Is employee shareholding a response to veterinary business succession?
With the tsunami of money, vets must find a way to sell their practices to secure their retirement. For some, that means selling to another vet. Increasingly, veterinary practices are being sold to private equity firms, although many vets fear this means their practice is more focused on making money than helping pets and pets. their owners.
One option worth considering is employee stock ownership. Two companies, 1st Pet Veterinary Services – a 300-employee, 3-site veterinary practice based in Chandler, Arizona – and a startup, Galaxy Vets, have found this approach to be the optimal solution.
For employees or anyone else, a key consideration when selling a veterinary practice is whether your state has corporate practice of medicine (CPOM) laws, which most states, but not all have. These laws are intended to prohibit the ownership of a medical practice by non-professionals. In recent years, however, private equity has increasingly bought up medical practices by creating management service organizations (MSOs), companies that take on all the operational tasks of a practice as a separate company contracting with the medical office. In states with strict CPOM laws the MSO cannot hire doctors, in other states they can. In “weak” CPOM states, the MSO can also make a variety of other business decisions, while in strong states, physicians must have much more control. There are also different rules on cost allocation. These laws mean that sales to employees other than veterinarians must be made through an MSO.
1st veterinary centers for companion animals
Randy Spencer, DVM, the former owner of 1st Pet Veterinary Centers, didn’t have to worry about CPOM issues because Arizona doesn’t have those rules. His focus was on inheritance. “We’ve created a great caring culture and I didn’t want to lose that to a big company, I also wanted to reward those who helped grow this practice and provide a good retirement opportunity for long-term employees.”
Spender used an employee stock ownership plan (ESOP) to make the sale. An ESOP is a kind of retirement plan, similar in some ways to a 401(k) plan. 1st Pet established an employee stock ownership trust to acquire stock for employees. The company funds the trust from its future tax-deductible profits. The company can contribute cash to the stock purchase plan over time or it can ask the trust to borrow money, with the company repaying it. Employees do not buy shares. The company can deduct the cost of buying the stock, the seller can defer the capital gains tax on the sale by reinvesting in other securities, and if the company is a 100% ESOP, like 1stPet, she pays no taxes.
ESOPs include most or all employees in the plan. They have substantial set-up costs and only make sense for companies with at least 20 or more employees. Since the trust is the legal owner, in a state governed by CPOM laws, the ESOP trust must own shares through an MSO. Details of the SOPs can be found on the website of the non-profit organization, the National Center for Employee Ownership.
A new venture to acquire veterinary practices in an employee-owned company could provide a pioneering model for employee share ownership growth. Galaxy Vets is looking to buy veterinary practices, with veterinary owners getting 50% of the sale price as an equity stake in Galaxy Vets’ parent company. An MSO will hire the doctors. Individual firms will be grouped under a parent company. Meanwhile, Galaxy Vets will create an ESOP for all employees of the parent company’s practice, with a target of 40% ownership and an additional 35% held by veterinarians, managers and veterinarians who sell to Galaxy. The rest will be held by investors. Galaxy already has a number of investors, including the founder, providing initial capital.
Galaxy aims to purchase 10-20 practices in a contiguous geographic area. It plans to build a new surgical and emergency hospital with its own reference laboratory, creating a vertically integrated veterinary health system.
Galaxy Founder and CEO Ivan Zakharenkov, DVM, MBA, told Dallas Innovates1 that “As a burnt-out veterinarian in the past, eradicating this chronic disease from our profession has become a very personal goal for me. For the past ten years, veterinary medicine has been taken over by private capital totally detached from the realities of our profession. Forced to generate revenue for investors, traditional consolidators often fail to deliver on their promise to improve the businesses they have acquired, including better support for veterinary teams. Every organization should make the well-being of their employees a top priority, and that’s how it’s going to be at Galaxy Vets.
Corey Rosen is the founder of the National Center for Employee Ownership.
Galaxy Vets launches employee co-owned veterinary healthcare system in North Texas. Dallas innovates. September 7, 2021. Accessed June 24, 2022. https://dallasinnovates.com/galaxy-vets-is-launching-an-employee-co-owned-vet-healthcare-system-in-north-texas