The key question here is: “do I need a partnership agreement if I am going into business with my veterinary partner?” Many veterinary business partners who form a legal entity under which they will operate their practice decide not to adopt a partnership agreement to save on expenses early in the life of their practice. Here, the term “partnership agreement” is being used generally to refer to an agreement between the owners of a veterinary business. Excited by the prospects of a new business and all the opportunities they foresee, the partners also believe there is no time to waste; they are convinced that negotiating a partnership agreement will slow their momentum and create unnecessary legal obstacles. Like many people they think “what could possibly go wrong if we operate our company without a partnership agreement?” The right answer: “Lots of things could go wrong” and this one decision could lead to significant financial consequences, not to mention the mental stress of a dispute among partners. To illustrate the conflicts that veterinary business partners can encounter, consider the following hypothetical:
A deeply shared interest in providing high-quality veterinary medicine along with compassionate service was the catalyst for a veterinary practice partnership between Jared and Eli. The business weathered a rocky start but appeared to be making progress toward sustainable growth. Unfortunately, by that point, Jared and Eli’s relationship had deteriorated. They were clashing often, especially over questions of contribution and control. Jared felt that he was doing all the real work, while Eli criticized his partner for mismanaging finances and decisions pertaining to employees. An outside friend weighed in on the situation and helped Jared see that he had made a lot of mistakes that cost the business money and good employees. Jared acknowledged his mistakes and decided he wanted out of the business. He contacted a colleague he had kept in touch with since veterinary school and started negotiating a purchase price for his shares in the practice. When Eli learned this, he felt angry and betrayed, and the hostility between the two further festered. Unfortunately, the situation depicted here is far from rare. The disputes depicted between Jared and Eli arose primarily because they did not have a clear partnership agreement in advance.
By adopting a well-drafted and custom-tailored partnership agreement, partners can avoid many potentially painful consequences. For example, in the above hypothetical, a partnership agreement would have served to define the rights and responsibilities of each owner. Further, addressing important issues in a partnership agreement means that the owners can set and manage each other’s expectations and avoid future disputes. With this understanding of what can go wrong, let’s dive into a few basics, and some of the key terms that should be addressed in a partnership agreement between veterinary business partners.
If the business is a limited liability company (LLC), or in some states, a professional limited liability company (PLLC), the agreement between owners is called an “operating agreement.” If the business is a corporation (Inc., Corp., PA or PC), the ownership agreement is referred to as a “shareholders’ agreement.” The following key topics and questions must be answered and addressed in a partnership agreement:
Ownership and Voting Rights:
1. What percentage of ownership will each owner hold?
2. Will all the owners have the same voting rights?
3. What voting percentage is required to approve an act by the company?
4. Will any decisions require unanimous consent of the owners?
Management of the Company:
1. Who will serve as the officer(s)/manager(s) of the company?
2. Will the officer(s)/manager(s) be paid separately for managing the company?
3. What are the responsibilities of the officer(s)/manager(s)?
4. What services will each owner provide the company?
5. If the owners cannot agree on an important decision, will they bring in a neutral decision maker, or mediate/arbitrate the dispute?
1. Who will manage the company’s finances?
2. Will the owners be required to make additional capital contributions or loans to the company?
3. When will distributions be paid to the owners and who will determine the amount of those distributions?
Restrictions on Transfer/Sale:
1. What happens if an owner leaves the company voluntarily or involuntarily? (e.g. death, disability, termination or employment, criminal behavior)
2. If the majority of owners vote for a sale of the business, can minority owners be forced to sell on the terms agreed to by the majority?
3. In the event of a sale, how will the purchase price for an owner’s interest be determined?
4. Will owners be restricted from transferring or encumbering their equity? If so, how?
1. Will owners be permitted to own an interest in another company or veterinary practice?
2. What restrictions will apply if an owner leaves the company (non-competition, non-solicitation, confidentiality)?
3. What time and geographic restrictions will apply?
1. How does the legal entity protect its owners from liability?
2. Will the company indemnify the officers/members and owners for defense costs and/or damages should a lawsuit or claim arise?
3. Are there any exceptions to the indemnity and limited liability the company will provide (e.g., breach of fiduciary duties)?
1. How often will the owners and leadership of the company meet?
2. What should be accomplished at these meetings?
3. How should these meetings and the decisions made be memorialized?
1. If the company ever needs to be dissolved e.g., after a sale, what procedure must the owners follow?
2. Must all owners consent to the dissolution? What are the consent requirements?
3. Who is entitled to payment, and in what priority, if the company is dissolved?
Another important consideration in deciding whether to prepare a partnership agreement is that absent a written and binding agreement, a company will be governed by the default statutes and regulations in the state where the company was formed. Although many state’s rules are comprehensive, they may not adequately address the rights and obligations of the partners under many different and relevant scenarios. By way of example, state rules may not discuss what happens when the company needs more capital, or whether an owner is prohibited from competing with his/her other veterinary business. Because each veterinary practice is unique, and the relationships between partners varies greatly, accepting the one-size-fits-all approach of state laws can be dangerous. For this and many more reasons, a well-structured partnership agreement prepared by counsel, which sets forth the parties’ intentions and provides for agreed rights and protections is the most valuable option. The National Veterinary Law Group at Mandelbaum Barrett is here to answer any questions you may have.