The opportunity to sell a veterinary practice is a milestone professionally, personally and financially. You built a successful business and can now realize a significant payoff. Additionally, selling a practice can support a better work-life balance for you by alleviating the administrative duties and, if you stay with the clinic, allowing you to focus solely on providing veterinary care.
However, no longer being your own boss and seeing operational decisions made by others can impact your compensation and the quality of your professional life. Depending on how long you plan to continue to practice, you’ll want to ensure that the post-closing employment agreement addresses key terms and conditions related to practice operations.
We have spoken to many veterinarians dissatisfied with how their clinic operated after the sale. They wanted to know what leverage or authority, if any, they had to compel changes.
Unfortunately, the answer is usually “none” unless the post-closing employment agreement outlines those powers. That is why we recommend that veterinarians consider the following matters when negotiating a practice sale.
Noncompetition
This is a hot-button issue in the veterinary industry and, generally, in the business and legal worlds. You likely heard or read about initiatives at the federal and state levels that would prohibit or limit noncompetition agreements. However, even if implemented, proposals addressing those agreements are secondary to employment contracts.
Restrictions related to the sale of a business are enforceable regardless of legislative and administrative initiatives. Furthermore, the law generally permits restrictive covenants ancillary to the sale of a company to be broader than those related solely to employment agreements.
When negotiating your deal, consider this question: If my employment relationship doesn’t work out, am I willing or able to move? If the answer is no, then you must not agree to a geographic-restricted territory that would prevent you from practicing.
Guaranteed Hours of Work
When a selling veterinarian negotiates a post-closing employment agreement, the practitioner often is concerned about caps on the number of work hours. If your compensation plan will be based on production, collections or per diem, having a guaranteed minimum number of hours you can work each week or month is critical. After all, the new practice owner might decide for reasons of economy or efficiency to reduce your hours and increase those of a doctor whose salary is less or whose production is more.
While you might argue that such an action constitutes a breach of good faith and fair dealing, litigating the issue would be lengthy and costly. Therefore, we recommend a contract clause that the buyer’s failure to schedule you for a minimum number of hours would be a material breach and enable you to terminate the agreement. We also recommend negotiating a clause that voids geographic noncompetition terms if a breach occurs.
Other Veterinarians
Your deal might have an earn-out component or a compensation plan with a bonus based on practice revenue. In that case, you’ll want to ensure that the clinic is fully staffed and that a doctor covers all hours of operation. Amid the veterinary labor crunch, numerous clients of ours have expressed frustration at a buyer’s failure or inability to hire additional veterinarians. Not being fully staffed will depress revenue or require that you work extra hours.
To address the issue, we recommend that the parties:
- Agree on the minimum number of veterinarians the buyer will hire or assign to the practice.
- Set a hiring deadline.
- Establish that a breach for “X” days would allow you to terminate the employment agreement and void any geographic restrictions.
Staff Support
Veterinary practices must be adequately staffed to maximize efficiency, productivity and profitability. A veterinarian cannot be fully booked with patients if technicians or assistants aren’t present to complete intakes and assist the doctor. Just as not having an adequate number of associate veterinarians will hurt practice revenue, not having the proper staffing will significantly reduce efficiency and revenue.
Office Hours and Services
Suppose you have an earn-out or a compensation plan that includes a bonus based on practice revenue. In that case, ensuring the clinic is open on the necessary number of days and hours is critical to meeting your income goals. Additionally, if your practice offers a specialized service that is a significant profit center, you’ll want the buyer’s commitment to continue it.
For example, clients of ours offered boarding or kenneling services that generated significant revenue. However, after acquiring the practice, buyers eliminated those services, denying the sellers substantial bonuses.
Again, the sales agreement should detail which services will continue.
Put It in Writing
Uncertainty and ambiguity lead to disagreements and conflicts. Addressing potential issues when negotiating a practice sale ensures the buyer and seller understand how the business will operate post-closing. Of course, a buyer might be unwilling to lock in minimum benchmarks in some instances. In that case, the seller must at least be aware of the issues and decide whether to move forward with the deal.
SETTLING ON A PRICE
According to AmeriVet Veterinary Partners, the three fundamental valuation methods used when generating a sales price for a practice are the income, market and asset approaches. Learn more at bit.ly/3I5pqYw.