Without the proper knowledge of deal structures and the strategies behind them, veterinarians may find themselves in uncharted territory. At Ackerman Group, educating you on the veterinary practice sales process is essential; that means helping you understand all the options available in transactions today. You may come across a lot of lingo and jargon, so we’ve created a quick breakdown of some of the key deal terms that you may see when engaging with corporate groups.
But first, some context. In today’s market, we’re continually observing four major deal structure approaches that buyers use to better align incentives between themselves and sellers. At a high level, buyers want to provide some incentive for the seller to continue working. That way, practice owners who continue to work will support both the individual hospital and the company that is purchasing the practice. Let’s review the basics of the four key deal structures.
TopCo or Private Equity (PE)
The most common deal feature today, buyers will offer you ownership in the parent company, rather than your individual hospital, on a tax deferred basis. They will typically offer 10 to 30 percent of the transaction value. For example, they’ll offer you $500,000 to $1 million of TopCo equity on a $5 million transaction value. With you owning part of the TopCo (Top Company or Parent Company), it achieves the following:
- Provides you incentive to support the larger organization as a reference and referral source for future practice acquisitions.
- Gives you the right to sell your TopCo shares to the new investor when the current investor does a “Recap” or sells the business. Pre-2022, valuations of consolidators have only moved up (so receiving TopCo shares has proven to be a worthwhile investment from 2016 to early 2022 for most sellers. Remember, past performance is not always a predictor of future performance!
- Allows the buyer to purchase your practice with less cash! 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.
The sellers that have taken TopCo equity in 2017 to 2020 have generated strong financial returns, with multiples and valuations for consolidators reaching all-time highs in 2021 and early 2022. The new risk we’re currently assessing is when practice owners take TopCo equity in a consolidator that recently underwent recapitalization at a high multiple. For buyers, a recapitalization event takes place every 3 to 6 years. Meaning, if you receive your ownership right after a new investor came in, you could be waiting 3 to 6 years before another opportunity to sell shares. Longer duration equals more risk. Will the market plateau or decline in 2024 to 2027? How will this impact the value of TopCo equity issued in 2021 and 2022 at peak valuations?
Earnouts
A feature we see in 10 to 30 percent of our transactions, earnouts focus on hospitals that (a) are driving well above market growth (12%+), (b) additional DVMs have been hired recently by the seller to drive more growth, or (c) a new location was opened and is not yet fully matured. In these situations, we want to help you capture value for the highly certain 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.
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. At Ackerman Group, our negotiations aim to ensure you understand how decision-making works and what rights you have on key decisions. With co-ownership, there are several items to consider:
- In what situations is it best to consider this structure?
- Is the buyer’s management fee appropriate and what is included?
- How and when can you (or your Associate) exit the co-ownership relationship?
- Will you have tag along rights and at what value?
Contingent Notes
Some buyers might offer you ‘Contingent Notes’ that defer the purchase price over 2 to 3 years. Contingent Notes are NOT guaranteed payments, and are paid assuming the owner is still working at the practice and performance hits modest revenue or EBITDA targets. These targets are usually designed to ensure there is no decline in revenues or profits.
We cannot emphasize this enough: Buyers position Contingent Notes as part of the offer price; however, they do have some risk and are not guaranteed.
In Summary
As a seller, you have the leverage to negotiate beneficial deal terms BEFORE you sign with a buyer. Once you sign a Letter of Engagement (LOI) with a buyer, that leverage to improve your terms is reduced. 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 decisive economic terms will maximize your upside and secure the future you envision for yourself and your practice.