As discussed in part one of this two-part article, owners of veterinary practices that are considering a sale to a corporate buyer may end up taking a variety of pathways throughout the transition period. One of the most important considerations of this process would be how employees will be compensated by their new corporate employer, but it’s not the only transition issue. Here are more aspects to consider.
The transition of the practice’s vendors is one of the more complicated and time-consuming aspects of the sale. First, the owner needs to determine which vendors have long-term contracts and which are simply an account in the practice’s name with no obligation to purchase a minimum amount or for a certain time period. Next, the parties should discuss and determine which companies the buyer plans to continue using after the sale. The plan for each vendor is typically one of the following: 1) close the account/terminate the contract effective the closing date, and the buyer will have a new vendor in place at closing; 2) leave the account open/contract in place at closing to give the buyer more time, and it will be closed/terminated after closing; or 3) assign that account/contract to the buyer at closing if the buyer intends to continue using that vendor.
It is important for owners to determine which vendors have a contractual commitment so they can assess whether it includes an early termination penalty. The vendors commonly known for these penalties are veterinary reference laboratory contracts and operational leases for laboratory equipment. For example, in return for an agreement to purchase a minimum amount of supplies from them for a set term, the vendor will “give” the practice certain laboratory equipment. Other vendors that commonly have termination penalties include companies that provide postage machines, copy machines, security alarms, telephones/internet, and machines that dispense controlled drugs. These contracts might state that the vendor retains ownership of the equipment and, on some occasions, that the equipment cannot be paid off or purchased. In that circumstance, the contract either needs to be assigned to the buyer or terminated with a penalty. Keep in mind, of course, that the vendor may have strict stipulations on the terms of the assignment, sometimes keeping the seller responsible if the buyer does not honor the agreement.
Some reference lab contracts give the owner discounted pricing up front or a rebate on the amount billed to the practice. If these contracts are terminated prior to the end of their term, the owner is often obligated to pay back the difference between the retail price and the discount price for every order placed during the entire term. Alternatively, they may be forced to pay back the rebates received. For this reason, it is beneficial to get these contracts assigned to the buyer because, depending on the volume of orders placed, the penalty can be significant.
If the language in the agreement contains the option to assign that contract, the next step is for the owner to discuss it with the buyer and try to persuade them to assume the contract, thereby avoiding the penalty at closing. Typically, the vendor must give written consent to assign it. Many companies have their own assignment or assumption form for the parties to sign. For the owner, it is important that the buyer assumes the obligation to pay the vendor, effective the closing date, and also for the buyer to assume all other post-closing liabilities associated with the vendor’s products or services.
The buyer may not agree to the assignment if they already have a master account with that vendor for all their practices. Corporate buyers are often able to negotiate better rates with vendors due to the number of practices they own and their spending power. Depending on the amount of leverage the seller has during the negotiations, though, they may be able to get the buyer to assume the contract through the end of its term and then terminate it. Even if the buyer assumes the contract, they may require the seller to pay the difference between their preferred pricing and the seller’s pricing schedule.
Some business and facility permits are transferable from the seller to the buyer, but the majority are not. It is often stated on the certificate as “Non-Transferable.” This means that the buyer will have to file a registration with the local authority or government agency that issues the permit. The seller should provide the buyer with copies of all current licenses and permits to make the buyer aware of what is required to operate the practice. It benefits the seller in the end when the permits are all in the buyer’s name because, in effect, it transfers the liability of the matter associated with the permit to the buyer. For example, some states require that the practice have a veterinary facility permit that registers a particular veterinarian as being responsible for the operation of the business. That is the type of permit that most owners would no longer want to be responsible for after the sale, especially if they no longer have control over the operations of the business. It would be best to have the buyer register it under their entity and another veterinarian’s name—generally, one of their own employed veterinarians.
Many owners have concerns about the buyer switching to a different practice software. It can be stressful for an owner that has used the same software for a certain number of years and has staff that are trained to use it efficiently. Having to learn a new system is time consuming and frustrating for staff members and one of the transition issues that creates anxiety. While some corporates require all their practices to be on the same software after a certain time period (generally six to twelve months), others are more flexible in their timing or don’t require a switch at all. The timing of switches can typically be negotiated.
The sale of the practice assets typically includes all intellectual property, which is comprised of the business name, phone numbers, website, social media pages, email addresses, and perhaps trademarks or copyrights. All these things will need to be transitioned over to the buyer’s legal entity. For owners who have been using the same email account for both personal correspondence and business purposes, this can be messy and a big headache, something we don’t recommend because they may need to be handed over to the buyer as part of a sale. Some corporate buyers are willing to offer their assistance and connect the owner with their IT department to work together on the separation.
An often-sensitive item for owners is the name of their practice. Some corporates like to add their name to the existing practice name. This can include putting a new sign out front that advertises the transition of ownership. If the practice legal entity is the same name as the business’s trade name, the owner will typically have to change it after closing. Most purchase agreements will include a time limit (i.e., within fifteen days after closing) for the owner to file an amendment to their articles of incorporation/organization with their secretary of state (or whichever authority manages business entity names). If the practice also has a trade name/fictitious name filed with the state, that registration will need to be terminated so the buyer can file that name under their own legal entity.
In addition to asking the corporate buyers questions about the various transition items, it can be beneficial to speak with former owners who have sold their veterinary practice to corporate buyers to learn about their experiences. If willing, they can share the details and timing of their transition both prior to closing and after the sale. Corporate buyers should be able to provide owners with a list of practices in their geographic region that have closed in the past one to three years. It can be helpful to speak with owners who have the experience fresh in their mind and also with owners who have worked for the corporation for a number of years and can share what it is like to be an employee of the company. The more information owners can gather in the beginning, the more comfortable they can feel as they approach the closing of their veterinary practice sale to a corporation.