Seeing the light in selling to 'the dark side'

Four years ago, I did something that surprised me—I sold my practice to “the dark side,” a veterinary corporation. I never intended to do this, as I had heard so many negative comments about the problems of selling to the corporate world. I had also believed I would hire and train a veterinarian in the art of holistic health care, and eventually sell to this new hire to take my practice to the next level. Below are details about my journey that include a few issues I’ve never heard anyone else, speaker or write, share about selling a practice to a corporation and continuing to work for the purchaser. Who should sell, when, and why When I made the decision to sell, I had been thinking of doing so for some time but could not find a private buyer (and honestly, no private buyer would be able to afford the price I wanted, which was easily met by a corporate buyer.) During this time, I had received regular mailings from several corporations but one in particular was quite persistent. I finally decided to give them a call, which began a journey that took about a year before I finally decided to sell to them and not one of their competitors. I had been wanting to sell my practice because even though I still loved serving the public and my patients (and as the only holistic veterinarian in the area, I really did not want to leave so many pets without this specialized care), but frankly, I was burned out dealing with the business side of practice. I’ve found for many older veterinarians, this is a common reason to look into selling the practice. Doing so allows the doctor to practice medicine, which we all love, and say goodbye to the treachery of running a business. However, I’ve also noticed even younger veterinarians (typically in their 40s) have also sold to corporations. These doctors, who often own more than one practice, sell for a high multiple netting them millions of dollars in cash. However, I have heard various practice management speakers advise against selling unless you are within five years of retirement. The reasoning is since veterinary practices grow at 10 percent a year on average, selling when you are too far away from retirement leaves money on the table. In theory, if you wait another 10-20 years, your practice is even more valuable and worth quite a bit more money. While this theory is correct, it ignores several very important factors. First, it totally ignores risk. What if you are disabled and can no longer work, or, worse, pass away? Then your practice is worthless and can’t be sold for its true value (if it can be sold at all). Second, if you cash out now and work for 10-20 more years, the cash payout, if invested properly, would have gone through, on average three doublings (if you got $1 million at selling, it would be worth $8 million in 20 years!) Third, it ignores the fact that maybe you are starting to burn out and just want to practice medicine and no longer run a business. Finally, it ignores the risk of something like COVID happening that could destroy the value of your practice. I think all these factors need to be considered before simply following the advice that you need to be only a few years removed from retirement until you should sell your practice. Weighing the pros and cons Before making an important decision such as selling your practice to a corporation, you need to carefully consider the pros and cons of your decision. Here are a few I think are important. Pros You get paid a lot of money up front. The money paid by corporations is usually more than from a private buyer; it can be immediately invested and begin growing. You get help with the business side so you can focus on the medical side (although some corporations might want to “control” the medical side of the practice as well). Many doctors prefer to simply practice medicine and not deal with the daily hassles of running a business. Usually, the corporate buyers will take over the business side of the practice, often resulting in greater profitability for the business and less stress for the owner. There are fewer headaches and stress, but not zero. My wife really noticed how relaxed I became after selling my practice. The daily grind was, for the most part, absent from my routine, and I felt re-energized to focus on patient care. There is more money to upgrade and modernize the practice. Often the corporate buyer will pay for more/better equipment to upgrade and modernize the practice, which in some cases, would be cost prohibitive for the veterinarian. This allows a better quality of care to be offered to patients. Procedures are streamlined. Redundancies can be eliminated, staff payroll is made easier and predictable, and the office procedures can be made more efficient. You can (gladly) give up payroll and tax and benefit duties. This means little to no office or busy work for you as the corporation handles all these things and any problems that may arise. Cons You will incur expenses when hiring a CPA, attorney, and practice valuation team. You definitely do not want to sell a practice on your own, and it is not cheap to hire professionals who will look out for your interests. It is hard to predict how much your team will cost, but I would suggest a minimum of $50,000 will need to be spent before you complete the sale. If the sale does not go through, you are still out the money for your expert team. You will incur a big tax bill (more on this later, including some ways to reduce your tax bill); you will owe taxes of some sort on your capital gains. Having the right team to negotiate a contract that is tax-favorable to you is essential in reducing your tax burden. You will get a lower monthly paycheck. In most, if not all, cases your income will fall (by up to 50 percent) as you will only get a production-based income (typically 20 percent of production) and forgo future profits. This is not a big deal if you plan for it; and remember you do get a chunk of money up front to replace those profits. You will give up having the final say. While it is true you and the new owner are “partners,” it is no longer your business, and decisions will be made that are in the corporation’s best interests when it comes to running the practice. Because I believe it is important that a doctor has complete control of patient care, it is important you choose a buyer who will not tell you how to care for your patients, but is only interested in controlling the business side of the practice. You may experience a slower time in getting equipment. Because you cannot simply buy what you want or need and will need to get approval (which can take a few weeks depending upon your needs), you will need to adjust to this reality. Concerns about selling—what no one else talks about While I was looking forward to selling my practice, my wife had a few concerns prior to signing our contract. First, my wife (and me) was concerned about the decrease in salary that I would receive. Since we would no longer receive distributions of profit after the sale, but only my salary, this meant my take-home pay would decrease by about 50 percent since the distributions (profit) now goes to the corporation. Our concern was what to do if we needed more money than my salary. In order to deal with this and help assuage my wife’s concerns, we decided to do three things with the money we received from the practice sale. While no one else talks about these three things, I think it is important you strongly consider them when you think about selling your practice. We devoted a portion of our sale price to investing for retirement. This made sense since the majority of our distributions/profits prior to the sale went to our future retirement accounts. Getting this “profit” upfront from the sale, rather than slowly trickling in monthly if I retained ownership, would allow us to generate more income from the growth in our investments and fine-tune retirement planning. We wanted to share our gift with our church and with other charities, so we started our charitable trust. Doing so allowed us to achieve two goals. First, we were able to distribute some of our windfall with those in need as we believe are called to do, and we have this money set aside for future gifts specifically for this purpose (setting up a charitable trust prevents us from “promising” the money for those in need but spending it ourselves.) Second, our trust allowed us to decrease our huge tax bill from the practice sale by almost 50 percent! We could be charitable with our money and give less to the government to waste—a win-win for everyone! Using a charitable trust also gives us, rather than the government or another entity, total control over our giving, and allows the money set aside to continue to grow, as well. Due to my wife’s concern about our decreased take-home pay, we set aside part of the money in a money market fund with the goal to make up any shortfall that might occur if my salary decreases as a result of decreased practice gross (since salary is tied to production, which fluctuates monthly, when selling to a corporation.) The money is there if needed (which brings a lot of peace of mind,) and if it is not needed, we can invest it and/or enjoy some of it. An extra benefit my wife and I discussed a lot since selling has to do with the disposal of the practice upon my death. Prior to selling our practice, if I died, my wife would have to try to find a buyer, which would be challenging since I practice holistic medicine, and finding a buyer would be very difficult. No grieving spouse wants to deal with trying to unload a large asset, and there is no guarantee of a sale or fair price. By selling now, my wife has in effect received payment and her retirement is secure in the event of my sudden passing. Hint: This may be the most important reason to sell your practice when you can if a fair price is offered, as you can take care of your spouse while you’re still alive! A few final thoughts A practice sale is a very stressful event that does disrupt your life for eight-12 months or longer. You cannot do it alone, no matter who buys your practice. You must assemble a team of experts to help you, and this excellent team does not come cheap. I used my current CPA who is familiar with the accounting practices of my S-corp and offered advice on structuring the deal to be tax-friendly to me. Additionally, I assembled a crack team of attorneys (led by Charlotte Lacroix) and another CPA and practice evaluator, Karen Felsted. I would also suggest to you if you sell to a corporation, go into the deal as if you will not hit goals set by the corporation to get some of the cash that is withheld at the closing of the sale. (The corporation will set production goals that can be linked to bonuses or money retained and not paid out upon completion of the sale) Be .re you’re comfortable with the cash you get up front upon closing the sale and not count on any future payouts (even though you’re likely to get those once your bonus goals are achieved). Get ready for a heart attack when you see the estimated tax bill your CPA prepares for you, as the IRS wants to participate in your newfound wealth, as well. Setting up a charitable trust, as mentioned earlier, can greatly reduce this bill! Finally, you may be offered stock as part of your compensation. The choice is up to you if stock is offered. I think a stock option is a good choice, but keep in mind that while you are likely to get more money down the road, it is not a guaranteed benefit. If you have any questions about selling to a corporation, feel free to email me at shawnvet@sbcglobal.net and I’ll do my best to answer any other questions. Shawn Messonnier, DVM, opened Paws & Claws Animal Hospital and Holistic Pet Center in Plano, Tex., in 1991. His special interests include holistic and functional medicine, exotic pets, dermatology, cancer, and internal medicine. In addition to serving clients, he has written for numerous veterinary and pet publications, and is also the author of several books, including the award-winning The Natural Health Bible for Dogs & Cats.

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Seeing the light in selling to 'the dark side'

The author shares lessons learned along the way, and why it may or may not be right for you.

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