Dr. Julie Simpson had put her veterinary practice up for sale, feeling burned out but not quite sure that she was ready for retirement. She received a couple of offers although they didn’t match her expectations. Then, she got another one—and this buyer put forth an intriguing proposal: that, as part of the offer, she’d receive a combination of 80 percent of the sales price in cash and 20 percent of private equity in the company.
Dr. Simpson received a cash offer of $3 million in this private equity offer, and she had $500,000 million in debt to pay off from the proceeds. So, she’d have a pool of $2.5M million in cash after the debt was paid off. Because she would also get 30 percent in equity, she understood this to mean $900,000 worth of units under the current valuation. She’d stay at the practice to share her insider insights but wouldn’t be part of the management team. Was this the answer for which she’d been hoping?
Although these types of arrangements have been taking place for a couple of decades, they began to surge in 2017. From 2017-2022, private equity deals in the veterinary industry surpassed $45 billion with two companies alone buying around 660 practices in the United States during that period. As context, out of the approximately 30,000 veterinary clinics in the country at this point in time, about 15 percent of them were now corporately owned or private equity backed businesses.[i] A 2020 statistic showed that at least half of the groups owning more than fifteen practices have private equity dollars invested.[ii]
Should Dr. Simpson accept the offer? There can be benefits to this type of arrangement—such as when rollovers take place on a tax deferred basis and/or potential significant increase in value. Although these upsides do not come without plenty of downsides to consider.
To understand how private equity investments work and the issues to consider before making a decision, it’s important to understand the terms of “private equity” and “rollover investments” in this context.
Private Equity in a Nutshell
Private equity firms (often called sponsors) raise money from investment funds, insurance companies, and privately accredited investors, using those funds to purchase a stake in or buy a private company like a veterinarian practice. These investors are looking to grow their own wealth in ways other than more traditional investments like stocks and bonds. Their goal in investing in a practice is to help improve the business and then sell it at a profit, perhaps in five to seven years. Investors earn revenue through management fees (which tend to be 2 to 5 percent of gross revenue), profits generated by the veterinary practice, and profits from the sale of the business when the time comes.
The U.S. Securities and Exchange Commission (SEC) designates certain investors as “accredited” when they possess the degree of financial sophistication needed to understand the investment and are in a financial position to have less need for SEC protection. According to Rule 501 of SEC Regulation D, if your individual or joint net worth with a spouse is greater than $1 million without including your primary residence OR certain income standards are met ($200,000+ in key timeframes as an individual or $300,000+ with a spouse), then this person qualifies as an accredited investor. Veterinary owners selling their practices and investing in private equity, will be required to sign a form representing they are “accredited investors”. Fortunately, for Dr. Simpson, she has worked hard and with the addition of the cash price, will easily be a credited investor.
Review of Rollover Investments
In more traditional private sale scenarios, sellers receive cash from buyer veterinarians—either from their own funds or generally through financing. With rollover investments commonly seen in private equity transactions, however, part of the purchase price is “rolled over” into the buyer’s equity or their holding company. This holding company (or platform company) would then consolidate all of the veterinary practices in the buyer’s portfolio. From the perspective of the private equity firm, they can make higher offers when trying to buy a practice without having to put as much cash into the deal. These higher offers can help to secure their bids and leaves these buyers with more cash to buy other practices. Sellers can appreciate the higher offers and the potential returns; in private equity lingo, this gives veterinary sellers a “second bite at the apple.”
In other words, Dr. Simpson might estimate that, when her practice is eventually sold, it would maybe for $6 or $7 million—and twenty percent of that would theoretically be hers: another 1.2 or 1.4 million dollars. However, that’s the ending of a success story for the veterinarian, which isn’t always the case. Management fees and other issues described below could chip away at any profits received by the seller.
When Dr. Simpson received multiple bids with one of them containing rollover terms, it’s crucial that she look if the rollover investment is required—or if it’s presented as an option. It can be useful to assign the rollover portion of the bid a value of zero before comparing the bids given. If considering the contract containing rollover terms, Dr. Simpson should ask for detailed financial projections and evaluate the situation and amount of risk inherent in these projections. She should ask about the tax-deferred status of the rollover, her role in corporate governance, and request references about previous arrangements with sellers. Also, she should ensure that she is not expected to provide any personal guarantee of debt that’s leveraged.
As noted earlier, private equity investments have been part of the veterinary landscape for the past two decades. What’s new and different: more and more deals are requiring veterinary sellers to invest in the company, which helps to ensure that the veterinarians stay with the practice. Private equity deals sometimes also offer equity to associate veterinarians. Also to keep the associates “tied” to the practice.
General Concerns About Private Equity and the Veterinary Industry
One of the primary motivations of the private equity industry is generating profit for investors. So, when decisions must be made between a higher profit action and one that would provide better patient care, concern arises about what decisions would be made. Plus, to maximize returns on investments, private equity backed practices can cut back on human resource costs in fields where burnout is already prevalent.
Studies conducted in other industries indicate that, post-buyout, businesses owned by private equity firms have lower employment numbers and wages.[iii] A 2024 report from the U.S. Senate, for example, noted how one large retailer, post-private equity purchase, saw worker incomes go down by an average of 1.7 percent. The report also shares a study demonstrating that, in the first two years of ownership via private equity, a company’s average employment figures drop by 4.4 percent.[iv]
With human health care, the National Library of Medicine notes how PE hospitals were “associated with lower patient satisfaction scores and were understaffed relative to non-PE owned hospitals, with a lower ratio of employees-per-occupied beds.”[v]
Satisfaction rates of veterinarians also fell during the time period of enhanced consolidation and private equity buyouts (although correlation does not prove causation). In 2005, 76 percent of veterinarians said that they’d recommend the profession to a family member or friend. By 2015, the number was under 50 percent and, in a more recent study, it dropped to 41 percent, overall, and just 24 percent for veterinarians under the age of thirty-four.[vi]
Next, we’ll explore specific concerns for veterinarians who are considering whether they should sell through a private equity arrangement.
Overview of Accepting a Deal
Once a seller accepts a rollover investment as part of the purchase price, they are now a minority owner of the business with fewer protections than a gambler at a Las Vegas casino because the gambling industry is highly regulated, and the private equity industry is not. Although it’s understandable that a seller might feel protected by the deep insights that they have into the veterinary practice, that’s typically not the reality. Buyers’ groups tend to structure deals to ensure they receive much of the profits through fees and other ways before the seller receives any of them, and they often plan to run the business in ways that differ from how the veterinarian did as majority or sole owner.
Plus, remember that the seller in a rollover investment deal is typically investing in the parent company that maintains a portfolio of veterinary practice companies. So, profits generated at the seller’s practice may be used to offset losses at other practices in the portfolio or to invest in additional businesses. Plus, some buyer groups refuse to negotiate their offer with sellers with any attempts to rebalance the contract to improve the situation for the minority owner refused. Moreover, the buyer may possess preferred stock in contrast to the seller’s common stock, which would prioritize the buyer when distributing funds: profits or sales proceeds.
So, unfortunately, the reality is that these deals are often not as good as they might sound to the sellers for the reasons described above and these next four.
#1 The selling veterinarian cannot force the private equity firm to buy them out.
So, the only way to cash out the deal is with the cooperation of the holding company, and that may not ever happen. This means that, until the practice is sold again, there isn’t a chance to obtain cash for the minority investment—and the amount will depend upon numerous factors out of the minority owner’s control. For example, the veterinary seller may be required to rollover its current investment into the next company, or accept a promissory note with below market terms
#2 Sellers could be subject to taxation on equity distributions that were never received.
Without a stated obligation to distribute profits, including upon the sale of the assets, your investment in the practice can be adversely affected. Although the sponsor contractually agrees to return their investment funds within a stated period to investors in the buyer group, typically for ten years, they don’t make the same promise to the veterinary seller investor. Instead, they just need to use reasonable commercial efforts to distribute enough cash for the minority owner to pay taxes on their share of profits. But they are not required to, which means that you could have to pay taxes on K-1 income, even though you never actually received the funds. Veterinarians considering a private rollover sale should consult with a tax specialist familiar with private equity investments about this issue.
#3 Noncompete agreements may bind the veterinarian as long as they are a minority investor.
As #1 points out, there is no end date to the investment until the holding company says there is. Moreover, the noncompete in the rollover investment documents may be stricter than in an all-cash deal. The’s because the noncompete would include restricted areas of all of the veterinary practices owned or managed by the buyer group. Plus, restricted territories would be based on radiuses around facilities that are generally 50 to 100 percent greater than what’s typical in a more traditional sale.
#4 The investment valuation can easily be manipulated.
Documents provided by the buyer group almost always require the seller to acknowledge that they make no statement about the value of the investment and that seller decided to invest without relying upon any valuation data provided by the buyer group. Plus, unlike publicly traded companies with current pricing available, there’s no external measure upon which you can rely. Instead, you’ll need to conduct your own financial due diligence—which can be conducted by accountants or other financial professionals rather than attorneys—to make an informed decision.
Due diligence may not be sufficient, either, if information provided by the buyer’s group is false, misleading, or otherwise unreliable. That’s because, unlike a statement that financial information given by seller to buyer in the initial veterinary practice sale agreement that the financials “fairly present seller’s financial condition, assets and liabilities in all material respects”—there isn’t a comparable representation in the buyer’s equity documents.
Conclusion
Although this article is not intended to suggest that private equity backed deals should be automatically turned down by the seller, the reality is that many of them are presented in a way that makes it difficult for sellers to understand the true value of their rollover equity and the complexities of the offer. Being fully informed through consultations with experienced veterinary attorneys and financial professionals and asking plenty of questions will allow the seller to negotiate with the buyer group and determine if a deal is worth pursuing.
[i] Prete, Ryan. “Got a pet? There’s a good chance private equity backs your vet.” News & Analysis. September 14, 2022.
[ii] Private Equity—What Veterinarians should know.” The Veterinary Idealist. February 12, 2020.
[iii] Private Equity—What Veterinarians should know.” The Veterinary Idealist. February 12, 2020.
[iv] Predatory Private Equity Practices Threaten Americans’ Health and the Economy. Joint Economic Committee. July 23, 2024. https://www.jec.senate.gov/public/index.cfm/democrats/2024/7/predatory-private-equity-practices-threaten-americans-health-and-the-economy
[v] Bruch, Joseph, Dan Zeltzer, and Zirui Song. Characteristics of Private Equity–Owned Hospitals in 2018. National Library of Medicine. August 1, 2021. https://pmc.ncbi.nlm.nih.gov/articles/PMC8299539/
[vi] Private Equity—What Veterinarians should know.” The Veterinary Idealist. February 12, 2020.
