8 essential steps in a veterinary practice sale
Christopher J. Allen, DVM, JD
Christopher J. Allen, DVM, JD is president of the Associates in Veterinary Law P.C., which provides legal and consulting services exclusively to veterinarians. He can be reached via e-mail at firstname.lastname@example.org. Dr. Allen serves on dvm360 magazine's Editorial Advisory Board.
Corporate consolidators are snapping up veterinary hospitals. Associate veterinarians scramble to find good ones left. And practice owners who werent thinking about selling all of a sudden wonder if nows the time. Heres how the process works.
It's no secret that the veterinary profession has entered a new world of rapid corporate practice acquisition. And trailing not far behind this wave of private equity and venture capital clinic purchases is a secondary wave of “potential” practice sales composed of practice owners who are considering sale earlier than they thought because of the robust prices. At the same time, associate veterinarians are becoming ever more alert to any potential availability of solid, successful practices, hoping they might be able to buy one before it's scarfed up by one of the corporate “big boys.”
So, with the hospital ownership world changing so rapidly, the smart money for associates and owners alike is on having a reasonable degree of familiarity with the process of practice acquisition: the nuts and bolts of how a clinic moves from being a local institution or family business to one of a chain of hospitals whose ownership can only be accurately identified through researching state d/b/a (doing business as) records and filings with the U.S. Securities and Exchange Commission.
In bygone days, word that a veterinary hospital might be available for purchase came to the universe of potential buyers through a thinly veiled advertisement in a veterinary journal or via word-of-mouth on VIN: whispers among former classmates, nearby competitors and drug reps. No longer. With everybody and their sister hunting for clinics to purchase, prices have soared and sellers are considering selling when they otherwise might have waited 10 years or more to pull the ripcord. Acquisition is on everyone's radar.
Here's how the process typically works when these chains court our country's veterinary practice owners.
1. Initial outreach gets a practice owner thinking
Today, veterinary hospital owners needn't seek out potential purchasers. I rarely encounter a clinic partner or owner who hasn't been contacted by mail or by phone from somebody who wants to discuss some form of acquisition. Sometimes these entreaties are rebuffed, but in no case does that contact fail to start the call recipient's gears turning. Even the attention of Dr. NeverSell will be, at least momentarily, drawn to the outsized price offers thrown around by corporate chains.
2. The sit-down may happen in secret
Not everybody who owns a practice is actively selling. Depending on the clinic owner's current frame of mind-as well as the salesmanship skills of the caller in initial outreach-most practice owners fall into at least the “extremely unlikely but marginally possible” category of potential practice seller. The target clinic owner may say to herself, “What have I got to lose? It might be interesting to hear what that consolidator has in mind.” So, there's often an initial meeting-in secret at a coffee shop in a nearby town at a late hour.
3. A ‘letter of intent' locks down confidentiality
Whether the suitor is a billion-dollar corporation or just a pair of guys looking to get a better return on their IRAs, the acquisition deal is generally initiated with the drafting of a proposed “letter of intent,” a document that describes the essential terms of a potential clinic purchase transaction. Letters of intent (LOIs) are generally not enforceable contracts except to the extent that they may mandate one or both of the following: 1) nondisclosure of the discussions and the details of the deal, or 2) the obligation of the seller not to entertain other offers until expiration of the LOI.
I've written on LOIs before. (Read about them here.) My general feeling about this document is that it should be as detailed as possible. There's no shame in having a half-dozen or more iterations pass between the parties prior to signing. It's much less expensive for the deal to collapse during multiple redrafts of a three-page LOI than to discover a deal-breaker the evening before closing after both sides have already incurred substantial legal costs.
More resources on buying and selling
- Why veterinarians who hate corporate ownership end up selling out
- Can veterinary associates buy a practice these days?
- What about selling to an associate for a corporate price? Is that even possible?
- A curated collection of content on the topic
4. Due diligence shows you where the money's at
If the deal survived the LOI process, there will be a far more specific set of terms set forth in a purchase-and-sale contract between the buyer and seller. Yet regardless of whether the contract is signed shortly after finalization of the LOI or at the time of closing (or any time between), the buyer must take a close look at the financial and other representations of the seller.
Is the gross revenue truly what is claimed? Are there liens on any of the equipment? Are one or more of the associates likely to leave if the practice is sold? These and many other facts about the practice need to be made certain through investigation by the buyer, the buyer's attorney(s) and the buyer's CPA or other tax adviser.
At this stage, there may be additional responsibilities for the practice seller. If the clinic is operated on leased premises, it's likely incumbent upon the seller to secure a commitment from his landlord to continue to lease (or sometimes to sell) the premises to the potential practice purchaser. Truth be told, if the seller has any significant doubt that his landlord will offer the purchaser a lease on terms similar to the existing one (and for at least 15 years), then the seller should probably work that angle before spending much time or effort negotiating a letter of intent.
5. The reveal must be managed well
Now, the tough part: At some point, the clinic staff needs to be told that the hospital is being sold. This is a contact sport for the seller. The way this news is revealed and the success of the seller's-and buyer's-spin on the deal will determine whether the practice sells … or whether the buyer walks away, leaving behind a hospital whose earth has been scorched by an employer now perceived as having blindsided or sacrificed the interests of his dedicated team.
There is no easy way to manage this reveal, and there are multiple techniques for carrying it out. Essentially, it's incumbent on the seller to figure out some way to get his people (particularly the associate veterinarians) on board before the buyer will part with the purchase price.
6. The contract is crucial to secure financing
As mentioned above, the final, definitive purchase-and-sale contract may be executed any time between the finalization of the LOI and the closing of the transaction. Ordinarily, in the case of larger practice sales and those in which a consolidator is the buyer, a final, definitive contract is at least prepared (if not executed) prior to the actual closing of the sale. A number of reasons for this exist, but the biggest one is the need to secure the money to buy the practice. A definitive contract may be necessary before a funding source-community bank, investment bank, venture capitalist, or perhaps the buyer's Uncle Fred-will commit to providing the funds for the acquisition. Another big reason is that banks and venture capitalists (and even Uncle Fred if he's a business-savvy guy) may well insist that the seller acquire commitments from most or all of the veterinarians to remain with the practice until at least a year post-closing.
7. Contract contingencies cover what needs to happen after the sale-or “no go”
The LOI, the purchase-and-sale contract or both of them may have preclosing contingencies. These are specific requirements that must be met before the closing may occur. One common contract contingency is that staff veterinarians must all sign commitments to remain with the practice for a minimum of (x) months after the closing. Another might be a requirement that the buyer be able to negotiate an acceptable lease for the use of the clinic property (either from the seller or from the seller's landlord).
8. The closing can be anticlimactic
For anyone who's bought a home, you likely remember that the closing was a nerve-wracking and exciting time. Maybe you had a table abuzz, with seller and buyer present, flanked by lawyers representing the seller, the buyer, one or more banks, a developer, a title insurer and more.
In what may seem quite counterintuitive, a practice sale closing (perhaps involving 10 times the cost of a typical residential unit) may take place with nobody getting together. If all the legal preparations have been made and all last-minute misunderstandings have been addressed, the closing may occur on a 100% digital basis with the buyer's and seller's attorneys exchanging signature pages via the web. The understanding in such closings is that all signature pages will be held in escrow pending the arrival of wired funds from the buyer's account to the seller's.
That's how it works
Those are the relatively universal stages involved in moving from Dr. NeverSell to become the wealthiest worker bee on staff at a veterinary practice you used to own. Any individual transaction can involve more or less drama (almost always more), but the steps are pretty much universal. And clearly, there are many moving parts: The order in which the steps are carried out, and the flow of information among all those affected, can make or break the outcome.
It makes good sense, before moving forward, for a seller and a buyer to realistically assess whether the deal works emotionally, financially and practically in their individual circumstances. If so, then it's game on!
Dr. Christopher J. Allen is president of Associates in Veterinary Law PC, which provides legal and consulting services exclusively for veterinarians. He can be reached via email at email@example.com.