Buying a veterinary practice requires obtaining and evaluating relevant information through extensive due diligence. Despite your best efforts, however, post-closing liabilities may still arise. Once the transaction is closed and funds are out the door, it can be difficult and costly to recover any losses. By working with an experienced veterinary lawyer, you can consider the options, like purchase price holdbacks, to mitigate these potential liabilities.
At Mahan Law, we represent veterinary professionals around the country in practice transitions. If you are buying a veterinary practice, we will leverage our skills and experience to help you achieve your goals. Our legal team knows how to negotiate purchase price holdbacks and revenue guarantees and will work to protect your interests at all times. The sooner you contact our office, the sooner we can get started.
Purchasing a Veterinary Practice? Consider a Holdback
Buying or selling a veterinary practice demands significant time and energy on the front end of the transaction: conducting due diligence, arriving at a proper valuation, determining form and type of acquisition, and ensuring the deal proceeds smoothly leading up to closing.
Once the transaction closes, post-closing liabilities can be a major cause of concern for both parties. For this reason, veterinary transactions often contain a holdback escrow element outlined in the purchase and sale agreement (PSA).
Put simply, a holdback is a portion of the purchase price that is “held back” and deposited into a third-party escrow account rather than paying it to the seller at closing. Typical holdback amounts, as a percentage of the total purchase price, range from 10 to 15 percent. Arriving at a fair and reasonable holdback amount requires the trustworthy advice and counsel Mahan Law provides.
How is a purchase price holdback used?
The holdback can be used to offset any losses incurred by the buyer for:
- The seller’s breach of representations and warranties in the purchase agreement
- Specific liabilities of which the parties are aware but do not know the exact amount at closing (e.g. pending litigation)
Ultimately, the holdback is governed by the escrow agreement between the parties and the designated escrow agent. Among other things, the escrow agreement will indicate:
- How long the holdback will be held
- The conditions for disbursing funds
At Mahan Law, we regularly collaborate with veterinary attorneys and escrow agents nationwide and are also equipped to act as escrow agents when necessary. In the end, having the funds available in an escrow account gives purchasers comfort, knowing the funds will be available if losses arise.
Specific Purposes Covered by Purchase Price Holdbacks
A PSA in a veterinary transaction typically contains contingencies and timelines that must be met after closing. These are intended to protect the parties if aspects of the agreement are not met or materially change after the fact. Examples include:
- Post-closing purchase price adjustments (true-ups) — Given that the selling practice’s assets and liabilities may change substantially between the offer and the closing date, working capital adjustments or true-ups may need to be made post-closing.
- Indemnification holdback for representations and warranties — This holdback provision protects buyers and sellers against losses due to undisclosed liabilities related to a breach of reps and warranties in the PSA.
- Specifically identified liabilities — The transaction may involve upfront risks (e.g. product returns, warranty claims, pending litigation), and purchase price holdbacks address and account for these risks.
- Earn-outs — Provisions in the PSA outline additional consideration that may be paid to the parties if specific performance goals of the target practice are met. For buyers, this provides assurance that potential additional obligated payments are accounted for upfront.
A Word About Minimum Revenue Guarantees
When you are buying a veterinary practice, the PSA should include a guarantee that you as the buyer will reach a minimum revenue amount during the guaranteed period. The revenue amount guaranteed may be total revenue, revenue from a specific product line, or some other revenue amount. The terms of the agreement will require the seller to make up any revenue shortfall.
Why Choose Mahan Law?
Given that buying or selling a veterinary practice involves several moving parts, it is wise to have an experienced veterinary attorney at your side. That’s where our firm comes in. We have extensive experience handling veterinary transitions and a proven history of helping our clients engage in successful transactions.
As the owner of a veterinary clinic, lead attorney Anthony Mahan is not only an astute lawyer but also a fellow veterinary professional who knows the ins and outs of practice transitions.
Our legal team has a well-earned reputation for serving our clients with the highest standards of professional excellence. When you partner with us, we will negotiate the necessary purchase price holdbacks and revenue guarantees to protect you from seen and unforeseen liabilities so that you can achieve your objectives.
Contact Our Experienced Veterinary Attorneys
Whether you are buying or selling a veterinary practice, purchase price holdbacks and revenue guarantees will invariably be included in the deal. Let the attorneys at Mahan Law see you through the transaction in a professional and expedient manner and help protect your investment. Contact our office today to get started.