How entrepreneurial veterinarians can reap benefits of a corporate practice while remaining independent
Corporate consolidators are effectively acquiring scores of what were previously independently owned and operated veterinary practices. Although the economy has cooled, these acquisitions continue to occur across state lines and across the US. What were previously independent practices, which reflected the unique characteristics of their entrepreneurial veterinary owners, are now all melded together under a corporation’s operational methods.
This reality presents 2 questions. First, how can this corporatization of veterinary medicine occur when, in all but a handful of states, a practice can be owned only by a licensed veterinarian? Second, what actions can entrepreneurial veterinarians take to maintain the independence of their practices from acquisition and control by consolidators? In answering these 2 questions, we are not commenting on whether such corporatization is a positive or a negative for the profession and the business of veterinary medicine.
The short answer to the first question is that a consolidator can, in effect, own a veterinary practice through a legal entity known as a management services organization (MSO). An MSO is a general business entity that, as the name connotes, provides services. It is usually formed as a general business corporation or a limited liability company, and it can be owned by anyone, including nonlicensed individuals or other business entities, and it can even be publicly traded. Often the MSO is owned by a private equity company that is owned by investors.
By comparison, in nearly all states, a veterinary practice must be owned by a licensed veterinarian, and as legal entities, the practice can only be organized as a professional corporation or a professional limited liability company, in recognition that the entity is providing professional services. Admittedly, many states also allow the practice to be organized as a limited liability company.
As a service provider, MSO provides the overall management/administration, all support services, clinical and nonclinical support staff, office space and facilities, and equipment and supplies. Essentially, the MSO provides everything a veterinary practice needs to operate, except for the clinical treatment of patients by veterinarians.
There is essentially a 2-step process through which the MSO effectively acquires ownership of a practice. First, the MSO purchases from the current veterinary owner all the practice assets, except for the professional assets, as described below.
Specifically, if the practice leases office space, the MSO assumes the property lease, handles all tenant-landlord relations, and assumes all the responsibilities for repairs and maintenance of the office. The MSO then subleases the office back to a new “friendly” practice entity with which the MSO has partnered in this acquisition of the practice from the current veterinarian owner.
The MSO purchases or assumes the leases for all the practice’s clinical and office equipment and systems. The MSO assumes all the financial and all other obligations and responsibilities for the equipment/systems, including providing for its maintenance, repair, replacement, and upgrade/expansion when necessary.
With these purchases, the MSO also hires all the practice’s nonclinical and clinical support staff (front desk and back office personnel, hospital manager, veterinary technicians, and assistants; all staff except for the veterinarians). The MSO then leases this staff back to the new practice entity. The MSO has then assumed all the responsibilities as the employer of these former practice employees, and the MSO assumes all nonclinical aspects of managing this staff in their working for the new practice entity.
Perhaps most importantly, the MSO begins managing and administering all aspects of the new practice’s day-to-day operations (except for supervising the providing of veterinary care for patients). These functions include front desk, client schedules, vendors and suppliers management (including dealing with and purchasing from), clinical and office facilities and all the support staff management. Establishing a budget, managing its finances, and controlling its banking arrangements are all additional functions of the MSO. Operational and strategic planning for practice development and expansion all occur at the MSO’s corporate headquarters.
Partnering with a veterinarian who is willing to work with the MSO is then the second step in its effectively acquiring ownership of a veterinary practice. The veterinarian is often employed by the MSO as a medical director. Because in this role the veterinarian is not providing any hands-on clinical treatment, they can be an employee of the MSO as a general business corporation. This medical director then provides clinical administrative services for all the practices acquired by the MSO (eg, establishing clinical protocols, training veterinarians and other clinical staff on new procedures or equipment). The medical director can be given some small equity interest in the MSO or a subsidiary entity of it in order to financially cement the relationship.
The MSO’s veterinary partner then establishes, and is the owner of, a professional entity in order to satisfy the requirement in nearly all the states that only a veterinarian can own a practice. This, then, is the MSO’s “friendly” practice entity.
When the MSO acquires, in a purchase and sale, all the practice assets from the veterinary owner, there is a simultaneous second purchase of all the selling practice’s professional assets. These professional assets are the client lists and contact information, all the treatment and other clinical records of the practice’s patients, and any employment or other agreements that this practice has with veterinary employees. The underlying rationale for this arrangement is that, as long as a professional entity, owned by a veterinarian (ie, the “friendly” practice) purchases and owns these professional assets, there is compliance with the requirement of veterinary practice ownership.
The MSO funds the acquisition of these professional assets, thereby further cementing the relationship between it and its veterinarian partner. The former owner of the practice is required to remain for some fixed number of years as an employee under an employment agreement. This former owner is sometimes offered an equity interest in either the “friendly” practice or in the MSO for the term of the employment agreement while the former owner transitions the practice, particularly the clients, to the new “friendly” practice.
The relationship between the MSO and the “friendly” practice is contractual. They enter into a management services agreement, and a number of other ancillary agreements, under which the MSO provides all the management/ administration, support services, clinical and nonclinical support staff, office space and facilities, and equipment and supplies. These agreements are for exceptionally long terms, often for 10 years with an automatic 10-year renewal. Although, theoretically, the veterinary owner of the “friendly” practice could terminate all these agreements, in practicality this does not occur because this veterinarian has a financially advantageous, symbiotic relationship with the MSO.
The MSO, as a general business corporation, can easily obtain authorization to conduct business in every state. The “friendly” practice entity can similarly obtain authorization to operate a veterinary practice in nearly all states. With the available corporate funding, the MSO and the “friendly” practice can then, again and again, replicate the acquisition process.
The advantages of this business structure, as compared with the independent, entrepreneurial veterinary practice, are not just the obvious economy of scale but also the quality and the breadth of scale. The economy of scale is obviously the greater purchasing power for equipment, goods, and services, and the efficiency of centralized scheduling, billing, human resources, and all other management/ administrative functions.
Examples of the quality of scale are the ability of the MSO to offer higher salaries and benefits to attract more skilled and experienced executives and managers, veterinarians, and other clinical and nonclinical staff to operate its veterinary practices.
Examples of the breadth of scale are the financial ability of the MSO to purchase expensive, sophisticated equipment, and its ability to hire specialty veterinarians to expand the scope of clinical services being offered. There is also the branding and marketing power of the MSO to attract clients and capture market share from the remaining independently owed veterinary practices.
Entrepreneurial veterinarians, who want to remain independent, have every reason to establish their own MSOs or to partner with other like-minded veterinarians to do so. Obviously, individual practices cannot effectively compete against corporate MSOs. But there is no magic to how they are organized and why they have been so successful.
In creating their own MSO, an individual veterinarian, or a group of them, can reap the same advantages as corporate MSOs while still retaining the one attribute they desire most; maintaining the independence of their practices. With a veterinarian-owned MSO, there is no sale of the practice to the MSO’s “friendly” practice. Each partnering veterinarian has an ownership interest in the MSO and a vote in how it is operated, and they continue to retain complete ownership and control of their practice. They voluntarily participate in a contractual arrangement with, in effect, their own MSO, and they are free to terminate the contract if, at some point, they determine it is no longer beneficial.
All that entrepreneurial veterinarians need to compete against the corporatization of veterinary medicine is the will to do so.
Peter H. Tanella, Esq, is chair of the National Veterinary Law Group at Mandelbaum Barrett in New Jersey and cochair of the firm’s corporate law practice group. He can be reached at email@example.com.
Dennis J. Alessi, Esq, is cochair of Mandelbaum Barrett’s Employment Law practice group in New Jersey and a partner in the firm’s veterinary law group. He can be reached at firstname.lastname@example.org.