Date: December 20, 2022Attorney: Peter H. Tanella and Maria Groeneveld

Veterinary business is big business. In 2019, the U.S. veterinary business was estimated at $51.3 billion. By 2021, the second year of the pandemic, the market had grown to $58.3 billion. Increased pet ownership and more frequent visits to veterinarians were two major reasons for the growth. At the same time, the corporatization of veterinary businesses meant the purchase price for those businesses continued to rise. However, by 2022, the peak in the industry – and purchase prices — had crested (this year the market decreased about 1.7 percent). But there are still opportunities for those veterinarian owners interested in selling. Since the environment has shifted to a buyer’s market, acquirers have become more selective about what they purchase. Perhaps most importantly, the risk of not closing has increased. This creates financial risk for a seller who has spent time and money on business and legal advice preparing for the sale.

How do you prepare your practice for sale and help improve your chance of closing?

Have your accounts prepared for sale in advance. Your business will be valued by a buyer based on EBITDA (earnings before interest, taxes, depreciation, and amortization). You will want an accountant to properly prepare your books for a sale. Your books not only need to be in order (accurate and up to date), but they must also be in a package appropriate for a buyer’s due diligence. We have seen honest but fatal flaws in the accounts of practices that have led to reductions in anticipated purchase prices. There can be simple but critical miscalculations (accidentally counting thirteen months instead of twelve) or more technical errors (not accurately depreciating assets). It can also be due to mistakes like including assets like the real property (the building and land) that will not be included in the transfer (more on that below). Another financial miscalculation that some owners overlook – the cost of your team. In other words, will they stay on? And what will that cost (literally)? If an associate is underpaid, that may cause a buyer to reduce their potential purchase price.

Make sure your associate veterinarians are on board. The value of your business is largely based on the revenue generated by your associate veterinarians. It is critical that they plan to stay with the practice after the sale. To ensure that, it is wise to make sure that they are on board for the medium- to long-term. Be prepared to discuss compensation – the corporatization of the veterinary business has increased salary transparency and associate veterinarians are aware that they bring value. Salaries have increased over the last few years as many younger workers have relocated during the pandemic, and jobs that require on-site/in-person duties have become less attractive. A good rule of thumb is for salaries to equal twenty-two percent of annual revenue generated by that practitioner. It is better to have this arrangement in place in advance of the sale – you don’t want to be negotiating with your team on salaries when the deal with the buyer is already in place. Additionally, you may need to pay a bonus (low six figures is common) to ensure they will stay in place. Consider structuring the bonus to be paid out over time, for example, twelve to eighteen months past the closing date.

Understand the real implications of the real property. As mentioned above, many veterinarians mistakenly assume that a buyer will acquire the physical property where the practice is located (if the veterinarian owns, rather than rents, the space). There are two critical notes here: one, the value of the property should not be included in the value of the practice; and two, you may need to be prepared to become a landlord. If you own the premises, understand the obligations you will be taking on (or those which you want to negotiate) as the ongoing landlord. It is recommended that you get legal counsel to help you talk through in advance what your preferred terms are. On the other hand, if you rent your premises, review your lease (and try to renegotiate if necessary) so that your landlord agrees to let you assign the lease to the new owner, preferably at the going rental amount. Again, your books need to reflect the cost of operations when handed over to a new owner – while your rental amount might be accurate in your historical books, you’ll want to disclose if the landlord plans to increase the rent for a new owner.

Planning ahead can help ensure a successful closing. . .and smooth a few post-closing details.

The final thing to keep in mind is planning for the post-closing transition. Many veterinarian owners assume that they will walk away from their practice immediately. But in fact, buyers may want you to work for a period of three to four years. Usually, buyers will want you to keep a schedule similar to the one that you kept over the prior few years. Therefore it is important to document your hours, schedule, and vacation time so that the buyer can understand what to expect of you after the closing. In addition, you may be asked to assist with the transition. These might be smaller tasks like reassigning website ownership, or you may need to make introductions to vendors and business partnerships like a marketing firm. And if you have now taken on landlord responsibilities, your post-closing relationship will be longer term. Like most major transactions, what is key here is knowing what’s coming. The best closing is an uneventful one.

The National Veterinary Law Group at Mandelbaum Barrett PC is here to assist you with any of your veterinary practice needs.