Veterinary medicine is no stranger to change, both on the medical side and the business side. As an example of the latter, much to the chagrin of many veterinarians, the storefronts of veterinary practices are shifting from “mom and pop” to corporate as corporations gobble up independently-owned veterinary practices in a feeding frenzy.
One of the reasons that corporate consolidation has been occurring at such as rapid rate in veterinary medicine is the demographics of practice owners. Many current owners are Baby Boomers who are on the back nine of their careers, looking to reap rewards for all the years of hard work and dedication they have put towards growing their practices by selling them. To maximize their returns on investment when they sell, many of these owners begin the sales process by hiring a broker to market their practices.
A broker is an individual or firm that works to bring seller and buyer together. In return for his/her efforts, a broker will charge a fee or collect a commission. Before acting on the behalf of a practice owner, the broker will request that the owner sign a listing agreement, which is a contract that grants a broker the authority to act as the owner’s agent in the sale of the practice.
Because a broker can be an instrumental agent in the process of selling a veterinary practice, the listing agreement that he/she presents to a practice owner may contain language that should be viewed with scrutiny. Most practice owners have little to no experience with listing agreements and so are unfamiliar with spotting potentially-detrimental language. This article highlights the key sections within a listing agreement and common issues encountered within them.
There are three basic types of listing agreements: an open listing, an exclusive agency listing, and an exclusive right to sell listing. An open listing is a non-exclusive agreement that allows the seller to hire more than one broker and only requires the seller to pay commission to the broker who finds a buyer willing to meet the seller’s asking price. An exclusive agency listing is similar to an open listing, except that only a single broker will represent the owner. In both of these types, the seller reserves the right to sell the practice himself/herself without paying any commission to a broker.
Of the three types, the exclusive right to sell listing agreement is the most commonly utilized. It is similar to the exclusive agency listing, except that the seller cannot sell the practice without paying his/her broker commission for the sale. Unless an exception is specifically noted within the contract, this type of listing agreement ensures that the broker will collect commission on any sale, whether or not he/she played any part in procuring a buyer or closing the sale.
Duration of the Listing
Listing agreements should outline a set period of time for which the broker has the exclusive right to sell the practice. Typically, the duration of a listing is anywhere between six months and one year. This timespan is long enough to provide the broker with sufficient time to advertise the practice and solicit offers from prospective buyers, yet short enough to incentivize the broker to work diligently at bringing a sale to fruition. However, what recourse does the seller have if he/she is not satisfied with the broker’s marketing efforts during this time period? Under this circumstance, the seller would not want to wait until the listing agreement expires before being able to employ a different broker. So, can the seller terminate the listing? The answer: it depends.
In a seller’s perfect world, he/she would be able to terminate the listing for any (or no) reason, at any time, and with no prior notification. Understandably, a broker will not agree to this proposition. This is where the negotiation begins. The seller should strive for specific language to be included within the listing that allows him/her to terminate the listing immediately for good cause or with a short period of prior notification if the termination is without cause. While a broker will usually accept these terms, the broker will also typically require that he/she is entitled to collect commission on a sale made to any prospective buyer identified during his/her time advertising on behalf of the seller. In addition, a broker will want any out-of-pocket expenses to be reimbursed if the listing is terminated without cause.
Duties of the Broker
A seller who hires a broker typically is interested in selling his/her practice within a reasonable timeline. In return for spending hard-earned profits on a broker, the seller should expect to know what he/she is getting in return; however, listing agreements are often vague and lax when detailing the services brokers will provide. Avoid listings that only include language such as “The Broker shall make diligent efforts to effect the sale of the Practice and shall advertise it in such manner.” This language is vague, subjective, and does not provide the seller with concrete action items of the broker.
A listing agreement should clearly outline the broker’s duties in return for collecting fees or commission from the seller. A seller should be informed whether the fees he/she is incurring is simply for listing the practice or if it also includes other services, such as time spent actively advertising the practice or negotiating with a potential buyer. In addition, language should be included stating that all advertising by the broker must be verified as accurate and approved in advance by the seller.
For the sale of veterinary practices, a broker’s commission typically ranges between 6% and 8%. The percent of the commission may be the same for both the total practice purchase price and real estate purchase price, or the two assets may each be assigned a different commission percentage. Sellers should not only look at the percentage requested by the broker when deciding if the request is acceptable, but also if the duties of the broker are well-defined and extensive enough to warrant the percentage requested.
When Commission is Paid
The trigger for payment of commission is a crucial part of all commercial listing agreements. The most common triggers include when the broker produces a buyer willing to meet the seller’s price or when the sale closes.
When a seller hires a broker to list his/her practice, he/she hopes that the broker will find buyers that are willing to meet the asking price. With this as the broker’s primary task, it is rational and reasonable that the broker would want to be paid commission once he/she procures a ready and able buyer willing to pay the seller’s asking price. However, the seller might add contingencies or conditions to the contract of sale that are not specified in the listing and over which the broker has no control, which may result in a sale not coming to fruition. The broker does not want to be penalized for a seller’s cold feet or recalcitrance.
Despite the above rationale, commission being awarded to a broker for simply procuring an adequate buyer can be an issue for a seller that does not want to sell to a particular buyer (e.g., a corporate consolidator) or if the sale does not end up materializing for some reason. With this trigger, the seller would be required to pay commission as if his/her practice was sold, even though the deal did not finalize; therefore, the seller may be pushed back to square one while also being thousands of dollars out-of-pocket. As a result, it is more advantageous for the seller if the broker earns commission when he/she procures a buyer that will meet the terms fixed by the seller, the seller enters into a binding contract with the buyer, and the seller completes the transaction.
From the broker’s prospective, he/she feels commission is earned by procuring a ready and able buyer willing to meet the seller’s terms. From the seller’s prospective, he/she only wants to pay the broker a commission when a sale is finalized. So how can both parties feel protected? A fair compromise between these two stances is reached when the listing agreement states that commission is earned only when a deal closes, except in cases in which the deal’s closing is prevented by the seller’s conduct.
While a broker will usually agree for a deal closing to be the trigger for payment of commission, the broker may also want an additional protection included within the listing agreement that states he/she is entitled to a commission if the seller, rather than selling the practice, enters into an “alternative transaction”. This provision is usually included to protect the broker from the seller choosing to lease the property or enter into a sale of ownership interest, rather than a wholesale of the practice and/or property. Alternative transaction provisions often are complicated and difficult to negotiate because they tend to be very broad to cover many potential eventualities, but do not address any particular eventuality in detail with regards to how the broker’s commission will be calculated or when it will be paid.
Brokers can worry that a seller may be dishonest and evade paying the broker’s commission by stalling until after the listing agreement period expires before entering into a contract with a prospective buyer who was introduced to the seller by the broker within the listing’s term. For this reason, most listing agreements will state that the broker is entitled to be paid a commission on any leases or sale agreements that are made with buyers specifically marketed to by the broker, even if these agreements finalize or commence after the termination of the listing agreement. This set period of time post-termination is sometimes referred to as the “tail period” or “after-look period.”
While the above provision protecting the broker is sensible, the seller needs to ensure that the provision is applied reasonably. In order for a seller to limit the applicability of this provision, he/she must know the names of the prospective buyers that the broker will claim commission on; this can be accomplished by requiring the broker to submit a prospect list. This list will include the names of the prospective buyers that the broker specifically marketed the seller’s practice to and should be submitted to the seller within a set short period of time (e.g., seven days) following termination of the listing agreement. If the broker fails to provide this list within the set period agreed upon, then the broker shall not have the right to collect commission post-termination of the listing.
In addition to requiring the prospect list to be submitted within the infancy of the “tail period,” the seller should also limit the number of names that can be included on the list. For example, if the broker sent out an email blast to his/her entire database of potential buyers or had a list of everyone that viewed a social media post he/she made advertising the practice, the seller would not want the prospect list to include these hundreds of names. The prospects should be well defined, such as to only include the names of those that viewed the practice with the broker or submitted an offer or letter of intent.
Finally, the length of the “tail period” should be considered. This period varies greatly between listing agreements and can be a major point of negotiation; typically, it ranges between three and eighteen months. A broker will push for a “tail period” to be in the upper end of this range, as it increases his/her chance of collecting commission after the listing agreement has terminated. It is not infrequent, though, that a prospective buyer is interested in the seller’s practice, but either does not have adequate funds to enter into a deal or may simply get cold feet about purchasing the practice. Therefore, a seller should negotiate for a shorter “tail period” to minimize the chance that the seller owes the broker commission on a deal that is rekindled with a previous prospective buyer without any additional help from the broker. A “tail period” of three to six months is reasonable and should typically be what the seller negotiates for.
Exceptions to the Listing
Similar to how a broker should provide a prospective buyer list to the seller upon termination of the listing agreement, the seller should provide a list of prospective buyers that he/she has been in contact with prior to entering into the listing agreement with the broker. By presenting and agreeing upon this exceptions list, the seller will not be required to pay commission to the broker if a deal is closed with one of the listed buyers, even if the deal is finalized within the term of the listing agreement. A broker may agree to this exceptions list, but will likely make the reasonable request that he/she receives partial commission if he/she is the one who negotiates and successfully closes the deal.
The indemnification provision is one of the most difficult portions of the listing agreement to agree upon at the negotiating table, as both the broker and the seller want the other party to cover him/her if there is a default between the parties or an issue arises that triggers liability from a third party. The broker does not want to incur liability for any accidental misrepresentation of the practice. Conversely, the seller only wants to be responsible for his/her own conduct that is contrary or negligent to his/her obligations outlined within the listing agreement.
Negotiations regarding this section typically conclude when both parties agree upon reciprocal-indemnification. Reciprocal-indemnification means that both the broker and seller agree that he/she will cover any economic loss sustained by the other party if the loss is a result of his/her actions or breach of contract. This agreement is reflected within listings that have language in which both the broker and seller agree to pay, reimburse, defend, and hold harmless the other party from and against any expenses that are incurred based upon the other party’s actions, omission, or breach of contract.
Seek Legal Counsel
While there should be a great deal of synergy between a seller and his/her broker, the seller must also recognize that the broker has an inherent conflict of interest. Since a broker usually only collects commission upon a sale finalizing, he/she is disincentivized from dealing with important issues that may slow down or compromise the sale. Because of this, a seller should seek advice from a seasoned lawyer regarding the terms of the sale. Doing so will impede an unscrupulous broker from oversimplifying the transaction to collect commission more quickly so he/she can direct his/her efforts toward the sale of another practice.
There can be considerable variation in both the form and content of listing agreements. While most touch on similar issues, how the issues are addressed can vary substantially. When entering into a listing agreement, practice owners should pay particular attention to the issues discussed above. While a practice owner may not have many qualms with the listing agreement drafted by the broker, he/she cannot predict the turns that his/her relationship with the broker will take if the selling process hits some unexpected bumps in the road. For this reason, practice owners should look at all of the issues implicated by the listing agreement carefully and with skepticism and seek legal counsel before signing one.