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Is employee ownership an answer for veterinary business succession?
The success 2 companies have found with this ideal solution
With the silver tsunami, veterinarians must find a way to sell their practices to secure their retirement. For some, that means selling to another veterinarian. Increasingly, veterinary practices are being sold to private equity firms, although many veterinarians are worried this will mean their practice focuses more on making money than helping pets and their owners.
One option that deserves consideration is employee ownership. Two companies, 1st Pet Veterinary Services—a 300-employee, 3-location veterinary practice based in Chandler, Arizona—and a startup, Galaxy Vets, have found this approach to be the optimal solution.
To employees or anyone else, a key consideration when selling a veterinary practice is if your state has corporate practice of medicine (CPOM) laws, which most, but not all, states have. These laws are designed to prohibit the ownership of a medical practice by non-professionals. In recent years, however, private equity has increasingly purchased medical practices by creating management service organizations (MSOs), companies that take on all the operational tasks of a practice as a separate corporation contracting with the medical practice. In states with strong CPOM laws, the MSO cannot hire physicians, in other states they can. In the “weak” CPOM states, the MSO can also make a variety of other business decisions while in strong states the physicians must have much more control. There are varying rules on how fees are split as well. These laws mean that sales to employees other than veterinarians have to be done through an MSO.
1st Pet Veterinary Centers
Randy Spencer, DVM, the prior owner of 1st Pet Veterinary Centers, didn’t have to worry about CPOM issues because Arizona does not have these rules. His focus was about legacy. “We’ve created a great, caring culture and I didn’t want to lose that to a big corporation, I also wanted to reward those who have helped build this practice and provide a good retirement opportunity for long-term employees.”
Spender used an Employee Stock Ownership Plan (ESOP) to do the sale. An ESOP is a kind of retirement plan, similar in some ways to a 401(k) plan. 1st Pet set up an employee stock ownership trust to acquire shares for the employees. The company funds the trust out of its tax-deductible future profits. The company can contribute cash to the plan to buy shares over time or it can have the trust borrow money, with the company paying it back. Employees do not buy shares. The company can deduct the cost of buying the shares, the seller can defer capital gains tax on the sale by reinvesting in other securities, and if the company is a 100% ESOP, like 1stPet, it pays no taxes.
ESOPs include most or all employees in the plan. They have substantial set-up costs and make sense only for companies with at least 20 or more employees. Because the trust is the legal owner, in a state with CPOM laws, the ESOP trust must own shares through an MSO. Details on SOPs can be found on the website of the non-profit the National Center for Employee Ownership.
A new venture to acquire veterinary practices into an employee-owned company could provide a pioneering template for employee ownership growth. Galaxy Vets is looking to buy veterinary practices with the veterinarian owners getting 50% of the sale price in the form of equity in the Galaxy Vets parent operating company. An MSO will hire the doctors. Individual practices will be rolled up under a parent operating company. Meanwhile, Galaxy Vets will be creating an ESOP for all the practice employees in the parent corporation, with a goal of 40% ownership and another 35% owned 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 buy 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 healthcare system.
Galaxy founder and CEO Ivan Zakharenkov, DVM, MBA, told Dallas Innovates1 that “As a burned-out vet in the past, eradicating this chronic illness of our profession has become a very personal goal for me. For the past decade, veterinary medicine has been taken over by private equity capital which is completely detached from the realities of our profession. Forced to generate revenue for investors, traditional consolidators often fail to fulfill their promise to improve the businesses they acquired, including better care for the veterinary teams. Every organization must make their employees’ well-being an absolute 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 is launching an employee co-owned vet 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