Today’s Veterinary Business
October 2020
By Peter H. Tanella
Starting a veterinary practice is an exciting endeavor for any clinician, but trials and tribulations are a normal part of the process. I’ve found that the following seven steps will help establish the foundation for a successful start-up.
1. Develop an Airtight Business Plan
Creating a business plan — the framework for opening a practice and a road map to success — is a crucial first step. The more meticulously you plan the business, the easier time you will have creating one that meets your goals.
A good business plan contains:
- A timeline of milestones and deadlines. For example, on which date would you like to open to the public? At which point will you need to obtain insurance coverage?
- Key steps and tasks. For example, how will you determine that a location is suitable for your clinic? What needs to be accomplished before you sign a lease agreement?
- Detailed information about the type of practice you envision and the services you want to offer. You need to consider the practice’s business structure, staffing requirements, and funding needs and sources.
- Business projections based on market research. Financial forecasting will help you judge the clinic’s potential and the range of revenue you can expect as the practice launches.
2. Obtain Financing
The debt incurred when starting a practice is significant. That said, make sure your credit is in good standing before you apply for a loan. A lender is more likely to approve a loan if you demonstrate good credit and present a strong business plan. If you have good credit and a solid team of advisers, then a veterinary lending specialist as opposed to a mainstream commercial bank might finance the entire start-up cost. A specialty lender also might provide additional working capital.
Most lenders will require a personal loan guarantee. This means that if your practice defaults on its obligations to the lender, you will be responsible for the unpaid balance. Ask the lender about graduated payments, where the monthly installments increase over time as you develop your practice.
3. Choose a Business Entity and Register
Before starting a veterinary practice, you must create a legal business entity, such as a sole proprietorship, general partnership, corporation, S-corporation, professional service corporation or limited liability company. Choosing the right entity will help you avoid personal liability for business claims made by vendors, creditors and employees, or even a personal injury claim such as a slip-and-fall accident. Among the factors you should consider when selecting an entity are your exposure to personal responsibility for debts and liabilities and the tax implications.
Although veterinary practices generally are organized as either a professional service corporation or a limited liability company, you should consult first with an attorney and a tax adviser. Furthermore, you will need to register the business with state and federal tax authorities and receive a tax identification number, or EIN, before you begin operations.
4. Find a Location
A good way to identify a suitable spot for your clinic is by affiliating with a commercial real estate broker experienced in veterinary practices. When searching for a broker, ask how often the person places a veterinary practice, how many potential locations the person has as a listing agent, and his or her familiarity with local zoning ordinances. Even if a particular use is permitted in a zone, issues such as parking requirements could disallow a veterinary hospital. In some cases, you might request a zoning variance from the municipality.
5. Begin Contract Negotiations
Whether you are buying or leasing real estate for your clinic, business transactions can be complicated and time-consuming. Rather than incurring the expense of immediately negotiating and drafting a lease contract, consider entering into a letter of intent, or LOI, with the other party.
An LOI is a document — sometimes just a letter from one party that is signed or initialed by the other — outlining the preliminary agreements and understandings. The LOI is not a legally binding contract except for an exclusivity provision that enables you to control the property for a short period while a formal contract is negotiated. The LOI should describe the essential business terms, including timing, money, financing, contingencies, risk allocation, documentation and which party will prepare the documents. The LOI saves time, energy and money when the parties cannot agree on the basic terms of a final agreement.
6. Negotiate and Enter Into a Lease
With financing lined up, a clinic location selected and an LOI drafted, you are ready to negotiate a lease agreement. The commercial lease might be the largest financial obligation you undertake.
Remember that as a commercial tenant, you do not have the same statutory rights as you might have in a residential setting. This means the lease agreement contains only the rights that a tenant contractually negotiated with the landlord. Thus, if the lease does not contain a provision in writing, then it is not so under the lease.
Before determining the provisions you need, work with an attorney to understand the different types of lease agreements, from a gross lease to a net lease. Variations include single, double and triple net leases.
The COVID-19 pandemic created myriad lease issues for commercial tenants who experienced a slowdown in operations or temporarily closed, so negotiating a favorable lease is more important than ever.
7. Find Your Employees
One of the final steps before launch is hiring employees. A company that operates without a clear understanding of labor and employment laws is taking a serious risk. Employment lawsuits can destroy a business through large verdicts or awards and legal fees. That’s why you need both a personnel manual that sets forth the policies of the practice as well as written employment agreements containing restrictive covenants for your associate veterinarians.
A personnel manual lays out policies necessary under the law, operational procedures and an explanation of employee fringe benefits. Upon accepting employment, every team member should be provided with the manual and sign an acknowledgment document that is kept in a personnel file.
Restrictive covenants are conditions and terms of employment on matters such as confidentiality, non-solicitation and non-competition. Such an agreement should be signed by the employee, especially an associate veterinarian, on or before the first day of work. The standard in most states for when a restrictive covenant is enforceable hinges on whether it is reasonably limited in both time and geography to legitimately protect the employer’s interests.
Once you decide to build your first veterinary practice, following these steps under the guidance of an experienced team of advisers will help ensure an exciting and rewarding journey.
For more information on Veterinary Law, please contact Peter Tanella.