Are you thinking about merging or acquiring a veterinary practice? If so, it helps to understand what the process entails. By knowing what to expect at each stage, you can better protect your rights and come out the other side positioned for success.
Full M&A Process Timeline: From LOI to Closing
The process of buying or selling a veterinary practice can involve several steps, including:
- Drafting and signing of the letter of intent or memorandum of understanding, which outlines the basic deal terms
- Due diligence, in which the parties review a practice’s legal, financial, and operational records to make sure they want to enter the deal
- Negotiating and drafting final deal documents
- Addressing licensing, regulatory, and insurance matters
- Closing, where parties finalize and sign transaction agreements and transfer ownership of the business
How Due Diligence Works in a Vet Practice Deal
Before parties close on an M&A deal for a vet practice, they will usually conduct due diligence. Due diligence typically includes reviewing a practice’s legal and financial documents to calculate its value, confirm representations made by the business’s owners, and identify potential risks or red flags for a merger or acquisition. One party to the deal will request from the other party the types of records or information they want to review.
Common Deal Structures
A merger or acquisition of a veterinary practice can take various forms, each with distinct legal, financial, and tax advantages and disadvantages. Some of the most common forms of M&A deals include asset sales and stock sales. In an asset deal, one business will sell all or most of its assets to another party. The business’s legal entity (if any) remains intact. In a stock deal, parties swap stock or equity in their businesses, or a buyer acquires a business’s ownership equity from the seller.
How Earnouts Are Used and Negotiated
In an acquisition of a vet practice, the buyer and seller may negotiate earnout provisions as part of the compensation paid for the business. An earnout shifts some of the purchase price to a later date. The amount of that later payment depends on the practice meeting financial or operational milestones agreed to by the parties. Parties may negotiate those milestones, the information or records they use to determine milestone success, and dispute-resolution procedures.
What Buyers Are Looking for in Their Review
During M&A due diligence, buyers will focus on specific issues to assess the suitability of a potential deal. Buyers will want to assess a business’s financial health, its potential for future growth, and the absence of any issues that could threaten it.
Red Flags That Kill Deals
Common red flags that arise during due diligence or negotiations that can end an M&A deal include:
- Discrepancies in financial records or with representations made during negotiations
- Undisclosed lawsuits or other potential liabilities (such as unpaid taxes)
- Client base vulnerabilities (e.g., low retention rates, overconcentration in specific services, etc.)
- Staffing issues or high employee turnover
Role of Legal Counsel vs. Broker vs. Accountant
Parties in a veterinary practice merger or acquisition may rely on various advisors, including attorneys, accountants, and brokers, each of whom plays a different role in the deal. Legal counsel handles due diligence, reviews legal records, drafts transaction documents, and advises clients on legal, regulatory, and tax issues related to the deal. Accountants or financial experts review financial records and establish business valuations. A broker facilitates an M&A deal by identifying potential buyers or strategic partners for a sale or merger.
Negotiating Reps and Warranties
M&A deals also include representations and warranties. These contractual terms cover promises that a party made about a practice in the transaction. For example, reps and warranties may address a practice’s financial health, client base, and current legal exposure.
Contact Us Today for Support As You Sell Your Practice
Although the M&A process can be complicated, seasoned legal counsel can make each stage much more manageable. Contact Mahan Law today for an initial consultation with a knowledgeable veterinary attorney to discuss what to expect when merging with or acquiring a vet business.