Sale and Purchase of Veterinary Practices
The following summarize the steps generally taken to consummate the
sale and purchase of a veterinary practice.
A. GENERAL CONSIDERATIONS
1. Identify client objectives and constraints in selling or buying a veterinary practice: This is crucial for structuring and negotiating the transaction and drafting documents.
2. Make agreement with finder or broker: If the services of a finder or broker will be utilized, it is preferable to reduce terms to writing and make payment of fees contingent upon final consummation of trans-action.
3. Choose the most appropriate structure (sale of assets, sale of stock or merger): This will have significant tax, accounting and other ramifications.
4. Consider signing a letter of intent: The advisability of entering into a letter of intent is controversial and depends on particular facts and circumstances. The purpose of the letter of intent is to set out the major terms of the transaction to be contained in a definitive agreement and it should not be binding upon either party, except Buyer's covenant not to disclose confidential and proprietary information and Seller's covenant to negotiate exclusively with Buyer and not other buyers.
5. Investigate Seller's practice: Buyer should do his or her due diligence.
6. Draft, negotiate and execute definitive agreement and related agreements: Control of the drafting may be critical.
7. Resolve all pre-closing matters: These include the preparation of additional documents, obtaining all permits and consents and completion of other relevant transactions necessary for consummation of the sale and purchase transaction (e.g., obtaining tax clearances and releases, compliance with bulk sale laws, review of equipment and real property leases, environmental reports and similar matters, and prep-aration of assignments of contracts and/or obtaining third party consents thereto).
8. Close the transaction: This is the actual consummation of the transfer of the practice and payment (with an exchange of all documents and presentation of evidence of satisfaction of all conditions to closing including the completion of the foregoing pre-closing matters).
9. Monitor post-closing matters: These include comple-tion of installment or earnout payments of the purchase price and administration of escrow of the purchase price (or portion thereof) to cover contingent liabilities, non-competition covenants, and employment contracts.
B. SELLER'S CONSIDERATIONS
1. Reduce risk related to practice and Buyer's management abilities which may be addressed by:
(a) Survival of representations and warranties after closing;
(c) Installment payment of consideration;
(d) Non-negotiable debt subject to set-off; and
(e) Covenant not to compete.
2. Taxation of transaction: Seller wants to maximize favorable capital gain treatment and minimize receipt of ordinary income.
C. BUYER'S CONSIDERATIONS
1. Determination of value: Based on appraisal approach or a percentage of gross revenues of practice. Practice value must be realistic and not inflated by Seller's ego or lack of economic reality.
2. Risk sharing: Balance between pre-closing investigation and post-closing risk-sharing by Seller.
3. Source of funds: Constraints imposed by Buyer's lenders or other source of funds.
4. Changes: Management changes to be made after acquisition; change name of practice; possible importance of preserving existing employee, customer and vendor relationships.
5. Uncertainty: Possible uncertainty of value of practice; desire to protect downside risk that practice will be worth much less than the purchase price.
6. Taxation: Buyer wants to amortize (i.e., write off) as much of the purchase price as possible within the shortest period of time.
D. PRELIMINARY CONSIDERATIONS FOR BOTH BUYER AND SELLER
1. Type of consideration:
(a) Cash: Cash gives Seller a feeling of certainty. However, once Buyer has paid in full, it is less leverage if unexpected problems arise after closing. One solution to this problem may be the use of an escrow for a portion of the purchase price, but this can present tax disadvantages to Seller. Another solution is to have the Seller carry-back a portion of the purchase price in the form of an interest bearing promissory note.
(b) Negotiable debt: Seller usually wants the promissory note to be negotiable. Under the Uniform Commercial Code, Buyer will be unable to assert non-technical defenses against a holder in due course. This effectively cuts off Buyer's remedy of offset for Seller's breaches of representations and warranties. Another important consideration is the extent to which the promissory note will be subordinated to Buyer's other obligations (for example, if a portion of the purchase price is financed by a commercial lender, then Seller's note will become subordinate and junior in priority to the lender's note).
(c) Nonnegotiable debt: A non-negotiable note is favored by Buyers who want the option to hold back some portion of the purchase price as an offset for damages arising from breaches of Seller's representa-tions and warranties.
(d) Earn outs: In an earn out, the payment of some part of the purchase price is made contingent on the results of the practice's operations in Buyer's hands. The formula used to determine the deferred portion of the purchase price is the key to an earn out deal. Seller should obtain specific covenants which will assure that it has adequate control in order to maximize the earnout purchase price.
2. Advanced planning: Even before Buyer is found, Seller should "clean-up" practice:
(a) Removal of Assets from Practice: Remove assets which Seller wishes to retain or which may be objectionable to Buyer;
(b) Financial and Accounting Records: Make sure financial and accounting records are in good order; and
(c) Litigation: Settle lawsuits.
3. Identify acquisition participants and define their role:
(a) Attorneys : Attorneys are responsible for assis-tance in deal structuring, due diligence, negotiation, preparation of transaction documentation and legal opinions (if appropriate);
(b) Accountants: Accountants are responsible for financial and income tax analysis, deal structuring, accounting and due diligence;
(c) Brokers or Finders: Brokers or finders are responsible for acquisition planning, assisting with the due diligence and negotiation; and
(d) Sources of financing: Conventional loans and SBA financing. Comparative shop to find the best interest rate and on the best possible loan terms.
4. Big deal vs. small acquisition: Acquisition issues are generally the same whether the transaction is large or small. Often times, the smaller the deal the bigger the problems.