Strategies for Veterinary Owner Pay in Practice Partnerships
One of the goals of owning a practice is increasing your take home revenue. If you are the sole owner, you can take home anything that is left after paying your employees and your other expenses. For your practice to grow, you’ll have to be able to pay for improvements and new equipment. However, the choice of how much money to leave in the business and how much to take home is yours alone.
As we discussed last week, there are lots of advantages to veterinary practice partnerships. Partnerships often have more capital to invest. In addition, the risk is shared and you have multiple people with different strengths who are invested in practice growth. Having a partner is also often less lonely than trying to do it on your own. Partnerships potentially allow for more time away from the practice for family as the day to day responsibility is shared.
However, in a veterinary practice partnership, one of the most contentious issues may be veterinary owner pay. You must agree with your partners on take home pay, money to leave in the practice for investment, and how to value work. If all partners are doing exactly the same work and are equal owners, it can be fairly straight forward. However, if the partners have different practice specialties or different strengths, what each partner is doing may be different or may change over time. Deciding ahead of time on the veterinary owner pay strategy for the practice partnership will help avoid conflicts.
Elizabeth Fritzler, DVM CVPM, has owned two practices with partners. She recommends that income be divided into four components to calculate veterinary owner pay. This component approach can help both with partnerships and can also clarify true profit in solo practices.
Four Components of Veterinary Owner Pay
Veterinary Services Compensation
Owners deserve to be paid for the veterinary services they provide just as if they were associates paid at market rates. If associate veterinarians in the practice are paid on straight salary, a similar salary should be paid to a veterinary owner working the same hours. If veterinarians are paid production quarterly, this should also be paid to owners based on what they produce as veterinarians. This should be paid out on the same time schedule as other employees. Some owners try to avoid this, preferring to devalue their veterinary services income to avoid payroll taxes. The IRS has a dim view of this practice. In an audit, the IRS will recalculate the owner draws based on fair market salary for a veterinarian in the area. If the draws have been too low, large fines and back taxes can be assessed.
Management Compensation
Management compensation should be 3 to 5% of gross practice revenue. Thus, larger practices with more total income, need more money for management. Historically 3% was used as a target percent. However, larger practices with more complex operations, larger facilities and longer hours have found that 5% is more realistic. Practices that are in a growth trajectory and adding new services or hours will also need 5% to have the management to implement change.
The management compensation percentage is what is available for all management wages, including bookkeepers, practice managers, and any other administrative personnel. If one or more owners participate in the management of the practice, they are entitled to their share of the money available for management compensation after all the management employees have been paid.
This category is less likely to be an are of conflict during the year if an annual budget is made each fall. During the budget meeting, partners decide on the management percentage and management needs for the coming year.
Return on Investment (ROI)
Owners typically invest some of their own money in the purchase of the practice and over time, build equity in the practice. If they did not invest this money in their practice, it could have been placed in a savings account that would earn interest at the going rate. Because any small business is a riskier venture than a bank savings account, investors (whether they are owners or not!) should earn more interest than a bank account. Partners should decide what is a fair interest rate for the capital each has invested in the practice. This interest should be paid to each owner at the end of each year.
Profit
What is left over after payment of practice expenses, doctor’s & manager’s compensation, and ROI is the true profit. Many practices do not reach this level, especially in the early years. For a well established, well managed practice, profits generally range from 10 to 20% in a good year. Exceptional practices sometimes generate profits as high as 25%. This is rare and difficult to maintain. Profits in this range often indicate that you are neglecting to maintain your facility and equipment or paying less than average wages.
Profit is not always paid out completely each year. Any new capital purchases such as equipment or facilities comes out of retained profits. Partners have to decide what to take home and what to reinvest each year. Again, an annual budget and strategy, decided upon in the fall of the prior year will help partners decide ahead of time how much of the expected profit to reinvest.
Practice Valuation
Veterinary practice worth (and sale price) is based solely on return on investments and profits. A practice that does not generate these is considered a “No-Lo” practice (i.e. a practice with no or little value.) This is why using this 4-component model can be helpful even for practices owned by a single individual. For partnerships, it is even more important to separate out the levels of compensation. When you calculate pay for each partner using a clear formula for the different ways they work and contribute, you avoid hard feelings.
Thank you to Elizabeth Fritzler, DVM CVPM for her insight into veterinary practice partnerships. Dr. Fritzler has owned two practices, Lien Animal Clinic and Cascade Heights Veterinary Center. She is also active with both Veterinary Management Groups (VMG) and for the Veterinary Hospital Managers Association (VHMA). In addition, she lectures for the VBMA at Washington State University.
