You should know a few crucial terminologies when buying or selling a veterinary office because it can be difficult. Understanding these concepts helps make the process simpler, quicker, and more efficient.
It’s crucial to tell apart the various phrases employed in this process, from comprehending the significance of a fair market value to learning about the various forms of practice transitions.
This article will briefly discuss the terminology you should know if you’re considering purchasing or selling a veterinary business.
Asset Sales
Asset sales are the most popular method for selling a veterinary clinic. It entails the seller providing the buyer permission to transfer all or certain assets, including, in some situations, the practice’s liabilities.
Examples of assets include inventory, goodwill, intellectual property, client and patient lists, and accounts receivable. Because the seller in this transaction will continue to be a company, the buyer must choose one of the following options.
One might either use a current firm as leverage, buy the assets themselves (not a good idea), or create their entity just for the deal (the preferred method). The asset purchase agreement (“APA”), which is the main document outlining the essential parameters of the sale, will be negotiated between the parties during the transaction.
The APA will include important terms like assurances from the selling veterinarian private practice regarding the practice’s operation before closing, restrictive covenants, transition obligations, closing contingencies, and indemnification.
It will also include the purchase price, terms for paying for the practice, representations, and warranties of the seller and the buyer, a detailed description of the assets being purchased, a list of additional papers and information to be delivered at the closing, and more.
Due Diligence
The process of due diligence entails a buyer carefully evaluating a proposed acquisition’s advantages and potential risks while considering all pertinent elements of the target practice’s past, present, and future. After a letter of intent is signed, due diligence is carried out; it could end on the closing date or last for a predetermined time.
Letter of Intent (LOI)
A letter of intent also called an “LOI,” is a casual document describing the major conditions of a potential business agreement. A letter of intent (LOI) is typically not legally enforceable. Therefore the parties are not obligated to carry out the planned transaction.
Before investing further time and resources into the negotiation process, a letter of intent (LOI) is used to ensure the parties have come to an agreement on crucial matters such as purchase price, payment terms, employment circumstances after the sale, due diligence, and closing contingencies.
Signing an LOI signals the parties’ agreement to engage in exclusive discussions for a predetermined time to close the deal.
NDA
A non-disclosure agreement is known as an NDA. This is usually the first contract signed since it protects the privacy of sensitive information that the seller discloses to the buyer. Confidential data, including the practice’s financials, client/patient list, supplier data, and personnel data, may be key factors in a potential buyer’s evaluation of the acquisition.
The vendor might suffer if this information ends up in the hands of a rival. Sellers could feel more at ease disclosing information to a potential buyer if an NDA is in place. However, a signed NDA must be in place before divulging sensitive information.
Rollover Equity
Rollover equity is the portion of the selling price offered to the practice seller as ownership in a practice buyer’s business (or affiliate). It also assures that the selling veterinarian is interested in the outcome and enables a buyer to pay the seller less upfront. Accepting rollover equity entails greater risk than accepting cash at closing, but if the buyer is successful, it can also be more beneficial. Rollover equity could occasionally be advantageous from a tax standpoint.
Conclusion
Purchasing or selling a veterinary practice is a complex process. It is important to understand the key terms of the process to make a successful transaction. By understanding these terms, you can make a more informed decision about buying or selling a veterinary practice. Additionally, you can consult with veterinary business advisors to better understand and ensure the process goes smoothly.
myVETgroup is an expert in veterinary practice transitions. As former clinic owners and buyers with more than 56 years of combined veterinary business experience, we add value and share success with our clients, team, partners, and communities. Speak with veterinary business advisors today!
