Veterinary Law Blog
Categories: Real Estate
New Trends in Pet Ownership: Pandemic Pups and a "Return to Normalcy"
February 18, 2022
For over two years Americans have continuously grappled with the unprecedented economic and social uncertainties brought about by the COVID-19 pandemic. While each individual was forced to face their own unique trials and challenges, many sought to cope with the ongoing isolation in a similar fashion: pets and companionship. Since the start of the pandemic, more than 23 million American households have welcomed new pets into their homes, nearly 1 in every 5 nationwide. As a result, American pet ownership has reached an all-time high, with household ownership rates exceeding 70% for the first time in U.S. history. This extraordinary surge in animal ownership has been accompanied by a significant uptick in pet-related spending. In 2020 alone, total pet spending in the U.S. reached nearly $84 billion, a 6.8% increase from the previous year, with expenditures on pet food, training, supplies, veterinary expenses, and more all experiencing considerable increases.
The remote nature of the pandemic had Americans not only spending more time with their pets, but more money on them as well. However, as Americans continue to navigate their way through the pandemic and toward a return to “normalcy”, social and professional obligations which have been absent from American life since early 2020 have begun to weigh heavily on recently adopted pets, as well as the bank accounts of their owners. A steady return to life in person has led many pet owners to seek out businesses, friends, and family members to care for their pets during working hours to ensure that they are not left alone throughout the day. The financial and logistical difficulties of pet ownership post-pandemic have left millions of Americans in precarious position, with some, unfortunately, electing to forgo their commitment to their pandemic companion in exchange for additional flexibilities. Pet ownership is a responsibility millions of Americans navigated for decades prior to the COVID-19 pandemic, and while the post-pandemic world certainly presents a plethora of obstacles to new pet owners, an ever-evolving pet-care industry is suited to assist. Below are examples of a few ways the legal field is helping to ease and improve pet ownership:
An Evolving Veterinary Landscape
Just as American pet ownership rates have seen a substantial increase since the start of the pandemic, so too have nationwide revenues in veterinary medicine. In 2020 alone, the veterinary industry saw an increase in national spending of more than 14%. The national average salary of veterinarians also saw a substantial increase of more than 5%, a stark contrast to many other professions over that period. Thus, the state of veterinary medicine is quite excellent, despite recent industry-wide obstacles such as clinical staffing shortages and COVID-related facility access limitations.
What does the state of the veterinary industry mean for pet owners? As the veterinary industry continues to grow, so too does level of service pet owners will experience. Across the country veterinary practices are being purchased, sold, and merged at record-breaking rates. These transactions often result in a more efficient and resourceful veterinary practice suited to better serve the individual and their pet. The parties playing the role of the buyer in many of these transactions tend to be larger companies with plentiful resources. After the transaction has been completed, the resulting veterinary clinic is often larger, more resource abundant, allowing veterinarians to focus on treatment of patients while management responsibilities are handled at the higher level. The beneficiary of this industry trend is not only the veterinarian, but the American consumer and pet itself, who will steady begin to experience a veterinary field better suited to meet the demands of the post-pandemic, pet-heavy market.
Increasing Landlord Lenience
Pet-related restrictions in the rental real estate markets have limited many new owners’ living mobility in a significant way. Pet-friendly housing can prove scarce in many areas of the country, an issue which the Humane Society has estimated to lead to nearly 500,000 pet surrenders each year. Even when many rental housing providers claim “pet friendly,” further restrictions on weight, breed, and age of the animal can result in the exclusion of the majority of otherwise eligible owners. The recent surge of American pet ownership has only further exacerbated this dilemma, with pet-friendliness ranking in the top 3 of rental amenity searches since 2020. The good news is that recent trends in the rental market are moving in favor of our four-legged friends. The Human Animal Bond Research Institute recently found that 83% of real estate owners reported pet-friendly vacancies are filled faster, and that residents in pet-friendly housing tend to remain 21% longer than those in housing that does not allow pets. “Individual apartment landlords are more agreeable to allowing tenants to have pets just to get tenants to rent their apartments,” said one prominent New York real estate agent.
While pet-friendly housing is trending in favor of pet-owners, renters should still expect their pets to affect the renting/leasing process in considerable ways. Indeed, a pet is likely to become part of leasing agreement, as many landlords will request a higher monthly multiple in security deposits from prospective renters accompanied by pets. While one to one and one-half monthly rent is typical in most residential leases, pet-owners should not be surprised by two, or in some cases even three times monthly rent is requested in security deposit at signing. Additionally, lease addendum permitting pets are also quite common. These are addition terms which attach to a lease agreement, and typically include a list of specific pets permitted in the rented space, pet vaccination requirements, liability provisions, and other rules and restrictions relating the pet’s occupancy of the property. These pet addendums are worth examining thoroughly, as owners will want to ensure that information contained therein is accurate and not overly cumbersome to the pet’s living situation.
Attorney:
Justin Wade
Related Practice: Veterinary Law
9 Items to Consider When Contemplating the Sale of Your Veterinary Practice
October 27, 2021
For many veterinary practice owners, aspirations of selling your practice may be tempered by the unknowns of the acquisition process. Even when the circumstances of a potential sale are ideal, unfamiliarity with the market and sale procedures can lead to hesitancy. While timidity toward the unknown is certainly justifiable, owners should not let it stop them from becoming a participant in the rapidly growing market for veterinary practice acquisitions. While each veterinary practice sale is unique in its own right, there are also a number of procedural commonalities that appear in nearly every deal. Getting familiar with these steps and procedures may help shed some light on the selling process and relieve the effects of the acquisition unknowns:
Deciding to Sell: Behind every veterinary practice sale is the practice owner’s “Why”. The end goal for a successful veterinary practice owner is to one day sell their practice for a lucrative price and start their next chapter. For some, that next phase is complete retirement. For others, it might mean stepping away from a managerial role to focus solely on medicine, carving out more free personal time or sharing the responsibilities with a partner. Whatever the motivation may be, every sale of a practice begins with an owner’s decision to sell.
Valuing the Practice: An owner must have a general understanding of the monetary value of their practice prior to initiating the sales process. This valuation establishes reasonable expectations of return prior to entering the acquisition market and sets a pricing standard for potential buyers. Several key factors that are helpful in determining your practice’s value include the practice itself, equipment, and current and potential revenue. Potential buyers will also consider gross revenue, profit and loss statements, net operating income, EBITDA (earnings before interest, taxes, depreciation, and amortization), profit margins, a good location, room to expand, a long-lasting, efficient staff, a practice owner who will stick around and great client retention.
Finding a Buyer: There are many ways in which a practice owner may come across a suitable buyer. In some cases, the buyer may be a partner or associate veterinarian in the practice. In others you may have considered selling to a corporate consolidator. Selling to a corporate consolidator can be an excellent way for some owners to get their equity out now, with the ability to still work as a DVM for a few years after the sale. Three things that just about every corporate consolidator is looking for in a practice – high gross revenue, profitability and location. Knowing your options when it comes to selling your practice is a must. Consider engaging an experienced practice broker who can help you form the best plan for you and the best plan for your practice.
Negotiate the Deal: Once a suitable buyer has been located, it is time to determine the terms of sale. What does the purchase price look like? Will the owner receive all cash at closing? How long will the owner have to work after the sale? Are there any ownership opportunities for my associates? Should I sell or hold the real estate? What will the terms of my lease look like? There are many moving parts that need to be negotiated before the transaction can be consummated.
Letter of Intent: The letter of intent (LOI) is the preliminary agreement of the acquisition process which contains such salient terms as the purchase price, how the purchase price will be paid at closing, when the deal will close, the owner’s opportunity to reinvest in the buyer, the owner’s post-closing employment terms, and the terms involving the real estate. While the LOI is not a legally binding contract, it is typically used to establish both the essential terms of the transaction and the commitment of the parties to move toward a successful closing.
Due Diligence: This is the process of “looking under the hood” of the practice; the buyer will conduct an extremely detailed accounting of the assets, records, inventory, and financial standing of the veterinary practice. By conducting due diligence, the buyer is ensuring that the practice to be purchased is worth the price to be paid. For this process, the parties will want to involve industry specific accountants and legal counsel, as the closing of the deal and the purchase price to be paid is naturally contingent upon buyer’s satisfaction of the due diligence outcome.
Contracting Stage: The “Purchase Agreement” is one of the most important pieces of the entire transaction. This agreement, prepared and negotiated through each party’s respective legal counsel, will encompass the essence of the acquisition and obligations of both buyer and seller in successfully closing the transaction.
Pre-Closing Contingencies: Between the execution of the LOI and the agreed-upon closing date, both the buyer and the seller will be contractually obligated to perform a number of actions prior to the closing. These obligations may include the obtaining financing, disclosure of all practice operations, execution of employment documents and various certificates, etc. Each party’s respective legal team will be significantly involved in facilitating the drafting of documents and ensuring the satisfaction of deadlines and contingencies during this period.
Closing: The “Closing Date” is the day that the veterinary practice transaction is solidified; the seller is paid the purchase price, the buyer acquires ownership to the practice, and transaction is complete! Keep in mind that with modern technologies, a successful closing is typically accomplished electronically – gone are the days of the in person closing. The closing date marks the end of the acquisition process, and a new beginning for each party, especially for the owner who moves one step closer towards retirement.
If you have questions about Veterinary Law, please contact Peter Tanella.
Attorney:
Peter Tanella
Related Practice: Veterinary Law
Category: Real Estate
Mut Do's If Thinking of Selling
June 22, 2021
The purchase or sale of a veterinary practice can be an overwhelming journey. Even seasoned clinicians will encounter numerous potholes — emotional, financial and legal issues — on the road to closing what in many cases can be a multimillion-dollar transaction. Here are eight gaffes that frequently occur in the veterinary world and suggestions for overcoming them.1. Failing to Plan
Selling a practice takes time. Not adequately planning for the sale can cause you to miss valuable opportunities to find the right buyer. To avoid this mistake, sellers should continually update their records and keep a sales portfolio on hand. Buyers and brokers notice when a seller has been diligent, giving them confidence in the purchase, not to mention assurance that the sale was not driven by desperation.
2. Rushing into Negotiations
Rather than immediately incurring the expense of drafting a contractual agreement, both parties should consider entering into a letter of intent. An LOI is not a legally binding contract; it’s a document that outlines the preliminary agreements and understandings. It should describe the deal’s essential terms, including the timing, monetary provisions, financing, contingencies, risk allocation, transition, form of documentation and which party will prepare the documentation. A well-drafted LOI increases the likelihood that a contract will be signed and that the transaction will close.
3. Not Enough Due Diligence
A deal should not close until the buyer is satisfied with the due diligence conducted. A thorough due diligence process should include:
- A detailed accounting of the practice’s assets and liabilities.
- An inspection of the premises, assets, inventory, records, tax returns, financial statements, client charts, accounts receivable, personnel files, employment agreements, leases and contracts, list of creditors, insurance policies and benefit plans, and any government approvals required to operate the practice.
4. Delaying Lease Talks
A tremendous amount of goodwill is attached to the practice’s physical location. The buyer should not assume that a lease is sound simply because of longevity. Buyers should request a copy of the lease upon taking an interest in a practice and begin a dialogue with the landlord. The seller should be upfront with the landlord, especially if the lease will expire soon.
5. Ignoring Accounts Receivables
The most common ways to manage accounts receivables (A/R) are:
- The seller keeps A/R, and the buyer collects it as a courtesy or for a fee.
- The seller collects and keeps A/R.
- The buyer pays a negotiated amount and collects A/R after closing.
6. Not Establishing Clear Restrictive Covenants
The seller’s post-closing plan should be shared and understood. The seller is receiving significant consideration during the transaction — the purchase price — and the buyer is acquiring all the goodwill and, in most cases, taking on considerable debt. Therefore, what’s reasonable is a requirement that the seller agree to a post-closing restrictive covenant with substantial time and geography limitations so that the seller leaves the marketplace.
7. Forgetting the Transition
A reasonable transition period will benefit the buyer, seller and veterinary clients. The contract should detail the arrangement. At a minimum, the seller should be willing to answer questions and introduce the buyer to clients and employees for zero to nominal consideration. The buyer should reserve the right to cut ties to the seller if the post-closing chemistry isn’t working.
8. Failing to Build a Team
Selling a high-value practice requires a professional team to work with potential purchasers, maximize the price and sale terms, and analyze the tax and legal issues. A solid team should include an experienced practice broker, an accountant and an attorney.
Avoiding these eight mistakes when you buy or sell a veterinary practice should put you well on your way to a positive experience. Good luck!
Attorney:
Peter Tanella
Related Practice: Veterinary Law
When Should Veterinarians Consider Forming a Management Services Organization?
March 12, 2020
A Management Services Organization Adds a Layer of Structural Complexity to a Veterinary Practice but Offers Non-Veterinarians and Even Family Members the Opportunity to Reap the Financial Rewards
Veterinarians, investors and executives who want to form a management services organization (MSO) often do so without fully exploring the reasons. One revolutionary change in the veterinary industry over the last decade was heightened interest in MSOs, which resulted in a lot of newer market entrants, including, but not limited to, private equity.
What Is an MSO?
At its most basic level, an MSO is a legal entity that is separate and distinct from a veterinary practice and that provides certain administrative or management services. In most states, a veterinary practice must be owned and controlled by one or more licensed veterinarians. Some states require those veterinary owners to be licensed in the state, while others will accept equivalent licensure from another state.
Some states allow non-veterinarians to own the practice directly, so long as patient care decisions are ultimately made by licensed individuals. In states where practice ownership is restricted, non-veterinarians may own the MSO instead. These non-veterinarians can be investors, lenders, members of management, trusts, or friends and family investors. These individuals may own the MSO alongside one or more of the licensed veterinarians.
Such flexibility permits the practice’s veterinary owners, for example, to have family members partially or completely own the MSO so that they can indirectly enjoy the financial rewards of the practices. Alternatively, the veterinary owners might want to expand or purchase additional practices but do not want to assume additional debt liability. The MSO can be owned by non-veterinary investors as a means of providing capital for funding practice expansion. The profits that these non-veterinary investors realize from their ownership of the MSO, and the value of this business entity at the time of a sale, are, in effect, the return on investment for these non-veterinary investors.
Back-Office Support
Involvement of the MSO in the veterinary practice and services provided will vary based on the goals of the parties as well as the applicable state regulations governing these arrangements and the corporate practice of veterinary medicine.
An MSO may be involved in almost every non-clinical aspect of the business and offer a full suite of administrative and management services, including billing and collections, IT support, human resources, professional management, payor contracting services, financial accounting, and benchmarking. On the other hand, an MSO may contract to provide a smaller subset of services in a fee-for-service model. The MSO can provide overall management and administration, all support services, facilities, staffing, equipment and supplies — essentially everything the practice needs to operate except for the actual veterinary care.
The MSO’s goal is to free veterinarians from the burden of operating the practice as a business, leaving them to focus on patient care and growing the practice. The MSO accomplishes these goals by hiring the support staff (office and clinical) and leasing them to the practice. In a practice acquisition, the MSO will typically purchase all of the selling practice’s equipment, both office and clinical. In a de novo scenario, the MSO purchases or leases all the new equipment. In both situations, the MSO will then lease the equipment to the practice. The MSO thereby assumes all the financial and all other obligations and responsibilities for the equipment, including its maintenance, repair and replacement.
Similarly, the MSO assumes responsibility for the purchasing and adequately supplying the practice with all required office and clinical supplies. Further, the MSO can assume the building lease, including payment of rent and all other landlord relations, and then sublease the office to the practice. If the practice owns the real estate, then the MSO can either act as the property manager or the MSO can own the real estate and lease the premises to the practice.
The operational advantages of the MSO can be summarized as economy of scale, greater efficiency and availability of a higher level of services. The economy of scale and enhanced efficiency is realized through the MSO’s providing of services for any number of practices with administration of their overall business operations, including human resources and centralized billing and collections, increased purchasing power, and the ability to negotiate lower rates on employment-related insurances such as health coverage and workers’ compensation.
The relationship between the MSO and practice is contractual. The MSO will typically enter into a long-term agreement to provide all the services and other items described above in exchange for a management fee. Because the relationship is contractual, it affords the parties involved great flexibility in what the MSO will provide to the practice and the ability to change the mix of services and other items as the relationship and business progress.
Savings and Additional Costs
Creating an MSO does not by itself create any real value attractive to investors. The value is in being able to deliver efficient processes, standardization and professional business management in a way that is scalable across multiple locations. Additionally, creating an MSO comes with some cost, such as legal and accounting fees, and adds a layer of structural complexity. Most importantly, the MSO and its arrangement with the practice will need to be structured to comply with the state’s corporate practice of veterinary medicine restrictions and federal and state fraud and abuse laws.
Additional structural complexity comes at a cost. Whereas operating out of a single professional entity as a veterinary practice is relatively straightforward, operating an MSO with one or multiple levels of management and submanagement can create headaches. Investors, management and clinicians will need to be taught the vagaries of a somewhat esoteric legal structure.
Finally, moving from a single-practice structure to an MSO can limit flexibility in structuring a sale or acquisiion. Specifically, in creating an MSO, the parties might inadvertently create issues around concepts like subchapter S elections, depreciation recapture and taxes.
This story was originally published in todaysveterinarybusiness.com
Attorney:
Peter Tanella
Related Practice: Veterinary Law
Category: Partnership Agreements