BUYING AND SELLING A VETERINARY PRACTICE

Your Lawyer's Perspective...

The purpose of this article is not to teach you how to become a lawyer when buying and selling veterinary practices, but to give you some insight into the lawyer's perspective of the transaction, hopefully allowing you to be a better partner in this relationship. What follows is my approach to the transaction involved in the purchase and sale of a veterinary practice. This includes classifying the transaction, identifying the players, analyzing the issues, negotiating open terms, drafting the documents and consummating the transaction.

In this analysis I am assuming I have been brought in fairly early in the transaction. I will draft the documents and my involvement will be from beginning to end. However, this is not always the case. There are variations as to the level of my involvement depending on the situation, which I will address later on in this article.

Classifying the Transaction - My first step is to classify the transaction according to the following categories: Inside vs. Outside Sale; Financing (Seller vs. Lender); Stock Purchase vs. Asset Purchase; Total vs. Partial Sale; Real Estate (Lease vs. Purchase & type of financing).

Identifying the Players - My next step is to identify the players involved in the transaction. One of my main functions is to coordinate this transaction among the various players. I must anticipate their needs and requirements, and understand their goals, motivation and attitudes in order to close the transaction successfully. The players typically involved include:

Principals (Buyer and Seller) - Potential Issues include out of state entities, husband and wife issues, partnership issues, trust issues, and authority to enter the transaction. At this point I try to assess the level of sophistication of each principal, their motivation, attitude, values, and the dynamics involved.

Broker(s) - If one of more brokers are involved, I know they probably have had considerable influence over the terms reached, including the price. I know that the broker has a fairly strong incentive to close the deal. The broker may have preconceptions about lawyers. We need to determine, up front, what role the Broker is going to play in any further negotiations and or in the due diligence phase.

CPA's - Many transactions today are initially negotiated through a CPA or similar Practice Consultant. I need to know what experience this particular CPA has. How much can I rely on his or her analysis? (e.g., allocation of sales price, sales tax issues, audits during the due diligence phase). What role will the CPA continue to play in negotiations, due diligence, and the closing phase? (e.g., final inventory, pro rations, transferring accounts, etc.)

Lawyers - Is the other principal represented by a lawyer? Does my client have a personal lawyer who wants to be involved? What are the divisions of labor and responsibilities between us? Is the lawyer on the other side experienced in these transactions? Do I have to reinvent the wheel?

Institutional Lenders - If an outside lender is involved, is it a typical veterinary industry lender, Matsco/Pacific Merchantile, etc.? If so, we can anticipate what they will require. If not, we are sure to get some surprises, generally in the 11th hour.

Title Company - Their needs have to be anticipated and met in order to close this deal on time.

Escrow - Escrow serves three basic functions. First, it is the neutral stakes holder who holds the money and the deeds until everything is ready to close. Second, it acts as a clearing house. Third, Escrow can, if requested, do title searches for the sale of the practice including UCC lien searches, IRS lien searches, County Property Tax lien searches and the like.

Landlord - If the real estate is leased, the lease has to be assigned and/ or renegotiated. What is the landlord like, what's his/her motivation, and have there been any problems in the past?

Other Players - There can be a variety of other players including parents, friends, spouses, other veterinarians acting as advisors, building inspectors, termite inspectors, environmental inspectors, or land use lobbyists. In general, I want to find out who is influencing the transaction and how they might help or hinder the closing of the transaction.

Identifying and Analyzing the Issues - This is probably where my experience pays off the most. Every transaction has its quirks. I can't explain why, but I know from my 25 years of experience that it's true. I start with the essential elements of a contract and go from there.

Parties - I already outlined above some of the issues that can come up here. Generally, I need to identify who is the seller and who is the buyer, and if there are any issues of standing and/or authority to enter into this transaction.

Other issues include multiple buyers, do we need a partnership agreement, form a corporation, buy/sell provisions, key woman/man life insurance?

Subject Matter: what exactly is being sold? - Here I'll analyze the Stock sale vs. the Asset Sale. Are there any issues with respect to what's being sold? If it is a corporation, what do we do about the loans, if any, between the shareholder and the corporation? What about the automobile in the name of the Corporation? Boat-Airplane?

If it is an asset sale, what about any excluded items such as cash on hand, accounts receivables, personal medical books, computer programs, artwork, etc.? Accounts Receivables - if they are not going with the sale, how do we handle them? Does the buyer collect them for a certain period of time for a fee? Debts to be assumed - equipment leases assumed, Maintenance contracts - yellow pages? Prepaid Expenses - yellow pages, utility deposits, rent deposits. How do we handle them? Price and Terms of Payment - has the price been fixed? Is it subject to any contingencies? Terms of payment - is the Seller carrying back paper/outside financing? How much down? Is it a good faith deposit? Seller financing - what terms - interest rate-length of loan-assumable-prepayment penalty-cross collateralized building and practice and assignment of lease.

These are big issues for both Seller and Buyer. The Buyer wants to build in his exit strategy going into the deal. The Seller wants control over his loan in the future and wants to tie the Buyer up as tight as possible. If the Seller has to take over the practice, he/she wants to be able to acquire the real estate (foreclosure) or regain the lease along with the practice. Allocation of Purchase Price is most important to Seller. Covenant not to Compete is subject to Capital Gains instead of Ordinary Income treatment.

Sharpening the pencil here.

Time for Performance - When is all of this going to happen? What is the time table for signing the contract, opening escrow, concluding the due diligence and closing the deal? Mechanics of the Transaction - in setting the timetable we also have to figure out the mechanics of the transaction. Who is going to do what and when in order to close the transaction?

Real Estate Selling Real Estate vs. Lease; Options to Buy Real Estate; Put/Option to Sell.

Miscellaneous Items - Covenant Not to Compete, Employee Issues, Employment Agreements for new owners, Employment of Seller if he or she is staying on, Warranties and Representations, Arbitration Provisions, and Applicable Law and Jurisdiction.

You cannot always satisfy everybody's concerns and goals. Sometimes it is a matter of compromise to give everybody as much of what they need as possible. In the words of Mick Jagger, "You can't always get what you want, but if you try sometime you just might get what you need." I think that is good advice in some of these transactions.

Negotiating Open Issues - This is probably the most difficult and for me the most rewarding part of the transaction. It allows me to pull together all of my knowledge and experience in putting these deals together and calls upon my people skills to get it done. This is where the values in my mission statement really come into play.

Remember, I am not in this deal unless my client shares my values. So I already know, at least from our side of the deal, that we are doing the right thing and what we are asking for is fair and reasonable.

That's half the battle in negotiating. Now, that does not mean that the other side has the same values. But if they don't, my client and I will have already had that conversation and I will have already asked, "Is this the practice you really want?" or "Is this the person you really want to take over your practice?"

So let's assume that the parties are both fair and reasonable. Now, our analysis under "Identifying the Players" is crucial because during that phase of the analysis, I have already assessed my client's motivation, the other side's motivation, and the requirements of the other players, lenders, and title companies, etc.

If my client is burned out and in his or her mind has already sold this practice, then my negotiations are going to be more difficult.

Likewise, if I have an associate who is used to being brow beaten by the Seller, I am going to have a more difficult time in negotiating. So not only do I need to gain the confidence of the Broker, the Seller's spouse, and whoever else may be influencing the transaction, but I also have to gain the confidence of my client.

Approaches vary with the individuals involved. Sometimes it's better to start with the deal breakers. Sometimes it's better to leave them until last. Other times it's better to put your best deal on the table and stick with it. Sometimes it's better to start high or low and negotiate from there. It's often helpful to use my client to sell a concept directly with the other side. Sometimes, as with some inside deals, the parties don't want to negotiate directly with each other for fear it will interfere with their working relationship.

It's better in those instances to make the attorney the bad guy or gal. But, it has been my experience that once we are at this stage, we don't lose the deal. With a little compromise on both sides and with a little advice from Mick Jagger, we get the deal done.

Once the terms have been agreed upon, the next step is to draft the documents. The following are the basic documents depending on the classification of the transaction: Asset Purchase Agreement, Exhibits - including Separate Covenant Not to Compete, Bill of Sale, Amortization Schedule of Payments and the like. Schedules including "List of Assets Sold," "List of Liabilities Assumed," List of Prepaid Reimbursements," and "List of Excluded Items." If it is a partial sale to an associate then in addition to the above there may be a Partnership Agreement, Employment Agreements for both parties, and (and/or?) the various security instruments to secure payment of the purchase price.

Consummation of the Transaction - This phase involves overseeing the closing of the transaction; assisting in satisfying Lender's requirements and/or Title Company's requirements; issues, which may arise during the final inventory count, what we call the "72 Hour Walk Through;" issues that arise during the "Due Diligence" phase; reviewing documents that have come up in the title search; preparing waivers, releases, acknowledgements and the like; employment agreements for the employees and other human resources issues; and last minute issues with the landlord.

Closing Day - Escrow Records, the relevant documents, Deeds, Trust Deeds, and UCC-1 Financing Statement. Escrow calculates the prorations, property taxes, insurance, and the like. Escrow deducts its fees from the deposits on hand and remits the proceeds to the Seller and refunds any excess to the Buyer. The Buyer is generally already spending much of his or her time in the practice talking with the employees and observing. The Seller hands keys to the Buyer and shows him or her how to work the alarm system an possession is transferred????? Attorney sends a bottle of expensive Champaign. CELEBRATION BEGINS! (Hopefully, I'm invited.)

When Should You Involve an Attorney?

Obviously, from my point of view, the answer is, "At the earliest possible time." Even if it is to make an introductory call and establish the relationship. "Hi, I'm Dr. Smith. My friend Dr. Jones referred me to you. I'm thinking of selling my practice and wanted to discuss you possibly representing me, when I have a buyer."

During this discussion I would ask you some basic questions about your practice, your motivation and your goals, and probably give you some thoughts about what type of structure you might consider and some things to watch out for. This is a 20 minute phone call that could prove to be very valuable to you. We can also discuss what my role would be. That is, if you are going to do the negotiations and you want me to advise you and draft documents. Or do you want me to participate in negotiating? Do you need my help in formulating a structure for the sale and or a negotiating strategy? Do you want me to merely review documents another lawyer has drafted? All of these are potential scenarios for my involvement. We would also discuss cost and time tables.

The important thing is that you and your attorney have a clear understanding as to exactly what the attorney is and is not going to do in the transaction. This is important because if there is something that needs to be done and the attorney is not going to do it, who is? For instance, you have a broker who is handling all of the negotiations. My question for you will be: who is going to advise you with respect to the "Due Diligence" you need to perform, me or the broker?

I hope this has given you some insight as to how your lawyer approaches his or her assignment in assisting you with the sale or purchase of a veterinary practice. As we have seen, the lawyer's role can be varied and he or she can serve a number of different functions and offer an array of services. There is also a wide variety of types of transaction as well as a collection of persons, professionals and institutions who may be involved in any given transaction. I hope you will come to see and appreciate the valuable role your lawyer can play in your transaction and that this Article will help you better utilize your lawyer as a resource.