Veterinarians who want to sell their veterinary practice or hospital will benefit from consulting with an attorney who is experienced in this type of sale. The professional can assist with having your practice appraised so you know its value. With this information, you can then make strategic decisions about pricing the practice and begin gathering the information and supporting documents the potential buyer is likely to request.
Many veterinarians receive inquiries from other veterinarians or corporations inquiring about the possible sale of their practice or veterinary hospital. These inquiries may be presented by phone or email. Do not reveal information beyond, “I’m interested” unless you receive a letter of intent (LOI). You do not want to lock yourself into something you did not intend but only mentioned in passing in response to a potential buyer’s initial outreach question.
If the caller seems to sincerely want more information, it may be prudent to refer them to your attorney who can answer their questions or direct them to offer an official letter of intent.
A letter of intent is generally given to the buyer by the seller at the beginning of the negotiations. As the seller, you and your attorney should review the LOI carefully and make sure it includes the protection you need.
It is not uncommon for negotiations to surround the LOI to be sure this preliminary intent to agree includes what both buyer and seller want and need. It is better if negotiations fail here in a little back-and-forth with the LOI than to have the deal collapse later in the process after much time, energy, and money has been invested.
The LOI is not a legally binding contract but essentially establishes what you the seller are selling and what the buyer is buying. It should include the following terms.
Non-Disclosure agreement (NDA). This may be part of the LOI or drafted as a separate document. During the negotiations and due diligence process, you will be revealing confidential information about your practice. You do not want a potential buyer sharing that information. The NDA spells this out so your confidential and proprietary information is not disclosed if the deal falls through. The NDA covers what is said in meetings between you and the potential buyer as well as documents that you share.
Many NDAs also restrict the buyer from hiring employees from the seller if the purchase deal does not take place. During the due diligence process, the prospective buyer will have access to the contracts of any associate veterinarians and other staff members. You do not want these valuable employees to be lured away from your employment if the purchase process derails.
Purchase price. Once you have had your practice valued, you should know the price. Set this out clearly in the LOI. Your CPA will know what tax implications may be and if that information should be included in the LOI.
List all that is included in that price, such as the equipment, furniture, computers, software, website, intellectual property, and whatever other assets owned by the practice that you are including in the sale.
Will accounts receivable be included in the purchase price? Decide how you want to handle this during the sale. Do you want to continue collecting accounts receivable yourself for a few months after the sale? Are you willing to share a percentage of the collections with the buying veterinarian if that doctor will help with collections? Or do you want to just close the door, including those accounts in the sales price, and just walk away?
Exclusivity. It is reasonable for the buyer to ask you not to negotiate with another potential buyer for a certain period of time. Be sure the LOI includes a specific start date for the exclusivity and how long it will last.
Is the physical structure being sold? If you are selling the real estate along with the practice, you should have an appraised value of the property. Also reveal if there are any encroachments the buyer needs to be aware of, any environmental, zoning, or permitting issues that could possibly impact the sale.
Any restrictive covenants associated with the sale? Has the buyer asked for a non-compete clause that would require you to agree not to open another veterinary practice within a certain geographical area for a certain period of time after the close of the sale?
Earnest money deposit. Determine at what point earnest money from the buyer will be required, how much that is expected to be, and how much is refundable and under what circumstances, and how much is nonrefundable.
How the purchase will be financed. Will the buyer be paying cash, or will it be by way of a seller-financed note, or by a traditional bank loan? If you as the seller have agreed to carry the note, or partially carry it, what is the buyer using for collateral?
How expenses of sale will be split. It is customary for each party to be responsible for their own expenses. Even so, this should be spelled out in the agreement so that misunderstandings at closing will be avoided.
Buyers are compelled to use due diligence in evaluating and investigating the practice prior to finalizing the purchase. You can prepare for this so that all documents and information required by the proposed purchaser are updated and ready to go as soon as the LOI is finalized. In addition to items referenced in the LOI, have these documents ready and expect the buyer to request them.
All financial statements. This includes tax returns, profit and loss statements, and documentation of the gross revenue. Gross revenue is often the most important factor to buyers who want verification for what they are actually buying. Also, have bank statements and any other relevant financial documents ready to share.
List of all liabilities. Buyers want to know what to expect. Include any current litigation or past litigation. Include how these liabilities will be handled with a sale.
Corporate documents if relevant. If your practice is incorporated, you need to provide the buyer all relevant documents including the Articles of Incorporation and minutes of all meetings. Include any upcoming dates when new filings may be due, or when corporate meeting dates need to be scheduled.
Employee information. Provide the names of all employees, their salaries, benefits, and their job descriptions. Identify key employees that are needed to keep the practice running at “top speed.” Will employees be terminated and re-hired at the closing? How will vacation and other benefits accrued under the seller be addressed by the buyer?
Is there an employee handbook? If so, the buyer should be given one. You may want to discuss the buyer’s employer/employee philosophy to be sure you are on the same page about valuing your employees.
List of equipment. This list of all equipment included in the purchase price should be itemized. The list should include the model and serial number of each item and its current condition.
Avoid entering into any new equipment leases or purchasing any new equipment as you plan for the sale. If an improvement or upgrade makes sense and will enhance the value of the practice, then do so. In general, these types of investments done just prior to a sale do not increase the value of the practice.
Vendor contracts. Provide a list of all vendors and copies of the contracts. Highlight any contracts that may need updating after the expected date the sale will become final.
Copy of all leases. Have copies of all leases ready for the buyer. This includes the lease for the office or veterinary hospital that houses the practice that is being sold as well as copies of all equipment or instrument leases.
Provide information about whether the lease for the practice facility is renewable and transferable. Know what the landlord expects of the new owner and whether there are any changes to the lease that will be expected.
Intellectual property. This includes logos, trademarks, the innovative name you created for your practice, a new way of providing treatment or performing procedures, and more. Determine which of these, if all, are included in the sale and which intellectual property you want to keep for yourself.
Your staff members need to hear about the sale from you. They will naturally be concerned about their own future and what effect the sale will have on their jobs with the practice. You want your staff to feel respected and know that you have considered their future. You want them to understand why you are selling, so they do not feel resentful.
Give them as much assurance as you can about their job security but be honest and do not promise something that you cannot. In most cases, the seller will want to encourage them to stay with the new owner.
The prospective buyer will visit your practice. He or she may want to talk to the staff. You do not want any of them to feel blind-sided because they were unaware there was a prospective buyer. You want your staff on board so they do not have a negative impact on the buyer to a degree that the buyer walks.
This is almost the final piece of the puzzle. This comes after buyers complete their due diligence process and you both agree on all the terms of the sale. Your attorney will draft this contract for you. When both you and the purchaser have agreed and signed the contract, it is now valid and becomes the document the buyer needs in order to secure the funds for the practice purchase. This is true whether the funding is coming from an independent bank, venture capitalist, or relative.
There are generally a few contingencies included in the final contract. The buyer obtaining funding is always a contingency. The seller may ask that a certain number of staff members or associates agree to stay with the practice for a designated period of time after the close of escrow.
The contract has a clause about representations and warranties. This means that everything you have represented as true, is true. A warranty means that if the buyer discovers a representation to have been false, the buyer will have legal remedies available.
After the contract is finalized and submitted to escrow, all that is left is for escrow to close.
The Closing
When the buyer has funded the sale and escrow received the funds, the final papers are signed, and the new owner is ready to go. Say your goodbyes to your staff and be on your way. Or not. You may have agreed to stay as an employee with the practice for a few months to ease the transition.
At Dental & Medical Counsel, we are committed to providing our clients unmatched access to legal advice as they explore the avenues of selling or buying a veterinary practice. Contact us today to schedule a complimentary consultation with attorney Ali Oromchian to further explore how we can meet your business objectives.
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