Published on: May 16, 2024 by Nathan Dreikosen, CPA
Updated on: May 16, 2024
Over the past decade, more independent veterinarians have been selling their veterinary practices to large corporations, a trend driven by several factors, including elevated valuations for veterinary clinics.
In addition to an attractive payday, veterinary practice owners who sell their businesses often look for exit strategies and operational support. This article explores the several pros and cons of selling a veterinary practice to a large corporation, discussing the benefits, hurdles, financial implications, regulations, and alternatives to selling.
Despite a slowdown in veterinary mergers and acquisitions in 2022 following a record-breaking number of deals in 2021, selling a veterinary practice to a larger corporation remains attractive for smaller, independent clinics. Corporations often have the capital and resources to invest in cutting-edge technology, staff training, and promotional strategies that can drive revenue and improve patient care.
Let's dig into a few more of the benefits of selling a veterinary clinic to a larger corporation.
Veterinary corporations often have the financial capabilities to upgrade the clinic’s technology, facilities, and services. And, not to be overlooked if the economy takes a downturn, being part of a larger corporation often provides more stability for the practice and its employees.
In addition to more funds, corporations have existing human resources, retirement plans, and other benefits that your employees could access. Typically, large corporations have more negotiating power than small veterinary clinics when it comes to health insurance premiums and other employee benefits.
Is your practice drowning in paperwork? Large corporations typically have dedicated human resources, marketing, bookkeeping, and compliance teams, allowing veterinary staff more time to focus on clinical work.
Recruiting, hiring, and onboarding new employees also takes a lot of time and resources. The average employee turnover rate in veterinary practices is around 23%, according to the American Animal Hospital Association (AAHA). Within a corporate veterinary entity, those functions are centralized, freeing more time and improving job satisfaction.
Whether or not you’re nearing retirement, selling a veterinary practice to a corporation can provide practice owners with a lucrative and straightforward exit strategy. For veterinarians nearing retirement, selling to a corporation can help them plan for retirement with a lump sum payment or a structured payout over time.
When veterinarian-owned clinics lack a formal succession plan, it can cause chaos when owners retire or want to leave. Selling your practice to a corporation provides a secure and lucrative exit strategy. Unlike complex buy-in agreements or mergers, corporations offer an easy way to access the full value of your practice. Selling can result in a payout multiple times your annual earnings, allowing you to plan for retirement with peace of mind.
On the downside, selling a veterinary practice to a larger corporation can involve some adjustments, often within operations and practice culture.
When owners continue working for the large corporation, they might find it difficult to adapt to corporate structures and procedures, and veterinary practice’s culture often changes as it becomes part of a large corporation, which can affect client relationships.
A major drawback of selling a veterinary practice to a corporation is the potential loss of autonomy in decision-making. Independent veterinary practice owners who are used to making decisions might struggle with the management style of the corporation.
Corporations often have standard protocols, policies, and procedures that may not align with the practice's established methods. This can lead to a loss of flexibility in managing day-to-day operations. Corporations often involve many layers of management, leading to slower changes or improvements, which can frustrate employees who are used to quick decisions made locally.
You also might find that a large corporation prioritizes financial performance and efficiency. Pressure to meet revenue, adhere to a budget, and track time spent with each patient can affect the quality of care.
Selling to a corporation often changes the culture of your formerly independent practice, which can affect team dynamics and morale. You might be dealing with a new management style, different communication channels, and revenue expectations.
Corporate ownership may place a greater emphasis on productivity, standardization, and compliance with company-wide policies. This shift in focus can sometimes lead to a more competitive or stressful work environment, particularly if staff members must meet new performance metrics or adapt to new systems and processes.
When selling a veterinary practice, the transition to corporate ownership might affect how your clients feel about your clinic. Management changes, staff procedures, and potential pricing shifts can lead to client dissatisfaction.
Understanding the financial implications of selling a veterinary practice is crucial. This section outlines key financial aspects to consider, from accurate practice valuation to sophisticated negotiation strategies and potential earn-out arrangements, ensuring owners are well-prepared to make informed decisions throughout the sale process.
When valuing veterinary practices, corporations have their own proprietary valuation process, which can be complex and vary from other industries. Factors in the price might include location, reputation, revenue streams, and growth potential. They also might consider profitability, client base, facilities, equipment, staff expertise, and local market trends.
Corporations will closely examine a practice's financial performance, including its EBITDA (earnings before interest, taxes, depreciation, and amortization), to determine its profitability and potential for future growth. They also might examine the size, loyalty, and demographics of the practice's client base.
Careful strategic planning is important when negotiating the sale of a veterinary practice to a corporation. During this complex process, many veterinary clinic owners find that financial advisors and legal experts, who are used to complex negotiation processes, help them get better terms and higher valuations.
One effective negotiation strategy is to get multiple offers from corporations so you can use them as leverage while you compare the terms and potentially play them against each other to secure the most favorable deal.
During the negotiation process, you’ll want to address terms of employment for the practice owners and staff, the level of operational control retained by the practice owner, and the financial arrangements. The length of the employment agreement is often a major negotiating point, with three to five years being common in corporate acquisitions.
Once formal negotiations begin with a specific corporation, the ability to negotiate may be more limited compared to selling to an individual buyer, such as an associate.
Earn-out arrangements are common in veterinary practice sales, tying part of the purchase price to the practice's future performance. While this can increase the total sale price, it also introduces uncertainty and risk for the seller. Earn-outs can be complicated and may not amount to anything substantial, as they are often based on achieving specific performance targets that may be difficult to reach.
Earn-outs might include performance metrics, a specified time frame, payment structure, and control and decision-making authority during the earn-out period. Legal experts can help navigate the negotiation process, evaluate the terms of the earn-out arrangement, and protect your interests.
Don’t overlook the tax aspect when structuring the sale of your veterinary practice.
Most practice transitions fall under two main categories: asset acquisition and equity (stock) acquisition. Asset acquisitions reflect a specific valuation of what your practice assets are worth. This includes accounts receivable, inventory, and equipment. Equity sales involve inheriting the practice’s liabilities, which typically isn't desirable for buyers.
No matter what the final terms and conditions are, it’s important to structure the deal in a way that nets the most favorable tax treatment. Structuring the deal with an eye on tax implications allows you to strategize the most tax-efficient path so that more sales proceeds are subject to reduced capital gains tax.
In an asset sale, how the purchase price is allocated among the assets can affect taxes. Goodwill and other intangibles are typically subject to capital gains tax. Other assets like equipment and inventory may be taxed as ordinary income.
Using an installment sale method allows the seller to spread income over several years, potentially reducing the total tax burden by avoiding a large lump-sum addition to income that could push the seller into a higher tax bracket in the year of sale.
If the practice’s success can be attributed to personal relationships maintained by the veterinarian, structuring part of the sale as "personal goodwill" can be beneficial. This portion of the sale is taxed at capital gains rates rather than ordinary income rates.
Incorporating retirement planning as part of the sale process is another way to maximize tax benefits. Qualified retirement contributions can reduce taxable income and defer taxes until retirement when the individual may be in a lower tax bracket.
Selling a veterinary practice to a corporation involves navigating various regulatory and legal hurdles, including transferring licenses, following employment laws, and meeting corporate governance standards.
Practice owners must ensure that all necessary licenses are properly transferred or obtained by the new corporate owner to maintain compliance with state and local regulations. They must also work closely with legal experts to ensure that the transition follows all applicable state and federal employment laws, such as those related to wages, hours, discrimination, and employee benefits.
You'll also want to work closely with legal experts to make sure the transition follows all state and federal employment laws involving wages, hours, discrimination, and employee benefits. Make sure everything is clear in the contracts. This might mean updating employee handbooks, contracts, and other legal documents to reflect the new corporate ownership structure and policies.
There are other options to consider, such as selling to an associate or partner, merging with another practice, or selling to a smaller, local group.
In a difficult hiring climate, selling to an associate or a group of associates can be a great way to attract younger veterinarians into the practice. However, associates might not have access to the same resources that large corporations bring to the table, which can affect the sale price and terms. As a result, you might have to get creative, such as with a gradual buy-in or earn-out arrangement, so associates can afford it.
Selling a veterinary practice to associates might not relieve you of management responsibilities immediately, unlike selling to a large corporation, but it offers other benefits. Selling your practice to someone you know and trust provides a sense of continuity and stability and it can be rewarding to leave a legacy of mentoring and empowering other veterinarians.
Merging with other independent practices can preserve more operational autonomy while tapping into the benefits and efficiency of shared resources and expanded services.
Merging with other practices allows each clinic access to a larger client base and promotes the sharing of best practices among veterinarians, which can improve service quality and operational efficiency.
Selling to smaller, locally owned groups or individual veterinarians can provide a middle ground, maintaining the practice’s legacy and community ties. These transactions often allow for more personalized agreements, potentially leading to better alignment with the seller’s values and goals for the practice’s future.
Selling a veterinary practice to a large corporation involves a variety of considerations, including financial, operational, cultural, and emotional factors.
There are potential benefits, such as a straightforward exit and significant payout. However, it is important to also consider the challenges that may arise from such a decision.
Thorough research and strategic planning, along with professional advice, will help you navigate this complex process and achieve an outcome that aligns with the owner’s objectives and the practice’s legacy, providing a sense of security and confidence in the decision-making process.
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Nate is a Senior Manager at SVA Certified Public Accountants focusing on the healthcare, dental, and veterinary industries. He works with practices in the southern Wisconsin and Fox Valley areas to manage cash flow, assess financial performance and growth, and evaluate expenditures. He also has experience in designing compensation models, tax planning, and providing guidance on tax implications for clients. He works with corporations, partnerships, and individuals of all sizes and ownership structures.
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