If You Choose to Sell to a Consolidator

Selling a veterinary hospital in today’s market is more than just a business transaction. It’s also a pivotal decision that can significantly affect the futures of the selling veterinarian and the associates working at the practice. With the veterinary industry continuing to experience a surge in purchases by corporate consolidators, understanding how to navigate the process is crucial. Selling to a corporate entity can bring substantial financial rewards and pose challenging complexities.

The following five-step guide can help independent practice owners and their partners manage a sale, maximize the hospital’s value and safeguard against risks.

Going to Market

The first step in selling your hospital is to surround yourself with a strong team of advisers. Here are four essential tasks:

• Assess the practice’s value: Before negotiating with potential buyers, you must understand what your hospital is worth. Hire a professional appraiser or a veterinary-specific business broker to provide a valuation. The practice’s earnings before interest, taxation, depreciation and amortization (EBITDA) is the metric most corporate consolidators will use to determine a proposed purchase price.
• Market it: To present your practice attractively, you need high-quality marketing materials that highlight the business’s financial performance, services and competitive advantages. Professional photos, client testimonials and thorough descriptions of the facility and team can enhance the presentation.
• Identify potential buyers: Corporate consolidators look for profitable veterinary practices. Work with your broker or adviser to identify companies that would be a good fit. Target buyers that align with your objectives, which might include ensuring the continuity of patient care and retaining your employees.
• Require secrecy: To protect your practice during the sale process, potential buyers should sign confidentiality agreements. This move ensures that sensitive information, such as financial records and client lists, remains secure.

Understanding the Offer

Once you attract interest from potential buyers, the next step is to understand and evaluate their offers. This stage is critical, as the proposed terms will significantly impact the outcome. Here’s what you should do:

• Review the offer: A corporate consolidator’s bid typically includes several components. It includes the price, the payment structure — upfront cash, deferred payments or earnouts, for example — and any terms related to your continued involvement in the practice. Carefully review each point with your financial adviser and attorney.
• Evaluate the price: The purchase price is often the most significant factor in the decision to sell. However, you should also consider the structuring of the transaction. For example, would the payment be upfront cash, or would a promissory note be issued at closing? Are deferred payments or earnouts based on the practice’s future performance? Would you receive equity in the buyer’s parent company, or would a new entity be formed and partially owned by your practice entity and partially by the consolidator (a joint venture)? Consult with your attorney and financial adviser to understand the different payment mechanisms.
• Assess nonfinancial terms: Crucial considerations include your role after the sale, employment agreements for your staff and the practice’s post-sale management. If you plan to stay as a veterinarian, your employment contract’s wording must be clear, and the compensation, responsibilities and duration must be defined.
• Negotiate the offer: Don’t be afraid to clarify the terms and maximize the selling price. Corporate consolidators expect it. Work closely with your legal and financial advisers to ensure the final offer meets your long-term needs and goals.

Preparing for Due Diligence

Once you accept the final terms, due diligence begins. The process entails the buyer thoroughly examining the practice to confirm the information you provided is accurate and that no hidden liabilities exist. Your job is to:

• Gather documentation: Due diligence requires extensive paperwork and files. You must provide financial statements, tax returns, client lists, employee contracts, lease agreements, licenses and other relevant documents. Having the material organized and ready to go can expedite the process and demonstrate your professionalism.
• Support a financial review: The buyer will scrutinize your financial records to ensure the practice’s reported revenue and profits are accurate. The buyer will examine income statements, balance sheets, cash flow statements and other documentation. Any discrepancies can lead to a reduction in the purchase price or, in some cases, the deal falling through.
• Prepare for a legal review: The buyer’s attorneys will review your practice’s legal standing. The examination includes ensuring that all licenses and permits are in order, that no pending lawsuits or regulatory issues are present, and that all contracts with employees, vendors and clients are valid and enforceable.
• Expect an operational review: Besides the financial and legal reviews, the buyer might evaluate the efficiency and effectiveness of your practice’s operations, including staff management, client-retention strategies and the quality of veterinary care.
• Prepare for potential issues: Red flags commonly arise during due diligence. Whether it’s a financial discrepancy, a legal concern or an operational inefficiency, you must be ready to address the issue. Work with your advisers to resolve problems promptly and keep the deal on track.

Understanding the Contracts

After successfully navigating due diligence, your next step is to finalize the contracts. The buyer’s lawyers will assemble the initial legal documents outlining the sale terms and your obligations. The contracts include:

• Purchase agreement: This contract is central to the sale. Depending on how the transaction is structured, the document might reflect the buyer’s purchase of specific assets or contemplate a transfer of equity in the practice entity. In either case, the agreement will include critical information about the transaction, such as the price, payment terms, representations and warranties, and contingencies. Review the document carefully with your attorney to ensure it accurately reflects the agreed-upon terms.
• Employment agreement: If you plan to continue working at the practice after the sale, you must negotiate an employment agreement. The contract will outline your role, responsibilities, compensation and length of employment. Most corporate consolidators include a noncompete clause preventing you from opening or working at a competing practice within a particular geographic area and for a specific period. The contract’s scope and duration can impact your future career opportunities.
• Lease agreement or assignment: Whether you own the real estate or lease the location from a third-party landlord, the sale to a corporate buyer typically has a leasing component. If you own the real estate, the landlord (you or your entity that owns the real estate) and the tenant (the corporate buyer) need a lease. If you lease the real estate from a third party, the buyer might request a lease assignment and amendment. In that case, having an open line of communication with the landlord early in the sale process will help facilitate the assignment.
• Joinder, subscription and LLC agreements: If you receive equity as part of the deal, you will be asked to execute a joinder or subscription agreement (or sometimes both) to memorialize the equity terms and conditions. If you receive equity in a parent company, you will be bound by the terms and conditions of the parent company’s shareholder agreement or operating agreement. If your transaction is structured as a joint venture, you and the buyer need to negotiate an operating agreement, which will specify how the practice will be managed after the closing.
• Transition services agreement: In some cases, the buyer will demand that you assist in transitioning the ownership for a defined period. Your responsibilities could include introducing the new owners to key clients, helping with staff moves and providing ongoing support.

Crossing the Finish Line

Once all contracts have been drafted and reviewed, it’s time to sign them and transfer the practice to the buyer. This stage is the culmination of your efforts and the beginning of a new chapter. Be ready to:

• Close the deal: Transferring legal ownership involves signing the agreements and receiving the funds. Your attorney will guide you in ensuring that everything is done correctly.
• Start the transition: After the deal closes, the next phase is transitioning the practice to the new owners. This moment can be sensitive for staff and clients, so manage it carefully. Work with the buyer to ensure employees are informed and supported and that clients are reassured about the continuity of care.
• Manage post-sale obligations: If you agree to remain involved in the practice, whether through an employment or transition services agreement, be sure to fulfill your obligations. Clear communication and collaboration with the buyer after the closing will help ensure a smooth transition.
• Conduct financial planning: Once the sale is complete, you need to manage the monetary proceeds. Work with your financial adviser to invest the money and manage tax liabilities.
• Reflect on the journey: Selling a veterinary practice is a significant milestone. Whether you move on to retirement, start a new job or step back from the day-to-day operations, take pride in the legacy you built and the positive impact you had on your patients, clients, employees and community.

ANOTHER TIP

When selling a veterinary practice, the owner must make significant representations and warranties on behalf of the business. Disclosure schedules attached to the purchase agreement will list many of them. Your attorney will review the representations and warranties to be sure you disclosed every required item.