Leading a veterinary hospital is a lot of work when you’re balancing patient care, management challenges, and building a successful culture, all while ensuring you have enough time for family and friends. One often-overlooked, yet major piece of running a practice includes having a strong team of advisors in your corner who will adequately prepare you for the eventual exit. The most important qualities these advisors should contain are 1) strong bookkeeping and accounting skills, and 2) expert legal advice. In this article, we’ll explain the potential challenges that could arise in these two areas and why it’s so important to have an experienced advisor to help resolve them.
Unfortunately, our team frequently sees practices that are unprepared for a potential sale because their accounting records are not detailed or clear. There are a few specifics that every practice should require of their accounting advisor/support, including:
- Corporate Structure: Some practices that were established pre-1990 are still C-Corporations, which makes a sale process much more complicated than other corporate structures. If you are set-up as a C-Corp, you need to ask your advisor how they will structure a sale to prevent “double taxation” that typically results from a C-Corp.
- Detailed Financial Records: Each expense item must be accounted for in your financial system (Quickbooks or other software). Sometimes practices enter a monthly lump sum for their credit cards instead of itemizing each line item to the appropriate vendor and expense account. This is not best practice. You should want to know the details in order to manage the business, and any buyer will insist on it (or offer you a discount, because they will make conservative assumptions about expenses that aren’t detailed). P.S. If your financials are entered quarterly or annually, please start having it done monthly!
- Personal Expenses: Many practice owners have some tangentially related expenses running through the business that would go away upon sale. Saving the receipts and having the details around these expenses is key to getting “credit” for them from a potential buyer.
These are just three of the most common challenges that should be solved by a good accountant and record keeping. If you’re unsure if your accountant is helping with these items, they are not doing enough! An accountant who has many veterinary practice clients is a positive sign – they can help you benchmark your performance and provide industry specific advice.
Having a capable veterinary industry-experienced attorney can guide you through the challenges of running a hospital for many years and prepare you for a sale process. In terms of the day-to-day running of your practice, your attorney should help you with:
- Associate Veterinarian Contracts: Binding contracts with non-competition provisions (in states where it’s allowed) are necessary to protect the business and also furthers its sellability. A veterinary-specific attorney can help you understand ‘market’ terms for your hired DVMs.
- Human Resources: As your hospital grows, you’ll need more staff to service your expanding client base. More staff means the inevitability of having to hire, fire, and resolve any issues that arise among your team. Having a human resources attorney that can assist in navigating these challenges not only provides peace of mind but also leads to a better workplace for all.
When you’re ready to sell (or partner with a veterinary corporation or another veterinarian), it’s essential to pick an experienced industry lawyer. In approximately 80 percent of Ackerman Group’s transactions, a practice owner uses an industry experienced lawyer that we have worked with and recommend, and sees a smooth transaction with positive outcomes. In about 15-20 percent of our transactions, a seller will insist on using their ‘local’ attorney with limited experience in our industry.
Historically, unspecialized, local attorneys create more stress and sometimes lead to deal delays or transactions failing to close. The common challenges that come along with local attorneys may include:
- Over-complication of LOIs and Deal Documents: Local attorneys may overcomplicate the documents involved in an effort to “show they know what they are doing”. This often looks like negotiating unimportant terms that waste time and energy. Many times local attorneys will have human healthcare experience; this may seem in line with veterinary in some respects, but overall it creates an inappropriate backdrop for the less-regulated veterinary industry that has no government (Medicare / Medicaid) reimbursement.
- Undernegotiation: On the flip-side, some local attorneys don’t understand deals and thus under-negotiate the documents. We’ve seen local attorneys barely mark-up the original versions of legal documents leading sellers like you to receive unfavorable terms. Local attorneys do not have the experience to understand industry standard terms for this type of transaction, so it presents an opportunity for the buyer group to take advantage.
- Delays & Failure to Close: Often, local attorneys are very small firms with one to three lawyers. If the firm gets busy, deals become at risk for delays or even failure to close because the attorney is not dedicating adequate time to the transaction. It’s important to remember that local attorneys dedicate the most of their resources to larger, recurring revenue clients. A one-time transaction that is likely the end their relationship for future services may become less of a priority in their view. The veterinary law firms we use and recommend prioritize our clients given the volume of business the Ackerman Group refers.
Veterinary-specific attorneys, on the other hand, have familiarity with the key issues and common deal terms found in these transactions. They can resolve them quickly, efficiently, and in a way that leads to a reasonable resolution of the deal terms.
One more note: most of the key financial and business terms in a practice sale are negotiated by Ackerman Group and yourself. However, the legal issues are important to enlist an attorney for, including details of the non-compete, indemnification provisions, impact of voluntary and involuntary termination of your employment agreement, representations and warranties, and more. These items can have an impact, especially if the go-forward relationship with the buyer does not work out as planned.
Selecting the right team of advisors is crucial to a successful transaction, and having the “right” accountant and lawyer is a key part of your support team. Ackerman Group is happy to provide recommendations, and we suggest you have your team in place long before you are ready to exit so that you can build trust with the advisors, and they in turn can help protect and grow your business.