The Quick Guide to Selling a Veterinary Practice
Selling your veterinary practice is never an easy decision. It’s hard to say farewell to your clients and their beloved pets, but sometimes, moving on is the best decision. There are many reasons why veterinarians decide to sell their practices — the economy, change of career, relocation, health issues or retirement. Regardless of the reason, there are steps you can take ahead of time to make sure the transition goes as smoothly as possible. You’ll need to find potential buyers, notify clients and the team, and wrap-up the legal and financial aspects. This guide was written from the practitioner’s perspective to provide you with strategies for a successful practice sale.
Why do veterinarians sell their practices?
As mentioned above, there are numerous reasons why veterinarians decide to sell their practice. The most common reasons include:
- Career change (43%). When you went through veterinary school, your goal was to treat animals, not run a business. Many veterinarians find themselves burned-out and frustrated by the demands of managing their practice. The high levels of stress, long hours, and the obvious emotional toll can push you to the breaking point. At that stage, many veterinarians decide to change careers and perhaps go into academia or consulting. Many go on to find rewarding careers in the animal health industry.
- Retirement (33%). There comes a time when everybody retires. You’ve worked hard throughout your career and now it’s time to relax. If you discover that the quiet life isn’t for you, you can always do relief work, consulting, or teaching.
- Personal (24%). There are many personal reasons why a veterinary practice may need to be sold. Among them are incapacitation, poor health, change in life circumstances (divorce, substance abuse, finances), and death.
Preparing for a successful practice sale
Due to the complexity of a veterinary practice sale, it might be challenging to know where to begin. We’ve got you covered and will guide you through essential steps you should take.
- Know your value. The first step in the veterinary practice sale should be its appraisal. Understanding how much your practice is worth can be beneficial at all stages of owning the practice, and it notably pays off when you decide to sell. Keep in mind that financial statements don’t always reflect true profitability and shouldn’t be the sole basis for determining value. We have an in-depth practice valuation piece for you.
- Optimize your practice for potential buyers. Once you know the value of your practice, it’s time to think about how you can increase this number. The value of your veterinary practice should be higher than the total value of its fixed assets and these factors in variable and intangible assets such as inventory, equipment, accounts receivable, and goodwill. Now might be the time to enhance the building’s curb appeal, update the interior and upgrade equipment.
- Gather your practice’s financial statements. Potential buyers will most likely ask for prior-years’ tax returns and financial reports (five years back is not uncommon). If you have a robust financial management/billing system, you can pull these reports yourself. If not, ask your accountant to prepare these statements for you. Trust us on this, having your financials in order will make the evaluation process much easier. If you have well-organized, timely reports at hand it will help you stand out amongst other sellers in a competitive market.
- Think about your future comfort. Often, during the practice evaluation and sale, the focus is getting the best possible price and making the transition easy for clients and personnel. What many practitioners overlook is securing their own future. How much money do you need each month to live comfortably? This is a good time to meet with a financial planner to get your future income and savings goals mapped out – this should be done three years prior to planning a sale. During this stage, you may also decide on any role you want to hold in the practice after you make a deal with the buyer. For example, you want to serve as chief medical officer for one year after the sale to oversee the medical standards and quality of care in the practice.
- Be as transparent as possible with your staff. The transaction process is challenging for the staff due to their future uncertainty, and it’s important to be as honest and transparent as possible. Let them know as far in advance as possible about your plans to sell the practice. The best time to share the news with your team is after you sign the LOI as doctors and other staff may choose to leave once they discover that practice is about to be sold, which can result in loss of revenue and lower valuation. Whether they realize it or not, your staff has a major effect on influencing buyers’ decisions. A buyer will look at the turnover rate, as well as service quality. The lower the turnover rate is, and the higher the quality of your practice services, the more chances you have to attract high-profile buyers and get a profitable deal.
Three documents that are essential to a successful practice sale
Veterinarians are healers, not salespeople. That’s why it’s easy for them to get taken advantage of or low-balled in a practice sale. As a way to protect yourself and make sure you are being dealt with fairly, there are three documents that you should insist on during the due diligence and negotiation processes. These include a letter of an intent, a non-disclosure agreement (NDA), and a sales agreement. Let’s go over these documents and outline what you should pay attention to when signing each of them.
- The term sheet or letter of intent (LOI). This document outlines the agreement that both seller and buyer expect to make and establishes the terms of the deal. You can think of it as a draft contract framework. Here are some key points that the letter of intent should.
- Lock-in the purchase price. Leaving it vague invites the buyer to try to finagle a lower offer during the due diligence. Allow some leeway for minor negotiations, but stand firm on the minimum amount you’re willing to accept.
- Stipulate that the amount in full will be paid to you after closing. Try not to accept payments over time if possible. The seller may not get paid in full after closing due to the partnership model, earnout, or seller financing. Even though these reasons have an upside, they carry certain risks for the seller.
- Pay attention to the employment terms, as failing to agree on those can complicate the deal further.
- Have your attorney review the LOI. It’s better to invest the time and money upfront than to discover deal-breaking surprises at closing.
- The non-disclosure agreement (NDA). Protecting the seller’s confidential data is essential as the deal involves sharing such information between parties. For this purpose, you and the buyer should sign a mutual NDA.
- Make sure that the document covers everything that you want to protect to ensure your confidential data will not be disclosed.
- Seek a long-term NDA. If the buyer will not sign an agreement for an indeterminate amount of time, at least try to make sure that both parties will not disclose any confidential information for a few years.
- If negotiation fails at later stages, ask the buyer not to solicit your employees for a set period as the buyer may obtain their contact information during the due diligence process.
- The sales agreement. Generally, this is the final agreement between parties, before closing. This agreement comes in three forms: an asset purchase agreement, a stock sale agreement, or a merger agreement. Regardless of which form is involved, it includes various vital provisions and you should carefully review those with your lawyer.
- Representation and warranties. This is a standard clause of all sales agreements. Representation attests that you have been honest about the practice you are selling. It is what you say it is. Warranties means that if what you have described turns out to be false, the buyer has some recourse.
Tips to help you handle the sale process
We understand that preparation for a veterinary practice sale takes time and effort. That is why we asked our co-founder, William Griffin, for tips that you, as a practitioner, should focus on or consider before selling veterinary practice. As a former practice owner and co-founder of Pathway Vet Alliance, Bill has a unique perspective on practice sales.
- Get outside advice. Talking with your accountant or a financial planner is one of the first and most significant steps that you should consider. First, your adviser will help you to evaluate how much money you will need to live comfortably after selling and we explain why it matters below. Second, they will help you understand what to expect as the sale progresses and afterwards. In addition, expert financial advice may help you to minimize tax consequences, as well as future liability.
- Take care of your finances. A potential buyer will want to see your financial statements. As standard financial reports do not reflect profitability, focus on determining EBITDA correctly. This will not only reflect the most accurate number for the seller but also can help you to improve the practice’s performance.
- Deal with the corporate records. Pay extra attention to this point if you sell your practice as a stock or asset sale, or incorporated practice (limited liability company). Make sure your corporate records are up-to-date, including documents associated with forming the company, bylaws, business licenses, and minutes of all board meetings.
- Have an idea of who you wish to sell to. Finding a potential buyer may be difficult if you do not establish a network of prospects in advance. Building long-term relationships with other veterinarians can be useful as you will be able to choose the buyer who has similar values and vision as you do. Also, being familiar or having an established relationship with the buyer will most likely minimize the stress when you sell your veterinary practice. Talking to people at conferences and trade shows is a good place to start.
- Be careful with the contract. Once you sell, most of the time, it’s considered a done deal, which means you cannot change your decision after you sell. That’s why you need to decide what role you want to assume after the sale.
If you want the best outcome from the sale of your veterinary practice, it’s best to start preparing well in advance. Matters such as finding a potential buyer or optimizing your practice can take more time than you think. Even though the process is complex, following all the steps and addressing issues in advance will result in a much more rewarding sale — more profit for you and the peace of mind that your hard-earned practice has been handed off to the best possible successor. This will free you up to confidently move ahead into the next direction that life leads you.