Aligning Incentives: A Veterinary Ownership Case Study

The Sustainability Crisis in Professional Ownership

Veterinary practice ownership faces a fundamental sustainability crisis. As corporate consolidators drive valuations upward, the traditional pathway—an associate saves capital, secures financing, and buys into or purchases a practice—has become increasingly untenable. The math simply doesn't work: practice valuations have outpaced associate earning capacity, creating a widening gap between what ownership costs and what it can reasonably return given the debt burden required.

This creates a second-order problem for existing owners. They've built valuable enterprises and understandably resist discounting that value to enable associate ownership. Yet corporate buyers, while offering competitive prices, fundamentally transform the nature of the practice. The tension is real: protect the value you've created or preserve veterinarian ownership, but rarely both.

Between 2020 and 2024, I participated in one attempt to address this dilemma through a private equity-inspired "carry structure" at Old Brown Dog Veterinary Partners—a holding company formed by consolidating three separate veterinary hospitals under unified ownership and management. Rather than presenting this as a solution, I want to examine it as a case study—what it optimized for, what tensions it resolved, what tradeoffs it embedded, and what it reveals about the broader challenge of sustaining professional ownership in capital-intensive environments.

For a deeper discussion of this model and its outcomes, I was interviewed on the Built to Sell Podcast.

The Misalignment Problem

The traditional buy-in model assumes rough parity between what a practice is worth and what an associate can afford to pay through a combination of savings and financeable debt. This assumption has broken down. Consider the arithmetic from an associate's perspective in 2020:

The Capital Requirement Problem:

• Practice valuations had reached levels requiring down payments well beyond typical associate savings
• Debt-to-income ratios for meaningful ownership stakes exceeded prudent lending thresholds
• Even minority positions required capital commitments that would take years to accumulate

The Return on Investment Problem:

• Financing costs consumed much of the expected profit distributions
• Risk-adjusted returns were questionable compared to simply remaining an associate with lower stress
• The personal financial fragility created by high debt loads undermined the supposed benefits of ownership

From the existing owners' perspective at Old Brown Dog, the calculus was equally constrained:

The Value Protection Imperative:

• Three partners held stakes of approximately 50%, 35%, and 15% across the hospital group
• Corporate offers valued the combined practices at $10 million
• Discounting to enable associate buy-in would directly diminish what they had built
• They were at different career stages with varying timelines to exit

The Succession Reality:

• They needed leadership continuity for eventual transition
• Pure associate hiring didn't solve succession
• Corporate sale was financially attractive but philosophically undesirable
• Time was a factor—decisions couldn't be deferred indefinitely

The question became: Is there a structure that protects existing value while creating genuine ownership opportunity without requiring capital the associate doesn't have?

The Carry Structure: Design and Mechanics

The solution we implemented borrowed from private equity's concept of "carried interest"—the idea that operators who drive value creation beyond a baseline can participate disproportionately in that incremental value. The structure had three core components:

1. Value Protection Threshold

We established a $10 million baseline that fully protected the existing partners' equity value. This threshold was not arbitrary—it reflected actual corporate offers and represented what they could receive by selling immediately. The principle: everything below this threshold remained 100% theirs regardless of what happened subsequently.

2. Growth Participation Mechanism

I received a 25.5% stake in all value created above the $10 million threshold. This created a specific incentive structure: my financial upside was entirely dependent on growing the practices beyond their current valuation. If the practices sold for $10 million, I received nothing. If they sold for $15 million, I received 25.5% of the $5 million increment, or $1.275 million.

3. Dual Equity Class System

We created two distinct equity classes to address different economic rights:

• Liquidity Event Equity: Determined distribution of proceeds in a sale or buyout. This class also carried voting rights.
• Operational Equity: Governed annual profit distributions during ongoing operations. This allowed for different treatment of cash flow versus eventual sale proceeds.

The Capital Requirement: Zero. I made no cash investment, took on no debt, and received immediate participation in both operational profits and future value creation.

What This Structure Actually Optimizes For

The carry structure resolved certain conflicts while creating or deferring others. Understanding what it optimizes for reveals both its utility and its limitations.

Alignment on Growth:

The most straightforward alignment was around practice expansion. With 25.5% participation in incremental value, my incentives strongly favored growth initiatives that increased practice valuation. This was genuine alignment—the existing partners benefited from 74.5% of that same growth while maintaining full protection of their baseline value.

However, this alignment contained an assumption: that growth was unambiguously good for all parties. In reality, growth often requires reinvestment that reduces near-term distributions, creates operational complexity, and may favor different exit timelines than all partners prefer. The structure aligned us on "more value" but not necessarily on the path to get there or when to realize it.

Risk Distribution:

The threshold mechanism created an interesting risk profile. Existing partners bore essentially zero downside risk—their $10 million baseline was protected by current market offers. I bore asymmetric risk: significant upside if we grew the practices, but no downside protection if the practice value stagnated or declined, and zero return if we simply maintained current value.

This seems inequitable until you consider opportunity cost. The existing partners had already invested years building the practices. I was choosing this path over alternative employment where I would also build no equity. The question wasn't whether the risk distribution was "fair" in some abstract sense, but whether it was acceptable to both parties given their respective alternatives.

Control and Governance:

The governance structure was more nuanced than simple economic alignment. Voting rights were tied to fully diluted liquidity event equity. I held 25.5% as CEO, and another partner serving as COO also held 25.5%. Together, we controlled 51% of votes on major operational decisions.

The structure avoided governance stalemates that could paralyze decision-making—if the CEO and COO aligned on a strategic direction, we could move forward without being blocked by existing partners with different risk tolerances or time horizons.

In practice, we never exercised the 51% majority. Every major decision achieved unanimous partner approval. Whether this unanimity emerged from genuine alignment, the shadow of potential majority action creating negotiating discipline, or simply effective working relationships is difficult to disentangle. The structure created conditions that could have forced decisions, but the presence of that mechanism may have paradoxically made its use unnecessary.

Timeline Misalignment:

The dual equity class partially addressed different time horizons—allowing current income distributions to differ from eventual sale proceeds. But it didn't fully resolve the fundamental tension: existing partners closer to retirement prioritized different outcomes than a partner in their late 20s.

In our case, we sold the practices after two years at a valuation substantially above the $10 million threshold, making my participation in the sale economically meaningful. This rapid exit benefited all parties—the existing partners realized their baseline value plus growth appreciation quickly, and I captured value creation over a compressed timeframe.

However, this outcome should not be considered typical or expected. We benefited from favorable market conditions, successful execution of growth initiatives, and timing that happened to align with buyer interest.

The structure defers this tension rather than resolving it, and it raises a deeper question: What type of liquidity event are all parties even seeking? If the endgame is simply to sell to a corporate consolidator a few years down the road, what's the point of implementing this model in the first place? The carry structure preserves veterinarian ownership temporarily, but if it merely delays inevitable corporate acquisition, it doesn't fundamentally address the sustainability of professional ownership.

The transition from this structure to something more permanent—where younger partners eventually buy out retiring partners while maintaining veterinarian ownership—remains an unsolved problem. That may require its own article, its own innovative thinking. For now, practices considering this model should be clear-eyed about what liquidity event they're building toward and whether that aligns with their stated values around ownership.

Broader Implications for Professional Ownership

This case study illuminates several dynamics relevant beyond veterinary medicine:

Value Creation vs. Value Capture:

The carry structure distinguishes between protecting value already created and participating in future value creation. This is conceptually clean but practically messy—where does "maintaining" end and "creating" begin? If the practices naturally appreciate with inflation, is that creation or capture? These definitional questions matter for equitable outcomes.

The Capital vs. Labor Problem in Professional Services:

Veterinary practice ownership conflates several roles: providing clinical labor, managing operations, bearing capital risk, and entrepreneurial value creation. Traditional buy-ins bundle all these roles together, requiring the new partner to pay for the privilege of providing labor and taking risk.

The carry structure attempts to unbundle them—compensating labor through salary, entrepreneurial value creation through carried interest, and leaving historical capital contribution unrewarded for the new partner. This unbundling is intellectually interesting but may not fully capture the complexity of what "ownership" means.

Generational Wealth Transfer Challenges:

If practice valuations continue outpacing associate earning capacity, creative structures like this may become necessary to maintain any veterinarian ownership. But each creative structure introduces its own complexity and potential for misalignment. There's no free lunch—we're choosing which problems to solve and which to defer or accept.

The Corporate Consolidation Ratchet:

Using corporate offer prices as a baseline legitimizes those valuations while attempting to work around them. This may inadvertently strengthen corporate position in the market—their offers become the benchmark that defines "fair value," even in structures designed to avoid corporate ownership.

Conclusion: An Experiment in Alignment

The carry structure at Old Brown Dog Veterinary Partners represented one attempt to navigate the misalignment between practice valuations and associate capital capacity. It solved certain problems—enabling ownership without capital, aligning growth incentives, protecting existing value—while creating or deferring others around control, timing, and exit.

Whether this model proves sustainable depends on variables outside the structure itself: continued practice growth, stable exit markets, aligned partner preferences, and effective working relationships. The structure creates conditions for success but doesn't guarantee it.

For other practices and associates considering similar arrangements, the key insight is not that carry structures are "the solution," but rather that they represent one set of tradeoffs among many possible configurations. The question is never whether a structure is perfect, but whether its particular alignment of incentives and distribution of risks is acceptable to all parties given their specific circumstances and alternatives.

The broader challenge remains: How do we sustain professional ownership in environments where capital requirements have outpaced professional earning capacity? Creative financing helps but doesn't fully resolve the underlying tension between protecting built value and enabling new ownership. That tension may simply be a permanent feature of the landscape, requiring ongoing negotiation rather than a permanent solution.

About this case study

I implemented this structure at Old Brown Dog Veterinary Partners from 2020 to 2024. For deeper discussion of the mechanics and outcomes, you can find an interview I did with the Built to Sell Podcast. I'm available to discuss this model and its implications—reach out on LinkedIn or leave questions in the comments below.

As seen in: KC Apex, Transitions in Business, Business Brokerage Press