The sale or purchase of a veterinary practice is likely to be one of the largest financial transactions that a vet will make. Whether selling or buying, it helps to be prepared in terms of understanding the process and the logistics involved. Tim Jenkins summarises some of the key considerations.
Most sellers will retain the services of an agent to act as an intermediary in marketing the practice for sale in order to conduct negotiations, to obtain the best price for the practice and assess the credentials of the proposed buyer. Retaining a specialist agent is recommended, as they will broker the key commercial terms for the transaction with the successful buyer (ie, price, assets included in sale, timescales and conditions to completion). These are usually then set out in a ‘memorandum’ of sale which is prepared by the agent but which is not normally, of itself, legally binding.
A sale contract is usually only legally binding once contracts have been exchanged through each party’s solicitors. Once their offer has been accepted, buyers should consider asking the seller to commit to cease marketing the practice and not to remarket or continue sale negotiations with other parties for an agreed period (often three months). While this does not give rise to an obligation to sell to the buyer, it confers exclusivity while the buyer incurs costs in progressing the legal work for the purchase and dealing with the logistics for completion.
Sellers will typically look to couple such a commitment with the buyer paying an initial deposit to secure exclusivity. Care will need to be taken to define the circumstances in which, should matters not proceed to completion, the deposit is to be returned. For example, deposits are often held by one party’s solicitor (or the agent) and are paid to the seller upon the buyer’s withdrawal from purchase without fair cause, but they might be returned to the buyer, say, if the seller changes his or her retirement plans.
Most buyers will look to leverage their own capital and will finance most of the acquisition cost by way of external finance. There are many banks that specialise in lending to vets both for working capital and to finance acquisitions. There are also other types of finance providers and a number of different types of finance options now offered by banks and others. Buyers should obtain independent financial advice before opting for a particular product.
Most finance providers will require security over the assets of the practice (or company) acquired. Additionally, for corporate buyers, depending on the level of borrowing, a finance provider might also ask for director personal guarantees to further secure the borrowing commitment. An exception to this might be if the buyer has an established existing business to offer as part security.
Buyers seeking to purchase the practice with the assistance of external funding will normally be asked to provide to the seller (or seller’s agent) evidence of the funding having been approved in principle when submitting an offer to purchase. Therefore, it is important for buyers to remember to consider this aspect at an early stage in the process.
STRUCTURE OF THE TRANSACTION
If the seller of a veterinary practice is an individual or a partnership, the practice will be sold by way of a transfer of the business’s assets to the buyer. Alternatively, if the business is operated by a company, the parties will have a choice. The company can sell the assets of the practice to the buyer (by way of asset sale as above) or the buyer could purchase the shares in the company.
For sellers operating as sole traders or in partnership (ie, not through a corporate structure such as a limited company) and who are planning ahead to retirement, they may want to consider the benefits of incorporating their practice ahead of sale (ie, converting to corporate status). There will be pros and cons (in particular as to tax) and professional advice should be taken before steps are committed.
An asset sale involves the buyer acquiring the key assets that comprise the practice business, including the premises, goodwill, fixed assets, equipment, IT systems and records, staff and client database, key trading contracts, and stock in trade. Generally on an asset sale the buyer will not inherit legal responsibility for the operation of the practice before completion of the sale.
A share sale involves the buyer acquiring the shares in the company that is operating the practice. Therefore, there is no asset transfer and the buyer (indirectly) will own the assets vested in the company. The corollary, however, is that the buyer, while not normally having direct legal responsibility for them, will also inherit all liabilities (including tax) within the company. For this reason, the share sale contract is often more complex and detailed than the equivalent upon an asset sale.
There will be pros and cons with each option for the seller and the buyer alike. In particular, there will be different tax consequences for the seller, and advice on the options, if relevant, should be sought out early on in the selling process, ideally before the practice is offered on the market.
Buyers (whether acquiring shares or assets) should consider whether they wish to purchase the business in their personal name. Alternatively, in cases where the buying party is made up of a number of vets through a partnership, or for any buyer purchasing through a corporate vehicle such as a limited company, there will again be pros and cons (including those relating to taxation) and it is a good idea to get advice on the best course of action as early as possible.
A buyer may wish to obtain detailed information as to the operation of the practice, its financial performance, competitive threats and the key assets of the business, as well as the extent of its commitments and liabilities, before purchase. Buyers will normally wish to meet with the staff before completion – albeit, often later into the process once a completion date has been fixed.
Much of the due diligence process is dealt with via solicitors and accountants for the parties. Sellers should be prepared early on for this part of the process and ensure that they have all the documents they will need and that all the necessary information is organised and collated for the purpose. Their advisers should be able to provide a checklist of the information that is likely to be required. This will help to ensure that this part of the process is handled efficiently, cost-effectively and as quickly as possible.
PROTECTING THE VALUE OF THE BUSINESS AFTER PURCHASE
The majority of the value paid for a veterinary practice will be in relation to its ‘goodwill’. Goodwill is an intangible asset and is a combination of the value of the practice’s reputation in the marketplace, its market share and its profitability. Therefore, the trading name of the practice is often a key asset, which is included in the sale.
Regardless of whether it is asset or share sale, buyers should always consider including in the contract a non- compete clause, that is, a commitment from the seller not to have an interest or involvement in a competing practice for a defined period and within a defined radius from the practice. Quite often there will be additional commitments from the seller that sit alongside these restrictions; for example, not to solicit key staff or clients away from the practice for a period of time. There are no fixed rules on the scope of the obligation, but the restriction should be no wider than reasonably needed in order to protect the value of the goodwill (otherwise the restriction may not be legally enforceable).
As a general rule on the sale of a practice by way of asset sale, the contracts of employment of the staff at the business, immediately before the sale is completed, are transferred automatically to the buyer on completion of the sale. As a result, the buyer becomes responsible for all the rights, obligations and liabilities of the seller (including historic) in relation to the workforce under the employment contracts. That is the case in any event where the sale proceeds as a company sale.
On an asset sale, sellers are legally required to provide certain information regarding the employees to the buyer before the sale and to obtain confirmation as to whether the buyer (once provided with the information) plans to make any changes to the workforce arrangements afterwards. On an asset sale there is a legal requirement for the parties to inform (and, in certain cases, consult with) the workforce before the completion of the sale.
PROPERTY POINTS TO CONSIDER
Veterinary practices can own premises in one of two ways: freehold or leasehold. Freehold is where the property is held absolutely until it is sold on. Leasehold is where the premises are held under the terms of a lease for a certain number of years. Owning the freehold of premises provides more freedom to dispose of a property, whereas owning the leasehold of premises means being governed by the terms of the lease.
Leases often require a landlord’s consent to any proposed dealing with the premises. This would include the sale of the premises to a buyer of the practice, underletting premises to a buyer (instead of transferring the lease) and the buyer granting a legal mortgage over the lease premises (to a finance provider).
The need to obtain these consents should be factored into the estimated timescale for the completion of a sale, as relevant. Landlords might require a corporate buyer to provide a rent deposit and/or a director’s personal guarantee as security for the buyer company’s compliance with the terms of the lease after completion.
If a seller owns freehold premises, they can choose to sell the freehold at market value along with the practice or, alternatively, to retain the freehold as an investment and grant a lease of the premises to a buyer. Financial and tax planning advice should be sought by a seller to establish which method is most appropriate. If the seller opts to retain the freehold and grant a new lease, but operates the practice as a company (and, therefore, plans to sell the shares in the company on sale), there might be a need to consider how to extract the freehold interest from the company before the sale takes place. This can have tax consequences and should be considered at an early stage.
A well-advised buyer should request an option to purchase the freehold of the premises in the event that the seller wishes to sell in the future. A buyer of a veterinary practice needs to be clear before agreeing to buy a premises what condition it is in. It is the usual position that premises are ‘sold as seen’. Depending on the age of the premises and/or the extent of lease repair obligation (if leasehold), undertaking a structural survey is highly recommended. If premises are in disrepair, an adjustment to the purchase price might be needed to reflect the future costs to the buyer.
Any buyer of a leasehold practice should review the terms of the lease carefully. Matters to consider include:
- The repair obligations.
- The lease term.
- What the property can be used for.
- How the property can be disposed of.
- The rent.
- Rent reviews.
- Service charges.
- The ability to alter the premises.
A buyer should pay particular attention to how much time remains on the lease term and whether there is any legal right to extend that term. As stated above, the goodwill of a business is a valuable asset and this goodwill will be closely associated with the premises from which the practice trades. In order to maximise the goodwill, any buyer will wish to ensure that they have a reasonable period of secure occupation rights.
Being fully prepared for the sale and purchase process of a veterinary practice will stand both the buyer and the seller in good stead and will help them to achieve a smooth, cost- effective and timely completion. Planning ahead is a must and retaining professional advisers who specialise in the sale and purchase of veterinary practices is recommended.
This article was originally published in 'In Practice', January 2016