Selling to Corporate Entities
Industry Spotlight
Welcome to our latest Industry Spotlight, where we share insights and strategies from industry insiders. In this article, Peter Tanella of Mandelbaum Barrett Law Firm discusses a major trend impacting veterinary hospitals: selling to corporate entities. With nearly 30% of veterinary practices now under corporate ownership, knowing how to approach a sale has never been more important. Whether you’re considering selling your practice or want to stay informed, this article provides key steps to maximize your value and navigate the complexities of the process.
Read on to learn more about how to prepare for a successful sale to corporate buyers.
Answered by
Peter Tanella
Corporate Law Partner
Mandelbaum Barrett Law Firm
Veterinary hospital ownership has seen a major shift toward corporate consolidation, with as much as 30% of veterinary practices now under corporate ownership. This trend shows no signs of slowing, fueled by increasing demand from private equity firms and large corporate consolidators seeking to acquire independent clinics. If you’re an independent practice owner contemplating a sale, here’s a crash course on what to expect—and how to navigate the process.
Getting in the Game
Enlisting the expertise of a veterinary-focused broker, accountant, and attorney early in the process is essential. A broker and accountant can assess your practice's financial standing using key metrics like EBITDA (earnings before interest, taxation, depreciation, and amortization), which typically forms the foundation of corporate offers. It's vital to ensure your practice’s financials are in top shape before going to market, as buyers are becoming more selective, especially with rising interest rates tightening acquisition financing.
Once bids are received, typically through a Letter of Intent (LOI), negotiations begin, and legal counsel is essential to protect your interests. It’s also crucial to engage valuation experts to ensure you understand the real worth of your practice, given the evolving market trends and various deal structures.
Deciphering the Offer
Corporate buyers rarely offer simple cash deals anymore. Instead, expect a combination of cash, equity, promissory notes, and earnouts. Understanding each component is key. For instance, equity stakes might seem appealing, but the terms for cashing out are often restrictive. Earnouts, which tie part of your payment to future performance, introduce additional risk but can increase your total payout if targets are met. As a seller, you should ensure that earnouts are based on metrics you can influence directly post-sale.
In addition to the financial terms, consider the post-closing employment agreement, noncompete clauses, and real estate considerations if you own the practice property. Noncompete terms should be reasonable in scope and duration, especially given the high demand for veterinarians in the current market.
Diving Into Due Diligence
After accepting an offer, due diligence begins. The buyer will thoroughly inspect your practice’s financials, including tax returns, inventory, and contracts. Expect a quality-of-earnings analysis, which assesses whether your reported profits are accurate and sustainable.
Buyers will also scrutinize legal matters, corporate documents, and employee benefits. Sellers should anticipate resolving outstanding debts and providing disclosure schedules that outline any liabilities or ongoing obligations.
Recent trends show increased attention to cybersecurity and compliance issues, given the growing reliance on technology in veterinary practices. Ensuring that your practice is compliant with HIPAA-like standards for veterinary medical records could avoid potential hurdles during the due diligence process.
Understanding the Contracts
When negotiating with a corporate buyer, expect a range of documents critical to finalizing the sale. These include:
Purchase agreements (asset, stock, or membership interest) outline whether assets or shares are being sold.
Disclosure schedules contain representations and warranties about the practice's condition, which must be truthful or risk penalties.
Employment agreements often require sellers to stay on for a period post-sale and include noncompete clauses.
Lease agreements may be negotiated if you own the real estate, with potential for a separate sale or lease arrangement.
If equity is part of the deal, agreements like joinder, subscription, or LLC agreements will formalize your stake in the buyer’s parent company. These documents tend to be non-negotiable but critically impact your long-term financial benefit from the sale.
Additional Steps to Maximize Value
Practice owners should consider additional steps to increase value and reduce risk:
Optimize Practice Operations: Buyers are more discerning than ever. Improving operational efficiency, tightening expense management, and increasing revenue streams (e.g., adding new services or technologies) can boost your practice's appeal.
Transition Planning: Buyers often seek smooth transitions for clients and staff. Developing a robust transition plan, especially for key personnel like associate veterinarians, can enhance your practice’s attractiveness to potential buyers.
Tax Planning: Work closely with your CPA to understand the tax implications of the sale. Structuring the deal properly from a tax perspective, especially with regard to capital gains, can significantly affect your post-sale financial position.
Real Estate Considerations: If you own the practice real estate, consider whether a sale-leaseback arrangement would maximize your returns or if retaining ownership and leasing it to the buyer might offer long-term passive income.
Crossing the Finish Line
As the transaction nears completion, due diligence wraps up, and the final agreements are signed. The buyer’s transition team will visit your practice to prepare for the change in ownership. On the closing day, you’ll exchange signatures, and the purchase price will be wired to you.
Post-closing, your role will shift based on the terms of your employment agreement. If equity or earnouts are involved, payments and profits will kick in as outlined in the purchase agreement.
Selling to a corporate consolidator can be complex and daunting, but with proper planning and expert guidance, you’ll not only close the deal but maximize the value of your hard-earned practice. Navigating these trends with foresight is key to crossing the finish line successfully.
