things were to happen:
- What happens if one of the owners is permanently disabled and unable to work?
- Are all of the owners happy to allow one of the other owners to stop working or work very few hours, or is there a minimum amount of work that all owners have to do? This is one of the most common issues we see in partnership disputes.
- If one of the owners wishes to retire, can they sell their part of the business to whoever they want or do they have to give the remaining owners the first option to buy.
- If one of the owners retires or wants to exit, what is the best way to establish the value of their share of the business.
As you can see, these things are very important, so don’t introduce new owners without an agreement, and don’t buy into a business without one – at the end of the day it protects all of you. Also remember to SIGN the agreement – we find a number of joint owners get the agreement drafted and then never finalise or sign it.