The purchase and sale of a veterinary practice are two extremely significant events in a veterinarian’s career. Finding the perfect practice to purchase or the perfect buyer is very important. However, the failure to properly draft a purchase and sale agreement has detrimental consequences.
Letter of intent
In general, just about every practice transaction [with or without a broker] should start with a signed letter of intent. The letter of intent memorializes the agreement between the parties regarding the purchase price, date of the proposed sale of the practice, accounts receivables, as well as lease issues. The letter of intent should also be non-binding.
The seller and buyer of a veterinary practice should keep the letter of intent confidential, regardless of the outcome whether or not the sale of the practice takes place. The seller of a practice should also have a potential buyer sign a non-disclosure agreement, which will keep the seller’s financial and practice information confidential.
Allocation of purchase price
As a general rule, most practice transactions involve the sale of practice assets (equipment, supplies, etc.) It is extremely important that the seller and buyer establish a purchase price allocation for: (1) equipment that is being sold; (2) account receivables that are being purchased; (3) goodwill of the practice; and (4) non-compete stipulations. From a tax standpoint, expensing, depreciating, or amortizing the assets are important to the seller and buyer. Certain tax rules apply regarding what can and can not be depreciated over time.
For the protection of the seller and buyer, a contract for the purchase of a practice should have an outline of events that must occur before the sale takes place. For example, the buyer must agree to the terms of the seller’s lease agreement [which the buyer will probably be assuming], or the buyer’s accountant should approve the seller’s financial records, and the sale should be contingent of the buyer’s approval of the loan amount. The buyer should also make sure that any liens [i.e. UCC-1] that are attached to the seller’s assets will be paid at closing.
Just about every practice sale agreement should have a non-compete clause that applies to the seller. The non-compete clause restricts the seller from practicing for a reasonable period of time and within a reasonable geographic radius of the practice.
Careful consideration should be taken when including a non-compete clause. The non-compete clause should take in to account that the seller may become a part-time associate, partner, shareholder, director, officer, consultant, employee or independent contractor of another practice.
If the practice sale contemplates that the seller will work part time for the buyer, the buyer should require that the seller enter in to some type of Host-Provider Agreement [i.e. independent contractor agreement], which should become effective from the date the practice is sold.
The sale of a veterinary practice can be extremely rewarding for the seller and buyer. However, if the terms and conditions of the practice sale are not clearly outlined, then it can be a very frustrating transaction for all parties involved. Before entering in to a contract for the sale of a practice, the seller and buyer should seek the assistance of professionals who are experienced in the area of veterinary transactions.