5 Proven Tax Deferral Methods for a Vet Practice Sale

Selling your veterinary practice could lead to a substantial tax bill if you receive the cash immediately at closing. There are ways to delay paying some of these taxes, through some complex deal structures, helping you keep more of your sales proceeds. Here are five proven tax deferral strategies to consider:

1. Treasury Funded Installment Sale
2. Collaterized or Monetized Installment Sale
3. Non-Qualified Structured Settlements
4. Deferred Sales Trust
5. Family Self-Directed Installment Sale

First: Who’s Who In The Veterinary Practice Transaction

To legitimately defer taxes on the sale of your veterinary practice, the process typically involves collaboration between you, an intermediate buyer, and the ultimate buyer. This involves a two-step transaction with the buyer, structured as follows:

• Seller: That’s you, the owner of the veterinary practice.
• Intermediate Buyer: This entity is a special-purpose vehicle (SPV) set up and owned by an investment firm, insurance company, or trust company. It ‘buys’ the practice from you in exchange for a promissory note, which is paid over time under negotiated, specific terms.
• Ultimate Buyer: The Intermediate Buyer then immediately sells the practice to the Ultimate Buyer, which is the consolidator you’ve chosen (e.g., SVP, NVA, VetCor). The Ultimate Buyer pays the purchase price in cash to the Intermediate Buyer, who then invests these proceeds based on agreements with you. The returns on these investments are used to make payments on the note between the Intermediate Buyer and yourself.

A Quick Background on Notes

When we mention “Notes,” we’re talking about a financial agreement or loan between you (the seller) and the Intermediate Buyer. It outlines the principal amount and interest you (as the lender) will receive over time. The repayment terms are flexible and can be spread out over several years or as a lump sum at the end of the term. By staggering payments over time, you can reduce the capital gains tax impact in any single year, potentially keeping you in a lower tax bracket and maximizing after-tax proceeds.

1. Treasury Funded Installment Sale

In this method:

1. The intermediate buyer (an SPV) purchases your practice using a promissory note.
2. They then sell the practice to the ‘Ultimate Buyer’ and use the proceeds to purchase Treasury notes.
3. The terms of these Treasury notes (including the duration and interest rates of them) match the promissory note issued to you, which ensures consistent payments.
4. You pay taxes on the interest received, while the principal is paid out over time, essentially deferring capital gains taxes.
5. The entity managing the transaction charges fees for their services and for structuring the transaction.

2. Collateralized or Monetized Installment Sale

This setup lets the seller get most of the sale proceeds upfront while putting off tax payments. Here’s how it works: 

1. The Intermediate Buyer sells your practice to the Ultimate Buyer and receives cash.
2. At the same time, you secure a line of credit from a third-party bank, using the Intermediate Buyer’s cash as collateral.
3. You end up with both cash in hand and a bank loan, typically an interest-only loan.
4. The Intermediate Buyer pays off the principal when the loan term ends.

When the Intermediate Buyer starts paying off the principal of the seller’s bank loan, that’s when taxes come into play. It’s smart to check with a savvy CPA about whether the interest on the loan can be deducted, to possibly have no taxable net income while the installment sale and note are ongoing. Keep in mind, this method does come with hefty fees, usually around 5-7 percent of the transaction value, but it offers cash at closing with the tax bills delayed.

3. Non-Qualified Structured Settlements

This strategy aims to earn more than what you’d typically get from Treasury Note Settlements by investing in more profitable options. Here’s what happens:

1. The Intermediate Buyer might put the money into an annuity with a fixed return from an insurance company, or it might go for a bigger risk by investing in a diverse pool of assets managed by an investment firm (and of course, tailored to your risk tolerance).
2. You won’t directly get the returns from these investments. Instead, you receive a higher fixed return from the promissory note given to you by the Intermediate Buyer.
3. The Intermediate Buyer makes money from the difference between the investment returns and what they pay you on the note.

In this type of settlement, you can also mix this with a partial Collateralized Installment Sale if you want some immediate cash.

4. Deferred Sales Trust

This approach is similar to Non-Qualified Structured Settlements but stands out in two key ways: 

1. Trust Structure: The intermediate buyer is set up as a trust, managed by an independent trustee (not a family member). This Trustee is responsible for making investment decisions and managing the associated risks.
2. Note Flexibility: The Note set up between the Trust (as the Intermediate Company) and the seller tends to offer more flexibility in terms and repayment schedules. The Trustee earns compensation through fees and by making additional returns above the principal and interest agreed upon in the Note, which benefits the Trustee.

5. Family Self-Directed Installment Sale

This approach is more complex. It operates as follows:

1. Your family owns a minority stake in the Intermediate Buyer, where your ownership and control gradually increase over time.
2. The Intermediate Buyer’s investments are specifically chosen to align with your family’s financial goals.
3. Any growth from these investments benefits you or your family directly. However, significant fees are paid to the firms setting up these arrangements.

When to Think About a Tax Deferral Strategy

Here are some scenarios where considering a tax deferral strategy might benefit you:

• Anticipated Lower Future Tax Rates: If you expect your personal tax rates to decrease over time due to lower income in retirement or changes in tax laws.
• Relocating to a Lower-Tax State: If you’re moving from a high-tax state to one with lower taxes, deferring the sale can lead to significant state tax savings.
• Willingness to Delay Access to Funds: If you don’t need immediate access to the full sale proceeds and prefer to benefit from deferred taxation.

Usually sellers opt for tax deferral strategies when they have specific reasons to delay tax payments OR they have enough financial assets to make this strategy viable. From a data standpoint, we see such strategies implemented in about 5% of our transactions.

Enlist Help from the Experts

These tax deferral strategies can seem complicated, but in the right situations, they can help minimize your taxes and provide decent returns. They’re not for everyone, though. If you’re thinking about whether these strategies might work for you, it’s a good idea to chat with your financial advisors or drop us a note. We’re happy to connect you with the right advisor who can figure out if these options fit your needs.

Disclaimer: This article is intended for informational purposes and should not be considered financial or legal advice. Please consult with professional advisors before making decisions.