Veterinary hospital ownership has become increasingly corporate in recent years, with 18% of practices classified as a C-corporation in 2021, according to the American Veterinary Medical Association. The trend has changed the game for independent owners eyeing the exit door. Here’s a crash course in what they are in for when they sell to a consolidator.
Getting in the Game
Enlisting the expertise of a veterinary-focused broker, accountant and attorney early in the process is essential for independent practice owners seeking a corporate purchase offer. Your broker and accountant can assess your business’s financial standing, typically using metrics such as earnings before interest, taxation, depreciation and amortization (EBITDA). Once the bids come in (usually as an offer letter or non-binding letter of intent), the negotiations begin, and it’s then time to get your legal team involved.
Deciphering the Offer
Generally, corporate buyers no longer deal in simple cash transactions. Instead, they offer a mixed bag of cash, equity stakes, promissory notes and earnouts. Equity, whether as a passive interest in the buyer’s parent company or active participation in a joint venture, comes with intricate terms, including constraints on when and how you may cash out. Promissory notes are a departure from lump-sum payments, while earnouts tether portions of the purchase price to future performance milestones.
However, the transaction isn’t just about the purchase price. Practice owners must be mindful of the post-closing employment agreement, the duration and proximity restrictions in the noncompete arrangement, the size of retention bonuses offered to associate veterinarians, and if you own the land, the terms of a lease or real estate acquisition.
Diving Into Due Diligence
Once you commit to a corporate buyer and accept the offer, the next step is due diligence. Selling to a consolidator requires an inspection of your practice’s finances and contracts.
The buyer’s accountants will do a quality-of-earnings analysis, scrutinizing your practice’s financial statements and the accuracy of the reported earnings. Expect to receive requests for historical financial statements, cash-flow breakdowns, and detailed revenue and expense data. They will also examine your practice’s accounts receivable, accounts payable and inventory reports alongside your business tax returns.
On the legal side, your attorney will be critical in helping you gather the requested documents. The buyer will scrutinize corporate documents, licenses, permits, contracts and ongoing legal matters. Prepare to settle outstanding debts and provide copies of all insurance policies and employee benefit plans.
In veterinary practice acquisitions, thorough preparation is the key to successfully navigating due diligence.
Understanding the Contracts
When dealing with a corporate buyer, a practice owner will face a long list of agreements to negotiate, all of which are pivotal in shaping the transaction’s terms and conditions. While the specifics might vary, expect to encounter some of the following documents:
- Purchase agreements: Whether the deal is an asset purchase agreement (APA), stock purchase agreement (SPA) or membership interest purchase agreement (MIPA), the document outlines the details of the sale. APAs focus on transferring assets and liabilities, while SPAs and MIPAs contemplate a transfer of stock or membership interests.
- Disclosure schedules: The practice owner will provide assurances about the clinic’s condition through representations and warranties in the purchase agreement. The buyer expects them to be truthful and accurate. If the buyer suffers a loss because of your misstatements, you might be required to compensate the new owner. Disclosure schedules are attached to the purchase agreement.
- Employment agreements: Unless the offer contemplates your immediate retirement, the buyer will most likely require you to sign an employment agreement detailing how long you will stay after the closing and how many clinical hours you will work. Most employment agreements involving a corporate buyer contain a noncompete clause that prevents you from competing with your former practice. While such clauses might go away — turn to Page 4 for an update — current associate veterinarians will be asked to sign employment agreements and might opt to hire an attorney to assist with negotiations.
- Lease agreements or assignments: Whether you own or lease your practice’s real estate, expect to negotiate a leasing component in any sale to a corporate buyer. If you own the real estate, you will sign a lease between you as the landlord and the buyer as the tenant. If you lease the real estate from a third party, the buyer typically will need a lease assignment and amendment to make the buyer the new tenant and perhaps adjust the terms.
- Joinder, subscription and LLC agreements: If the transaction gives you equity, a joinder, subscription, rollover, shareholder or operating agreement will formalize the terms. If you receive equity in the buyer’s parent company, you will be bound by the terms and conditions of the company’s shareholder or operating agreement, which is often complex and substantially non-negotiable. If your deal is structured as a joint venture, you and the buyer will negotiate an operating agreement to specify how the practice will be managed after the closing date.
Crossing the Finish Line
As the transaction progresses, the buyer will wrap up due diligence, and attorneys will iron out the final details in the documents. The buyer’s transition team will visit your practice to prepare for the change in ownership. The closing date marks the moment when assets and ownership interests shift.
On the closing day, you will exchange signatures, and the portion of the purchase price slated for then will be wired to you. Any pre-closing expenses that apply to the post-closing period, such as real estate taxes, rent payments and monthly service payments, are factored in as adjustments. Expect to file a legal name change for your entity because it is now part of the buyer’s intellectual property portfolio.
After the closing, the employment agreement details your new role. Any deferred payments and earnouts kick in as outlined in the purchase agreement. If you receive equity, the practice entity will hold onto it until a recapitalization event or a repurchase option is exercised. Joint venture structures might yield intermittent profit distributions.
Selling to a corporate buyer might seem daunting, but remember that the transaction is a marathon, not a sprint. Running a veterinary practice by day and reviewing legal documents by night is challenging, but you will cross the finish line in no time if you have the proper support team and understand the route.
DID YOU KNOW?
According to the AVMA’s 2023 Economic State of the Veterinary Profession report, the average practice is 3,510 square feet and has 3.4 exam rooms.