It may be your first time buying or selling a veterinary practice. During this process, you will undoubtedly stumble upon terms that are unfamiliar to you and admittedly confusing. While learning all the terminology and legal jargon of the mergers and acquisitions industry should not be your goal, it is important that you understand the meaning of some key terms that will help you confidently navigate the course of buying or selling a veterinary practice.
Below we have compiled a number of key terms which will likely rear their head at some point in the acquisition process. We have condensed the meaning of these terms and organized them in a way that should follow the natural progression of a veterinary practice transaction. However, please be mindful that transactions are driven by the parties and their unique needs. Therefore, this is not an exhaustive glossary of words or issues that arise, but rather a sampling of terms practice owners and buyers will likely encounter during the sale.
A Non-Disclosure Agreement (“NDA”): This is typically the first agreement that is signed as it serves to keep sensitive information disclosed by the seller to the buyer confidential. Proprietary data, such as the practice’s financials, client/patient list, supplier information, and employee information can be crucial to a potential buyer in assessing the acquisition. However, if this information fell into a competitor’s hands, it could be detrimental to the seller. With an NDA in place, sellers can feel more comfortable sharing information with a prospective buyer. Nevertheless, it is important to have a signed NDA in place before handing over any sensitive information.
Letter of Intent: This is a preliminary document (also known as an “LOI”) which sets out the key terms of a proposed business transaction. An LOI is usually non-binding, which means the parties are not obligated to complete the proposed transaction. The purpose of an LOI is to ensure that the parties agree on important terms such as purchase price, payment terms, employment terms following the sale, due diligence, and closing contingencies before investing further resources negotiating the deal. Signing an LOI signals the parties’ willingness to negotiate exclusively for a set period as the parties work to finalize the deal.
Asset Sale: An asset sale is the most common way to sell a veterinary practice. It involves a seller agreeing to sell all or certain assets, and in some cases the practice’s liabilities to a buyer. Assets will include, but not be limited to equipment, goodwill, intellectual property, inventory, patient/client lists, and accounts receivable. However, in this sale, the seller will retain its corporate entity and the buyer must either (1) purchase the assets in his or her individual capacity (not recommended), (2) use a pre-existing entity, or (3) form their own entity for the purchase (the preferred method). During the transaction, the parties will negotiate an asset purchase agreement (the “APA”), which is the primary transaction document that sets out the key terms of the sale. The APA will include the purchase price, payment terms for the practice, the representations and warranties of the seller and the buyer, a detailed description of the assets being purchased, a list of other documents and information to be delivered at the closing, as well as other key terms such as representations of the selling veterinarian about the pre-closing operation of the practice, restrictive covenants, transition obligations, closing contingencies, and indemnification obligations.
Due Diligence: A buyer’s careful assessment of the benefits and liabilities of a proposed acquisition, which entails inquiring into all relevant aspects of the past, present and future of the target practice. Due diligence occurs after a LOI is signed and may be limited to an agreed-upon period or may continue through the closing date. By way of example, due diligence can include running lien and judgment searches on the practice (and the individual owner(s)), which can reveal unpaid taxes, debts, or legal judgments; financial due diligence, which includes a deep dive into the seller’s financial statements; and legal diligence, which includes an exhaustive review of seller’s contracts, governmental permits, professional licenses, insurance coverage, employee data, litigation, corporate formation documents and ownership, employee benefits, along with a host of other issues. A good legal team will mentally prepare both parties for this phase of the transaction, as it often leads to “deal fatigue.” This is because due diligence is tedious, may feel repetitive, and often seems to last a long time. This response is normal and expected. However, in the end a thorough due diligence process is in both parties’ best interests. A buyer does not want to overpay for the practice or inherit an unexpected liability or problem, and the seller does not want to indemnify the buyer for violations or inaccuracies in the representations and warranties the seller makes when selling the practice.
Rollover Equity: This term refers to an ownership interest in a practice purchaser’s entity (or affiliate) given to the seller of a practice as part of a sale consideration. This allows a buyer to pay seller less cash up front, and ensures a selling veterinarian has some skin in the game. Accepting rollover equity is riskier than taking cash at closing, but can be rewarding if the buyer is successful. In some circumstances, rollover equity may also be advantageous from a tax perspective.
Covenant Not to Compete: This is a contractual term in the APA (and owner employment agreement (if applicable)) that restricts the seller’s right to engage in competitive activity in a specific geographic area and for a specific length of time. For example, a veterinarian that is selling a small animal practice will generally be required to agree to a non-compete provision prohibiting the veterinarian from practicing near their former practice for several years (typically 3-5 years) following the sale of the practice, unless the veterinarian is working for the buyer. In most states, non-competes must be reasonable in time and geographic area to be enforceable.
Closing Contingencies: These are conditions that must be satisfied before a transaction can be completed. Generally, a buyer will insist that key employees agree to continue working for the purchaser (this may include the owner of the selling practice); that due diligence be satisfactorily completed; that the buyer have an agreed-upon lease with the practice’s landlord or have successfully negotiated an agreement to purchase the property where the practice is located; and that all the debts and liens on the practice’s assets be paid off and terminated at or prior to the closing.
Hopefully these key terms will help you gain a better understanding of what to expect when buying or selling a veterinary practice. If you are comfortable with these terms, you will be better equipped to take the required steps to ensure your transaction proceeds efficiently and successfully. The National Veterinary Law Group at Mandelbaum Barrett is here to answer any questions you may have.