The Four Potential Components to a Veterinary Practice Sale Transaction
When selling your veterinary practice, you’ll encounter various structures that buyers use to align incentives and reduce the cash required at closing. In today’s market, the four most common approaches are:
1. TopCo Equity
2. Earnouts
But transactions can get complicated, and chances are you’ll feel confused by all the financial terms, business jargon, and different sale options. It’s important to understand the basics of how veterinary practice sales work to get the best value and set yourself up for success. In this guide, we’ll explain these key potential components to a transaction in simple terms so you can feel confident when engaging with corporate groups.
It is important to explain some finance jargon clearly. When buyers talk about ‘structure’ they are referring to any component of a deal that is used instead of paying cash at closing. All four of these types of structure are meant to preserve cash for the buyer and align incentives post-closing.
1. TopCo or Private Equity (PE)
TopCo equity is when buyers offer you ownership in the parent company, rather than your individual hospital, on a tax deferred basis. In this structure, a buyer will typically offer 10 to 30 percent of the transaction value in TopCo equity. For example, they’ll offer you $500,000 to $1 million of TopCo equity on a $5 million transaction value.
This was the most common sale feature prior to 2024, but nowadays we are observing a bit of a decline in its use for a variety of reasons.
Benefits of TopCo Equity:
- Incentivizes Support: Provides you incentive to support the larger organization as a reference and referral source for future practice acquisitions.
- Potential for Future Gains: Grants you the right to sell your TopCo shares when the current investor does a “Recap” or sells the business. Pre-2022, valuations of consolidators had only moved up (so receiving TopCo shares proved to be a worthwhile investment from 2016 to early 2022 for most sellers. Remember, past performance is not always a predictor of future performance and the recapitalization market has been dormant for over 2.5 years (mid 2022 to late 2024)!
- Less Upfront Cash for Buyers: Allows buyers to purchase your practice with less cash by offering equity instead. When a buyer pays 12x your EBITDA and can only borrow from their lender ~6x, using 2-4x of TopCo equity means they can come up with less cash upfront.
Things to Consider:
- Market Timing: Receiving TopCo equity after a recapitalization at high valuations may mean waiting longer for a return, increasing risk. For buyers, we know a recapitalization event takes place every 3 to 6 years. So if you receive your ownership right after a new investor bought the business, you could be waiting 3 to 6 years before another opportunity to sell shares. Longer duration equals more risk.
- Market Fluctuations: Future market conditions (2025–2027) could affect the value of your TopCo equity. The sellers that took TopCo equity in 2017 to 2020 generated strong financial returns, but that was also when multiples and valuations for consolidators reached all-time highs in 2021 and 2022. Will the market plateau or decline in the next few years? How will this impact the value of TopCo equity issued in 2021 and 2022 at peak valuations? Only time will tell.
2. Earnouts
Earnouts are performance-based payments focusing on vet hospitals that:
- Are driving above-market growth (8%+)
- Have recently hired additional DVMs to drive more growth
- Have opened a new location that’s not yet fully matured.
- A select number of buyers use earnouts in most all their deals to incent growth
A feature we see in 20 to 40 percent of our transactions, earnouts focus on hospitals that show a lot of ‘highly certain growth’. In these situations, we want to help you capture value for that expected future growth through an earnout. Earnouts are typically based on EBITDA or revenue growth and try to capture as much of the upside for the seller as reasonable.
Earnouts take many forms and contain many nuances that need negotiating. When sellers attempt to negotiate earnouts without full knowledge of the market, they often leave a substantial amount of money on the table. Having an experienced advisor drive these discussions is critical for maximizing your value. Additionally, it’s imperative to monitor the financial performance of your hospital post-closing to ensure you understand the practice’s actual performance relative to the earnout goals. At Ackerman Group, we help you negotiate and navigate these opportunities to achieve favorable terms.
An earnout in practice deals means the seller gets some money upfront and more later if the hopsital hits certain goals, like making a certain amount of profit.
It’s a way for the buyer to make sure they’re not overpaying, while the seller has a chance to earn extra if the practice does well.
3. Co-Ownership or Joint Venture (JV)
An increasingly common approach, the seller and/or an Associate DVM co-owns the hospital with the corporate buyer. The buyer will always purchase a majority ownership position while local DVMs serve as minority owners. We have seen 40-45% of all our deals in 2022-2024 use a JV and the percentage of deals using this structure is rising in 2025.
At Ackerman Group, our negotiations aim to ensure you understand three overriding issues: how decision-making works, your ability to sell or exit your minority ownership, and the fees charged by the buyer.
Important Questions When Assessing a Joint Venture:
- Decision-Making Rights: What is the governance structure? What are your rights on key decisions within the practice?
- Management Fees: Is the buyer’s management fee appropriate and what is included?
- Exit Strategy: How and when can you (or your Associate) exit the co-ownership relationship?
- Tag-Along Rights: Will you have tag along rights and at what value?
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4. Contingent Notes
Some buyers might offer you ‘Contingent Notes’ that defer the purchase price over 3 to 5 years, contingent on you continuing to work at the practice and meeting certain basic performance targets.
Sticking Points:
- They’re Not Guaranteed: ‘Contingent’ is they key word here. Contingent Notes are paid assuming the owner is still working and practice performance hits modest revenue or EBITDA targets. These targets are usually designed to ensure no declines in profits.
- Risk Factors: We cannot emphasize this enough: Buyers position Contingent Notes as part of the offer price; however, they come with conditions and risks.
Case Study:
Dr. Joseph Kinnareny
- Employed TopCo equity & contingent notes
- Achieved “best case” scenarios for co-owners
- Gained work-life balance to focus on other interests
Sale Structure Matters in Your Veterinary Practice Sale, Especially Before the LOI!
Negotiating beneficial sale terms is most effective BEFORE signing a Letter of Intent (LOI) with a buyer. After signing, your leverage to improve terms diminishes significantly.
Because of this, we want to make sure we fully understand your goals and priorities in advance of receiving offers so that our team can negotiate the best price and best terms for you. Having an experienced advisor like Ackerman Group to effectively negotiate these terms will maximize your upside and secure the future you envision for yourself and your practice.
Not sure which sale structure is the most advantageous for you? Schedule a call with us.
Maximize your sale terms, schedule a call with Ackerman Group to find the best structure for your practice sale.