The number of mergers and acquisitions occurring in the veterinary industry is unquestionably at an all-time high. Corporate chains and aggregators own as much as 15 percent of general companion animal practices, according to estimates, and the percentage is even higher for specialty practices.
This means an increasing number of veterinarians are entering the deal arena and putting their negotiation skills to the test.
The negotiations that precede a practice sale are not for the faint of heart, particularly for veterinarians who are new to mergers and acquisitions. Certain agreement terms are central to almost every deal, and understanding them is crucial when the parties approach the bargaining table.
Any practice acquisition involves three fundamental agreements:
- The non-disclosure agreement. This is typically signed before any exchange of meaningful financial or practice information. In general terms, it protects the seller’s confidential information, but other provisions might be proposed as well.
- The term sheet or letter of intent. This sets forth the main deal terms. The document confirms that both parties see eye to eye on the deal before they proceed to the full sale agreement.
- The purchase agreement. This is the final, detailed agreement setting forth all the terms by which the parties agree to purchase and sell the practice. It incorporates and supersedes the provisions in the term sheet or letter of intent, but it also addresses numerous other provisions.
Here are tips and strategies that buyers and sellers can employ.
Negotiating the NDA
To facilitate a possible sale, the buyer needs to see the seller’s financial and other business information. As a result, nearly every deal starts with the exchange of a non-disclosure agreement, or NDA, which is intended to protect the seller’s confidential data. Generally speaking, NDAs obligate the buyer to protect the seller’s non-public information and use it only for the purpose of evaluating a purchase.
Not all NDAs are created equally, so don’t assume the NDA is a standard document.
Sellers should:
- Make sure that sensitive information isn’t defined too narrowly and that the document covers everything the seller wants to protect.
- Confirm there are no seller representations about the accuracy of the information either being complete or true at this stage of the transaction.
- Seek a long-term NDA. Buyers might not agree to an indefinite period, but they should be willing to obligate themselves for one to several years after the parties separate.
- Consider asking the buyer to agree that if negotiations fail, the buyer will not solicit the seller’s employees for a set period. This is particularly important if the seller is concerned that the buyer will obtain pay data and other important information about employees during the due diligence process.
Buyers should:
- Make sure the definition of confidential information isn’t too broad. The list should not cover information that is discoverable through legal means or that is in the buyer’s possession.
- Watch for employee non-solicitation agreements. While a buyer may be willing to agree not to seek out and solicit a seller’s employees for some period after a deal falls apart, the duration should be limited. The buyer might require that it be allowed to hire the seller’s employees if they respond to the buyer’s general job announcements.
- Consider whether the NDA should be a mutual agreement, meaning it protects the buyer’s information as well. This is important in deals in which the buyer shares confidential information, such as business plans or pay data for the buyer’s existing practices.
Negotiating the Term Sheet or the Letter of Intent
Before drafting and negotiating a long and detailed sale agreement, the parties will almost always sign a term sheet or a letter of intent (LOI) that describes the basic terms of the deal. These include critical items such as the purchase price, the structure of the deal, the form and timing of payment, the assets and liabilities being transferred or retained, and the terms of employment and management rights after closing.
The LOI is critically important in helping the parties determine whether they agree on enough key deal points to proceed. A thorough and well-drafted LOI can save both parties lots of time and legal fees.
Sellers should:
- Seek to lock in a purchase price with minimal adjustments. Ideally, the purchase price will not be subject to substantial downward adjustments during due diligence as the buyer reviews the seller’s business information.
- Negotiate for more of the purchase price to be paid at closing rather than over a period after closing.
- Negotiate key employment agreement terms. If continued employment for a set period is important to the selling veterinarian, the failure to agree on employment terms can make a deal implode late in the process.
- Address the seller’s real estate, either the assignment of the lease or transfer of the facility. The seller should determine early on whether hurdles need to be cleared in assigning or transferring rights to the seller’s facility.
Buyers should:
- Set the seller’s expectation for a downward adjustment in the purchase price if the buyer’s due diligence uncovers negative information.
- Seek to pay more of the purchase price over a period of years after the closing rather than at closing.
- Request that part of the purchase price be held in escrow for a period after the closing. This ensures that money is available to cover any of the seller’s liabilities that arise after the sale.
- Require an exclusivity clause that prevents the seller from engaging in discussions with other potential buyers during the due diligence and negotiations. This helps avoid a bidding war that can drive up the purchase price.
Negotiating the Sale Agreement
Depending on its structuring, the sale agreement generally takes one of three forms: an asset purchase agreement, a stock sale agreement or a merger agreement. It reflects the final agreement of the parties and allows them to proceed to a closing, either when the agreement is signed or on a specified date.
Although the sale agreement typically contains hundreds of important provisions, buyers and sellers often focus their negotiations on key areas.
Sellers should:
- Seek to limit the seller’s representations and warranties. Representations and warranties become the basis for the buyer’s indemnification claims, which chip away at the purchase price after closing.
- Try to cap the total damages the seller could pay due to misrepresentations and warranties.
- Negotiate a relatively short survival period for the representations and warranties so that the seller isn’t exposed for an unreasonably long time after the closing.
- Avoid or limit the owner’s personal liability for representation and warranty claims.
Buyers should:
- Require a holdback or an escrow of part of the purchase price to help cover indemnification claims against the seller.
- Negotiate a relatively long period for the seller’s representations and warranties.
- Provide employment terms aimed at the retention of key employees.
- As long as state law allows it, consider requiring a broad and long non-compete agreement for any sellers who will not continue practicing as well as for any employees who enter into employment agreements.
- Be clear about whether and to what extent the seller will assist the buyer in the transition and integration process after the closing.
Of course, even the best negotiators will not succeed if the other party is not a good match. Don’t base your choice only on the proposed purchase price. Also consider the culture and vision for the combined practices after the closing occurs.