The sale or purchase of a veterinary practice is likely to be one of the largest financial transactions that a vet will enter into. Whether selling or buying, it is important for vets to understand the process involved.
Is your practice ready to sell?
Prospective buyers will expect to see information regarding the practice such as existing contracts, maintenance records and property used and/or owned by the business. A buyer will want to learn about all ongoing liabilities it is likely to take over. It is important therefore that, prior to marketing the practice, the seller ensures that the practice information and records are in good order.
Marketing the practice
Many sellers will use a specialist agent to market their veterinary practice. It makes sense to use an agent who is experienced in marketing veterinary practices. Such agents act as intermediaries assisting to conduct initial negotiations, to hopefully obtain the best price for the practice, but also to help the buyer assess the target business. The agent will usually then prepare a memorandum of sale setting out the key terms of the deal such as the price agreed, what is included, and whether a deposit is payable. This is not necessarily a legally binding document, but it helps keep everyone on track.
If buying, it is worth making your offer on the basis that the seller ceases marketing the practice – at least for a period of time to give the parties time to progress the legal work.
If you are selling the practice, it is normal to seek to offer such exclusivity period in return for a deposit from the buyer. If the buyer pulls out of the transaction without a fair cause, the seller could keep the deposit as compensation. However, if the buyer were to pull out because of a change in the deal e.g. something unexpected is uncovered during the due diligence investigation, or the seller seeks to increase the price, then the deposit should be returned.
Financing the purchase
Often a purchase will be a mix of the buyer’s own funds, and some third-party finance from a bank or alternative lender. As with the agents, it makes sense to use a bank with experience of lending to the specialist sector. It is always best to seek independent financial advice when looking to secure finance for such a transaction.
In return for providing finance, the lender will usually expect some security such as charges over property and personal guarantees. Such security will depend on the level of finance being provided, whether the buyer is a limited company or individual, and the means of the buyer.
Structuring the deal
If trading as a sole practitioner or in a partnership, the practice would be sold by way of an asset transfer. However, if the business and assets are owned by a limited company, there is the added option of selling by way of a share sale instead. It is vital for both the buyer and seller to take tax advice to help decide which route is best. Whilst tax is not the only reason for a particular structure, it can be very costly to a party if the wrong decision is made!
As well as tax, there are other important differences in the two structures.
In a share sale, the buyer takes the company “warts and all” and assumes all historical and future liabilities of the entity. All assets owned by the company (including employees) will remain with the company, but ownership of the company will switch to the buyer. The company continues to be the contracting party in the commercial contracts of the veterinary practice, including contracts of employment. If a client or supplier has a claim against the practice, it would be against the company.
An asset sale involves the buyer “cherry picking” the key assets that comprise the practice business, including the premises, goodwill, fixed assets, equipment, IT systems and records, staff and client database, key trading contracts, and stock in trade. Usually on an asset sale the buyer will not take legal responsibility for the operation of the practice before completion of the sale. Such risk remains with the seller of the practice.
The employees will transfer to the employment of the buyer, their new employer, unless they opt-out. During an asset sale, the employees will need to go through a notification and consultation process regarding the change of employer and a timetable will need to be agreed with the buyer to schedule this within the process. The TUPE regulations protect employees in such situations, and good advice is important to protect the practice principals being caught in breach.
Another key structure question to consider is how the seller will be paid. Will it be payment in full at completion? Will there be any deferred payments i.e. stage payments? Will the seller be required to work in the practice for a period of time post sale? If it is a share sale, will completion accounts be required? Experienced solicitors and accountants should be able to guide the parties through these questions and hopefully secure a deal that works for everyone.
As with a residential property, veterinary practices can hold premises in one of two ways: freehold or leasehold. Owning the freehold of premises provides more freedom to dispose of a property, whereas owning the leasehold of premises means being governed by the terms of the lease.
Ideally as part of the heads of sale, or memorandum of sale, the parties will have agreed how the property will be dealt with during the transaction.
A lease will require a landlord’s consent to assign an existing lease, or it might be that the lease is surrendered with the grant of a new lease between the landlord and buyer. Landlord’s fees will likely need to be covered. Dealing with landlords can add to the transaction timeframe. If there is a corporate buyer, the landlord may require a guarantee in respect of the rent.
If a seller owns freehold premises, they can choose to sell the freehold along with the practice or, they could retain the freehold as an investment and grant a lease of the premises to a buyer. Financial and tax planning advice should be sought by a seller to establish which method is most appropriate.
Depending on the age of the premises and the extent of any lease repair obligation, as well as carrying out property searches, undertaking a structural survey is recommended. If premises are in disrepair, an adjustment to the purchase price might be needed to reflect the future costs to the buyer. Aside from good practice, if the buyer is using third party funding to finance the purchase, it may be that the lender expects property searches and / or a survey (similar to when buying a house).
Aside from the property, the majority of the value paid for a veterinary practice will be in relation to its ‘goodwill’. Goodwill is made up from a combination of the value of the practice’s reputation, its market share, and its profitability. Therefore, the trading name of the practice is often a key asset, which should be included in the sale.
Buyers should always consider including restrictive covenants in the contract such as a “non-compete clause”. This is a commitment from the seller not to have any interest or involvement in a competing practice for an agreed period and within an agreed radius of the target practice. Buyers may also want to restrict sellers from soliciting key staff or clients away from the practice for a period of time. It may be that the seller has no intention of trading as a vet again whether in the local area or otherwise, however you never know, and circumstances change! It would be awful to pay all of that money over and then have the seller start up a new practice 10 minutes down the road.
Before buying the veterinary practice, a buyer may wish to obtain detailed information regarding the operation of the practice, its financial performance, competition and the key assets of the business, as well as the extent of its liabilities.
Some of the key areas covered by the due diligence exercise may include: the structure of the business, compliance with Royal College of Veterinary Surgeons (RCVS) registration, supply agreements, collection of clinical waste, details of RPA inspections, out of hours agreements, locum contracts, HSE registration and consent, pet health plans, practice insurance, GDPR and data protection compliance, and website ownership.
As well as questions about the business, the buyer’s solicitors will also will raise Commercial Property Standard Enquiries, known as CPSEs, and further property enquiries regarding your ownership or occupation of the property used by the vet practice.
The buyer’s accountant will also have enquiries regarding accounts management, VAT, employee taxes, tax computations and the profit and loss of the business.
Much of the due diligence process is dealt with via solicitors and accountants. It pays for sellers to be organised and have the information ready to provide when asked. This part of the process can feel laborious, but if sellers provide full information quickly and clearly, they can help speed up this process. Making sure practice documentation is available can avoid stress and reduce delay.
Whilst the due diligence is ongoing, the sale agreement will be being prepared and negotiated between the solicitors. These may be referred to as SPA (share purchase or sale and purchase agreement) or ASA (asset sale agreement). These can be weighty documents of up to 80 pages for more complex practice deals, and should incorporate all of the terms agreed between the parties, and a considerable amount of clauses to protect the parties in respect of many legal issues they will not perhaps of considered.
It is normal practice for the buyer’s solicitor to prepare the first draft of the sale agreement and the seller and its solicitor will then go through and amend it as required having taken the client’s instructions. The agreement can travel back and forth depending on how reasonable the parties are being, and how commercially the teams are acting. Sometimes, despite all efforts, certain points can prove tricky to agree, but where there is will, there is usually a way, not least because everyone wants to do a deal and get it across the line.
As well as the sale agreement there will be a disclosure letter. This discloses any issues to the buyer which are intended to qualify the warranties (legal statements in the agreement regarding the practice). The letter is intended to limit the seller’s liability for claims from the buyer, as if the buyer knows about an issue prior to purchase, it would not be fair to sue the seller for it afterwards. This is why solid due diligence is so important for the buyer.
If the transaction is a sale of shares, then the agreement will also usually include a tax covenant from the seller. In such instances, your solicitor should want to discuss the terms with your accountant. Similarly, the sale agreement may include a completion accounts mechanism for agreeing the final price on a share purchase once working capital has been finalised. This will also require accountant input.
In addition to these documents, there will be various ancillary documents to tie everything together, ensure compliance, and enforceability.
Legal costs of buying or selling a veterinary practice
The old adage, how long is a piece of string, is not unreasonable to use when discussing legal costs. Costs depend on how big the practice is, how many sites it trades from, how the property is held, how many employees, whether there are any particular oddities to consider, how quickly the deal needs to complete, and so on. As such, costs typically range from £4,500 for a small sole practitioner with a simple property situation, to £15,000 for a larger practice or multi-site practice. It goes without saying that there are exceptions, such as particularly large corporates, or those practices with more than two properties, or particularly complicated property holdings, and so on.
However, following an initial consultation, an experienced business solicitor will be able to give a buyer, or seller, a fixed fee based on the level of work expected on a transactional matter. We would suggest always urge prospective clients to agree a fixed fee in respect of legal costs on the sale or purchase of a vet’s practice.
Once you have taken a deep breath, considered the above information, and you have decided you are ready to seek legal support on your transaction, then please contact Ben Ironmonger.
The corporate solicitors at Scott Bailey LLP in Lymington, Hampshire regularly act for clients across the country on sales and purchases of businesses like yours. If you would like more information about our legal services for healthcare businesses, including veterinary practices, please contact us.