If you are considering selling your veterinary practice to a corporate consolidator, it is crucial to consider the tax consequences of the intended transaction. One way to mitigate taxes and maximize the value of the sale is to consider rollover equity. The best way to protect your interests is by working with an experienced veterinary attorney.
At Mahan Law, we help veterinary professionals around the country navigate practice transitions.
Given that capital gains taxes will weigh heavily on the sale of your practice, it is wise to have trustworthy advice. When you consult with us, we can help to determine whether to incorporate rollover equity into the deal and how it should be valued.
Our nationwide team of veterinary attorneys and financial professionals are here to help you consider all the factors involved in selling your practice. Contact our office today to get started.
What is rollover equity in a veterinary practice sale?
In recent years, there has been a significant increase in the use of rollover equity as a consideration in veterinary practice sales, especially when the buyer is a corporate consolidator or private equity firm. Corporate consolidators often encourage sellers to roll over a portion of their equity so that they retain a minority interest and have a stake in the future success of the practice.
Rollover equity is the percentage of ownership in the veterinary practice that is retained by the seller, in lieu of only receiving cash from the sale proceeds. In other words, you “roll over” a portion of your equity into the equity of the corporate buyer’s practice. Depending on the valuation of the practice, you might retain between 10 to 40 percent ownership.
What are the benefits of rollover equity?
Rollover equity can be advantageous to both the buyer and the seller and ensure their incentives are in alignment. Rather than just taking cash, the seller keeps some skin in the game. When the acquired practice is ultimately sold (corporate consolidators typically sell within 3 to 5 years), the value of the retained equity can appreciate considerably.
For the buyer, rollover equity is a preferred form of financing because it requires less upfront cash to close the transaction. Additionally, rollover equity is an effective negotiating tool if the parties disagree about the value of the practice.
At the end of the day, generating revenue from rollover equity hinges on the post-sale success of the target practice. In other words, the equity will be worth more if the practice continues to grow until it is eventually sold. Rollover equity differs from an earn-out in that monetizing rollover equity requires that the practice not only succeeds but also that it is subsequently sold. The rollover equity interest holder does not receive the payment until the acquiring entity sells its interest.
In this regard, the seller also stands to gain from future transactions. If the buyer acquires additional veterinary practices, the seller can realize substantially higher gains from the sale of multiple practices entities, including higher cash flow and more diversification. Ultimately, the gains are taxed as long-term capital gains rather than ordinary income.
Choosing the Right Buyer for Your Veterinary Practice
While the purchase price and rollover equity are fundamental to selling your veterinary practice to a corporate buyer, there are other considerations involved, not the least of which is selecting the right one. The bottom line is to focus on culture fit and your legacy as a veterinary professional, so it is important to clarify the following points:
- What is the buyer’s vision for the future?
- Is the buyer planning on selling to a larger corporation?
- What is the buyer’s staff turnover rate?
- Will your employees’ jobs be secure?
In short, you need to determine if the buyer has a long-term vision for the continued success of the practice, stability for your loyal employees, and the preservation of your legacy. Finally, if continuing your employment is part of the deal, you need to know what to expect in terms of hours, duties, compensation, vacation, and benefits. While most corporate consolidators will need you to stay on for a while, circumstances can change dramatically and override your ability to do so.
Why Choose Mahan Law?
Selling your veterinary practice to a corporate consolidator and determining whether to consider rollover equity is challenging. In the long run, the best way to navigate the intricacies of a practice transition is to have the informed representation that we provide. As the owner of a veterinary clinic, lead attorney Anthony Mahan is well aware of what it takes to own a practice, as well as the impact of corporate ownership on the veterinary landscape.
Our legal team understands the market trends in regions around the country and will leverage our knowledge and skill to help you determine whether rollover equity is the best option for you. Above all, we will help you engage in a successful veterinary practice transition and protect your legacy. Contact our office today to set up a consultation.