Peter H. Tanella
Legal Lingo columnist Peter H. Tanella chairs Mandelbaum Barrett’s National Veterinary Law Center. He earned his JD from Quinnipiac University School of Law and served as a deputy attorney general with the New Jersey Office of the Attorney General’s Division of Law, where he was general counsel to numerous state agencies. He has advised hundreds of veterinarians on practice acquisitions, sales, mergers, partnerships, joint ventures and associate buy-ins, the structuring of management service organizations, and the development of practice succession strategies. He may be emailed at email@example.comRead Articles Written by Peter H. Tanella
The purchase or sale of a veterinary practice can be an overwhelming journey. Even seasoned clinicians will encounter numerous potholes — emotional, financial and legal issues — on the road to closing what in many cases can be a multimillion-dollar transaction. Here are eight gaffes that frequently occur in the veterinary world and suggestions for overcoming them.
1. Failing to Plan
Selling a practice takes time. Not adequately planning for the sale can cause you to miss valuable opportunities to find the right buyer. To avoid this mistake, sellers should continually update their records and keep a sales portfolio on hand. Buyers and brokers notice when a seller has been diligent, giving them confidence in the purchase, not to mention assurance that the sale was not driven by desperation.
2. Rushing into Negotiations
Rather than immediately incurring the expense of drafting a contractual agreement, both parties should consider entering into a letter of intent. An LOI is not a legally binding contract; it’s a document that outlines the preliminary agreements and understandings. It should describe the deal’s essential terms, including the timing, monetary provisions, financing, contingencies, risk allocation, transition, form of documentation and which party will prepare the documentation. A well-drafted LOI increases the likelihood that a contract will be signed and that the transaction will close.
3. Not Enough Due Diligence
A deal should not close until the buyer is satisfied with the due diligence conducted. A thorough due diligence process should include:
- A detailed accounting of the practice’s assets and liabilities.
- An inspection of the premises, assets, inventory, records, tax returns, financial statements, client charts, accounts receivable, personnel files, employment agreements, leases and contracts, list of creditors, insurance policies and benefit plans, and any government approvals required to operate the practice.
The buyer should check for liens against the practice’s assets. Most notably, during due diligence the buyer will want to determine the viability of the real estate lease, ratify the fairness of the purchase price, verify financial data, be satisfied with personnel contracts and other key agreements, and inspect and cross-reference charts with billings and procedures.
4. Delaying Lease Talks
A tremendous amount of goodwill is attached to the practice’s physical location. The buyer should not assume that a lease is sound simply because of longevity. Buyers should request a copy of the lease upon taking an interest in a practice and begin a dialogue with the landlord. The seller should be upfront with the landlord, especially if the lease will expire soon.
5. Ignoring Accounts Receivables
The most common ways to manage accounts receivables (A/R) are:
- The seller keeps A/R, and the buyer collects it as a courtesy or for a fee.
- The seller collects and keeps A/R.
- The buyer pays a negotiated amount and collects A/R after closing.
Determine early the amount of A/R. One drawback of having the seller collect it is that the practice’s goodwill could be damaged if the seller aggressively chases clients who owe money.
6. Not Establishing Clear Restrictive Covenants
The seller’s post-closing plan should be shared and understood. The seller is receiving significant consideration during the transaction — the purchase price — and the buyer is acquiring all the goodwill and, in most cases, taking on considerable debt. Therefore, what’s reasonable is a requirement that the seller agree to a post-closing restrictive covenant with substantial time and geography limitations so that the seller leaves the marketplace.
7. Forgetting the Transition
A reasonable transition period will benefit the buyer, seller and veterinary clients. The contract should detail the arrangement. At a minimum, the seller should be willing to answer questions and introduce the buyer to clients and employees for zero to nominal consideration. The buyer should reserve the right to cut ties to the seller if the post-closing chemistry isn’t working.
8. Failing to Build a Team
Selling a high-value practice requires a professional team to work with potential purchasers, maximize the price and sale terms, and analyze the tax and legal issues. A solid team should include an experienced practice broker, an accountant and an attorney.
Avoiding these eight mistakes when you buy or sell a veterinary practice should put you well on your way to a positive experience. Good luck!
DID YOU KNOW?
According to the American Veterinary Medical Association, about 60% of U.S. veterinary practices in 2019 were companion animal exclusive. Nearly 18% were companion animal predominant, 11% were mixed animal and 6% were equine. Food animal and specialty practices made up the rest.