Selling your veterinary practice can be financially, legally, and emotionally complicated. And, while selling to an associate certainly has its benefits, there are still plenty of complications you need to be prepared for. Before you sell your practice to an employee, take the following steps to ensure a smooth transition for everyone involved.
1: Assemble the right team.
Don’t attempt to sell your practice without the right people on your side. At least two years prior to selling, assemble a team of professionals to keep all your T’s crossed and your I’s dotted. On your team, be sure to include a lawyer, accountant, banker, practice valuation specialist, and mentor who has been through the experience.
2: Know your practice’s worth, and price it right.
No one likes talking about money, but just because you’re selling to an employee, doesn’t mean you shouldn’t get a fair price for the business you’ve built. As soon as you’ve assembled your transition team, get your practice appraised by a veterinary-specific valuation expert. Knowing the true value of your practice will help you determine the price, financing, and transition terms.
Practice valuations are complicated. Here are some terms you should know:
- Earnings before interest, taxes, depreciation, and amortization (EBITDA) — EBITDA minus the estimated average spent each year on equipment is a good starting point to determine the practice’s profitability.
- Seller’s discretionary earnings (SDE) — The SDE is calculated by combining the EBITDA with the practice owner’s income and benefits.
- Net income — Take the practice’s earnings minus its expenses to determine the net income.
- Net tangible assets — This is the fair market value of the practice’s property that can be seen, weighed, touched, and measured (e.g., real estate, equipment, supplies, product inventory, accounts receivable).
- Intangible assets — These assets can’t be touched or measured (e.g., client list, patient medical records, an experienced staff, a positive reputation in the community).
Some other factors that can affect a practice’s value include its location and type, as well as the demographics of its clients. Once you know your practice’s worth, you can decide on a fair sales price.
3: Determine what percentage of the practice you want to sell, and how the practice will be managed going forward.
Whether you want to retire after you sell or continue working full- or part-time, consider the following:
- What percentage of the practice will you sell to your associate?
- Will your associate have the option to purchase additional equity in the future?
- Will you retire or continue working? If you want to continue working, will you work full- or part-time?
- How do you plan to phase out of practice?
- Does your associate want you to have a fixed retirement age or date?
- How will management decisions be made going forward? Consider establishing a transition period during which you’ll work together to make decisions before you relinquish full control. This will help your associate learn to make difficult decisions, as well as give the team time to view the new owner as an authoritative figure.
Be upfront with your associate about your future plans throughout the negotiation process.
4: Draft a letter of intent.
A letter of intent (LOI) outlines the preliminary agreements and understandings of a potential practice purchase transaction. An LOI is not enforceable by law except that it may mandate that the details of the deal can’t be discussed, or may ensure the seller doesn’t entertain other offers until the LOI has expired. The LOI should be as detailed as possible and should include essential terms such as monetary provisions, financing, contingencies, transition, risk allocation, timing, and documentation preparation. A well-drafted LOI improves the likelihood that the transaction will proceed successfully.
5: Review the lease agreement
Leases are typically a major issue in a practice sale. Many renewal clauses are written to become null and void if the practice is sold or subleased. Your practice’s physical location is an important factor in its success. Be upfront with your landlord, and negotiate the lease terms long before the sale so your associate gets a preferred term and rate, including renewal options and rent-escalation clauses.
Thinking of selling your practice to an associate? The National Veterinary Law Group at Mandelbaum Barrett PC can help facilitate a smooth transition—give us a call.