A look under the hood of a business practice purchase
It is an unexpected, often turbulent event that occurs seemingly every day. The owner of a long-established veterinary practice gathers the team for a lunchtime meeting and announces the news: âI have decided to sell the hospital to a group of companies. Lay staff are wondering if this will mean a raise or maybe more vacation. Associates and LVTs aren’t quite sure what to think – not at all sure if the move will help them, hurt them, or just change the culture of the office in completely unpredictable ways.
But in almost all cases, the decision to sell seems sudden to staff, something that happened out of the blue. However, nothing could be further from the truth. Acquisitions of corporate clinics are the product of months of thoughtful, stressful reflection and scrupulously planned execution.
Here’s what’s going on in the months leading up to this lunchtime âbig revealâ.
The decision to sell and the NDA
Staff members need to recognize that a veterinary hospital owner’s decision to sell is possibly the biggest decision they’ve ever made, unless they get married or become a parent. The choice cost the seller many sleepless nights and hundreds of hours of research into the financial and personal impact of the decision.
Most likely, once the tentative decision is made, the owner (s) of the practice are faced with the difficult choice of finding an individual buyer or accepting offers from business consolidators (there are dozens of such companies , large and small) in the hope of finding the right crop, as well as the most attractive cash offer.
Then, after identifying a few final candidates, the selling physician will sign a Mutual Non-Disclosure Agreement (NDA) which ensures that none of the actors (seller, potential buyer, lawyers, accountants, etc.) will reveal confidential information. concerning either side. of the current agreement.
LAW and Due Diligence
The steps after signing an NDA are fairly consistent, except that corporate veterinary groups typically delve much deeper into the financial details of the practice than private buyers. In addition, the paperwork is more voluminous and complicated. The owner frequently engages in what can be a protracted negotiation dance with several potential buyers, with each party striving to secure the best deal among many âpackages of offersâ from the suitors.
The product of this financial mating ritual will be a Letter of Intent (LOI), outlining in a few pages the terms and conditions of the agreement to be made. A letter of intent is not a contract, and this document is rarely legally enforceable, except that it usually requires the seller to cease dealing with any other buyer until the transaction is completed or canceled.
After signing a letter of intent, the real back office work begins for both the business consolidator and the practice vendor. A plethora of financial information has to be exchanged, so-called âdue diligence,â which usually has to be carried out with the utmost secrecy on both sides. Remember that at this point the buyer should make sure that the clinic is as profitable as its owner claims. And the seller? They must ensure that financial information is passed to the business without the knowledge of staff (sometimes because the buying company insists, sometimes because the seller has not yet fully decided to sell, knowing that he can still revoke the LOI until the final sales contract is signed).
There are countless obstacles that can potentially arise before the final closure. Part of the reason for exercising due diligence is spotting challenges to closing the deal, including those from unexpected sources. Each of these stumbling blocks is a looming nightmare for the seller as they become more and more emotionally invested in the life change they’ve embarked on. Here are a few examples of flies in oil that our office encountered while advising salespeople through the process.
- Reluctant owner: A private landlord can choose not to grant a lease assignment to a clinic buyer. Sometimes he wants the lease to expire so that the property can be rented out for other more lucrative purposes.
- Zoning complications: The corporate consolidator may want to expand the target clinic’s footprint only to find that the veterinary zoning has changed and only the existing facility has been protected for such use, so any expansion would be out of line. current local.
- Disagreements over asset values: How the sale price is taxed depends on the value assigned to each asset purchased. The buyer and seller are legally required to stipulate to the IRS what both agree are the values ââof items such as equipment and goodwill. Generally speaking, reviews that are good for the buyer are bad for the seller and vice versa. In addition, drawn-out negotiations have the potential to derail the deal.
Integration of partners and staff
Shortly before closing, when the final sales documents are signed and the sale proceeds transferred to the seller’s bank account, the fact of the sale must be disclosed to all staff. Often times, associate vets are notified a little earlier than the rest of the staff, as they often need time to review their proposed new employment contracts with the acquiring company or private buyer.
When acquiring a business clinic, the consolidator who buys the business usually sends a team up front to the firm to answer questions and allay fears of possible pay cuts, reduced hours and / or social benefits, etc. While this may appear to be simply an effort to keep nervous employees from leaving, it may reveal the potential positive impacts of acquisition by âbig companiesâ.
According to the acquiring company, the sale may very well benefit doctors and staff when a large veterinary venture capitalist is the buyer. For example, new owners can institute better retirement plans, such as a 401 (k) plan with matching employer contributions. Some consolidators are streamlining the schedules of associates and lay staff, providing a better work-life balance, which can mean a lot to some vets and the practice team. The transition can also present daunting challenges for some staff members and cause team members to choose to move to another job.
Closure and integration
Shortly after the owner signed the mountain of legal documents exchanged at the close (now usually done electronically, and not with a dozen lawyers sitting at a mahogany table like before the web), a major transformation of the clinic’s commercial systems takes place. The new owner changes passwords, activates new bank accounts and installs new software. They also institute new employment policies, a sort of upheaval, but sometimes in fact welcome in a practice where real practical management was sorely lacking.
It can take up to a year or more for everyone to feel completely comfortable with the company’s new way of doing business. And some staff will decide to leave or retire rather than adopt a new way of doing things. From that point on, however, it’s up to the new leadership to empower the team and get the practice off the ground, or stumble and watch it languish.
Christopher J. Allen, DVM, JD is President of Associates in Veterinary Law PC, which provides legal and advisory services exclusively to veterinarians. Allen sits on the editorial advisory board of dvm360 magazine.