Date: March 17, 2023Attorney: Peter H. Tanella

Over the course of the last decade, veterinary practices have increasingly been acquired by corporate buyers. This new trend means more and more veterinarians own equity (stock) in a large company, instead of full ownership in their own practice (or ownership split among two or three partners). But the concept of holding a stake in a veterinary practice is not limited to corporate consolidators.   In fact, for the private practice owner, incentivizing employees with an equity interest in the practice is increasingly becoming a requirement, not an optional perk, for attracting and retaining quality veterinarians and support staff. 

Innovative compensation incentives can help veterinary practice owners recruit and retain talent.

Every veterinary practice owner is competing for quality veterinarians and support staff and these kinds of financial incentives can be useful to attract and retain talent. However, offering equity and establishing a profit-sharing plan are two different options. While they both can promote employee satisfaction, increase motivation, and improve loyalty, it is important to understand the distinctions.

The upside of equity. Offering an employee a percentage of the practice gives a valued team member an incentive to overperform but doesn’t commit the owner to share or collaborate in major operational decisions. If the employee leaves the practice they can sell the shares back to the owner, ideally at a higher price, because the practice has grown over time. The owner can also offer to pay dividends on that stock from time to time. Shares in a private company can rarely be sold or given to someone else, so the owner doesn’t have to worry about the associate selling those shares to someone else.  

There is also an emotional element to having equity in a business: people are more likely to take more responsibility and “think like an owner” if they have stock in a business. It is not unlike buying stock in your favorite food or clothing company. You can help the company do well by buying their products, but you’re also helping yourself as the stock price rises.

Things to consider before providing equity. One of the drawbacks to providing equity is that the employee must have the financial ability to pay for the shares. The owner can, “in effect,” lend the employee the purchase price. (The loan is only “in effect” because no money actually changes hands between the parties.) Nevertheless, ultimately, the employee must repay the loan, or suffer an adverse tax consequence.  Further, if the owner ultimately forgives the loan, then it has been doubly disadvantaged in that the owner has given the employee an ownership interest and the owner has not been paid for it.  Another drawback is that it creates a long-term relationship. While that means the owner is more likely to encourage loyalty from the team, it also means the owner has a legal commitment to the equity holders because they own (albeit a small) part of the practice. If the owner later decides to sell the practice (to another private owner or to a corporate buyer), it may be more difficult legally to do so. Another drawback can arise if the owner must buy out an associate who leaves the practice. It could be impractical or impossible to quickly determine a value and pay someone who is leaving the practice or worse, that the owner has decided to part ways with. It can be a great long-term relationship, but the road runs both ways.     

But equity is not the only option: profit sharing models. Profit sharing is another way to reward employees beyond straightforward compensation options like raises and bonuses. Profit sharing is just what it sounds like. On a regular basis, usually annually, an organization announces its profits for the prior fiscal year. Employees receive a modest percentage of that profit. Profit sharing provides employees an incentive to work harder for the practice since they share in an upside. As long as the overall practice is profitable, every member can receive a share. Thus, essentially, the employee shares in the owner’s future growth in value.  (The share doesn’t have to be equal, however. It can be proportionate to their role.)  

The advantages of profit sharing.  Profit sharing is different from a bonus. A profits interest is an outright grant of an equity compensation benefit to the employee.  The employee does not pay for the profits interest because it is granted in consideration for the employee’s services and other contributions to the owner.  Profit sharing can be a complement to the bonus structure in order to recognize that the practice as a whole benefits from everyone’s participation. This can particularly incentivize those employees that are key to the practice but don’t offer as much direct revenue. And unlike equity, a profit interest can be easily altered from year-to-year and if the practice has a low-performing year, the owner may not have to pay it out at all. The owner can also combat the risk of complacency that comes with high salaries: structure a higher payout for everyone upon reaching a specific milestone. The owner only pays it out if the practice makes it.  

The challenges of profit sharing. Most practice owners, like any small business, are privately held and therefore only the owner and the owner’s accountant know the numbers. Profit sharing will likely require more transparency, since documenting the profit means showing total revenue and total expenses. The owner does not have to disclose the salary of each employee, but the owner should be prepared to at least offer a top-level view into expenses like total compensation paid. The owner may also need to offer some insight into costs like rent or mortgage, marketing, equipment rental, or utilities. And with transparency can come an invitation for unsolicited advice and opinions. While the team is likely to be more motivated to help the practice increase revenue, they may also be more willing to speak up if they have ideas on how the owner can better run the practice. The owner won’t be under any obligation to listen. But it can be a mental shift for an owner to invite this additional scrutiny. And unlike equity, it won’t necessarily create a long-term incentive: if profits begin to dip, the profit-sharing is only academic, and some team members might decide to move on.

Equity and profit-sharing opportunities can increase employee participation and loyalty.

They both are innovative ways to help employees feel more economically and emotionally connected to the practice they work for. It can also help employees think about ways they can help the practice beyond their job description: getting the word out, helping to train junior staff, and reducing unnecessary expenses. In either case, an owner should seek both legal and financial advice to fully understand the commitment they are making. There very likely will be local laws, tax laws, or best practices that influence how and when the owner can implement each of these programs. However, the upside could mean a loyal and motivated staff that not only works for the owner, but with the owner, to build and grow a successful practice.