Today’s Veterinary Business
By Peter H. Tanella
So, you’ve decided to sell your veterinary practice after a lifetime of hard work, but the COVID-19 pandemic has fundamentally impacted the process. From new contractual provisions and buyer financing delays to due diligence issues, you’ve encountered numerous roadblocks. However, with better planning and the right team in place, a sale can be successfully achieved.
Before COVID-19, buyers and lenders had a tremendous amount of capital available and were willing to make deals relatively fast. What immediately followed the viral outbreak was economic uncertainty for lenders and borrowers alike. This understandably caused lenders to reassess their standards, with some requiring three months of financial statements that showed practice revenues returning to a certain percentage of pre-pandemic levels — 80%, for example. The requirement can tack another delay onto an already lengthy process and limit a lender’s ability to issue a commitment letter.
Layered on top of all the uncertainty are administrative headaches that many lenders face because of the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Paycheck Protection Program (PPP). While serving as a lifeline to many business owners, the PPP caused backlogs within already hesitant lending companies.
Protecting the Buyer
Buyers seeking financing during the pandemic should aggressively negotiate a contingency into the letter of intent or the asset purchase agreement (APA). A financing contingency in an APA stipulates that the buyer’s obligation to close the purchase is subject to the successful receipt of financing.
Before the pandemic, a financing contingency was relatively straightforward in an APA, but I am seeing additional requirements being layered in to further protect the buyer. Today, a seller might resist granting termination rights to a buyer and instead try to negotiate a delay in closing. In such a scenario, the buyer isn’t allowed to terminate the contract.
Keeping the Team Together
The pandemic has caused unprecedented issues for veterinary practices and their employees. Clinics have had to reduce employee schedules, prepare for layoffs, navigate safety regulations and face the prospect of some team members not returning to work. With these challenges, an issue that comes up time and again in practice sales is hospital owners not having adequate employment agreements in place with their associate veterinarians. Such a failure can devalue the practice and leave the seller hamstrung by an associate who demands a pay bonus to stay with the new owner.
When reviewing or drafting an employment agreement, you should confirm that it contains a provision allowing the contract to be assigned to the next owner. The buyer then is empowered to enforce the terms of the agreement and can rest assured that highly trained and knowledgeable staff will be with the practice moving forward. Losing those employees because of the lack of an enforceable contract could derail the sale altogether.
Employment agreements can provide for bonuses payable to an associate if the practice is sold. What’s important is that any bonuses be negotiated well in advance of a potential sale. The bonus can be structured as a retention payment in which the associate agrees to work for a new owner for a set number of years.
During the due diligence process, expect buyers to look for disclosures regarding how the pandemic has impacted the practice. Generally, buyers will want to know about steps the practice took to manage cash, how the practice performed during stay-at-home orders, and how the pandemic affected historical earnings and forecasts.
The scope of some disclosures might have changed in light of the pandemic. In particular, these two representations and warranties justify more focus:
1. No violation: It says the consummation of the transaction contemplated in the contract will not violate any organizational documents, contracts, or permits and licenses. This representation usually requires the seller to disclose contracts with third parties that have consent rights.
Given pandemic-related financial stress, some third parties might be wary of consenting to a contract’s reassignment. Therefore, the seller must confirm all required notices and obtain needed consent. In particular, revisit equipment leases and ask a buyer about assuming lease obligations. If the buyer refuses, the practice owner will need to plan to pay off the leases, which could trigger a renegotiation of the purchase price. Also, be aware of any consents that are required by CARES Act loans or by other contracts signed during the pandemic.
2. Employment and employee benefits: Buyers will be especially concerned about additional obligations put on employers during the pandemic, including compliance with governmental shutdown orders, disability laws involving employees susceptible to COVID-19, family leave laws, safety requirements, and discrimination and privacy laws.
Recognizing Acts of God
Because of the pandemic’s unforeseen impact on economic activity, a practice’s seller and the buyer might consider whether a force majeure provision is appropriate. A force majeure provision provides a means for both parties to absolve contractual duties when forces beyond their control prevent the performance of the contract. It sometimes is referred to as an “act of God.”
While not commonly included in purchase agreements before 2020, force majeure provisions have become an important and useful tool in dealing with pandemic-related contract delays. When such a provision is included, sellers should try to limit the buyer’s ability to delay the closing if all other closing conditions are met.
Selling a business is hardly ever a seamless process, but the pandemic casts new light on the importance of being organized and prepared for each step. In a post-COVID environment, delays in financing and due diligence likely will occur more frequently.
As a seller, prepare for the scrutiny that certain parts of your practice will face. Begin to look at employment agreements and equipment leases, and discuss with your financial advisers the preparation of financial statements requested by the buyer’s potential lenders.
With preparation, the headaches and delays that could plague a post-COVID sale can be lessened or avoided.