To secure the best price from a veterinary consolidator, sellers need to hire associates wholl stay on after the transition.
Corporate veterinary hospital consolidators know that job one in any practice sale is to lock down commitments from the practice doctors. The veterinarians are the revenue-generating power plants of target clinic acquisitions, and, as such, their future employment status must quickly be ascertained and, if possible, controlled. If a corporate buyer can’t get sufficiently stout commitments from existing associates, it likely will steer away from the acquisition entirely. Here’s what a consolidator does to manage this at various stages of a practice sale:
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Tactic No. 1: Motivate the seller to add more associates
It’s widely recognized that most corporate buyers are looking for hospitals with top-line revenue at or above seven figures-the higher, the better. But they’re not just avoiding smaller clinics. There’s a second, less obvious reason consolidators prefer larger hospitals.
They know that if a hospital is earning $1 million because the DVM who owns it is an efficient and high-producing one-man show, that efficiency isn’t going to be much help when the owner leaves after the mandatory two-to-four-year “golden handcuffs” transition phase. Without another doctor in the mix, there will be no face recognition by clients when the seller finally leaves and someone new takes over. Knowing that, a typical consolidator will require that a selling owner hire a second DVM, even if that step causes bottom-line profit to drop.
Additionally, corporate buyers will require that the existing practice owner negotiate a robust noncompete commitment to be included in that second DVM’s contract. The practice owner’s juicy buyout offer will be contingent on (1) lining up a second doctor and (2) getting that doctor to sign an assignable (transferrable-to-the-corporation) noncompete.
Tactic No. 2: Get the seller to ‘buy’ associates’ continued employment
As I mentioned, corporate “roll-ups” (Wall Street’s term for consolidators like this) frequently dangle before sellers an excellent purchase price for their hospitals, but only after they get X number of associates to enter into employment contracts with the new owner/consolidator with bulletproof noncompete terms.
I’ve seen many associate DVMs involved in a corporate transition agree to stay on with the new owner simply because it’s easier not to change jobs. Others remain because they’re already subject to transferrable noncompete agreements they don’t want to challenge. Others agree to work for the new corporate owner because they know other doctors who’ve worked for the same consolidator and had acceptable, or even excellent, experiences doing so.
A significant number of associates have successfully parlayed their skills and experience into cash rewards in exchange for their commitment to continue working for the new owner.
However, a significant number of associates have successfully parlayed their skills and experience into cash rewards in exchange for their commitment to continue working for the new owner looking to buy out their old boss. This arrangement can work a couple different ways:
Scenario 1: Retention bonus. The old owner tells one or more of the top-producing doctors they can get a retention bonus if they sign up to work for the new corporate owner for one, two or three years after the practice sale closes. I’ve seen general practitioners offered more than a year’s salary to stay on. It depends on how badly the seller wants the deal and how much of the sale price he or she will fork over, in the form of bonuses, to associates to make that happen.
Obviously, the seller can’t handcuff the associate who receives such a windfall to the operating table or exam room door handle. Instead, the seller offers a cash down payment (maybe a third of the total money) plus a written contract stating that the associate will receive the balance at the end of the promised employment term. Frequently, the seller’s attorney will hold the balance of the funds in an escrow account for release at the end of the employment commitment.
Scenario 2: Associate buy-in. A veterinary consolidator can also engender loyalty by offering an associate partial ownership in the clinic about to be purchased. The ownership offer is almost always a minority position, and it invariably comes with a number of caveats and contingencies that need to be considered carefully (preferably with professional legal and accounting guidance) before being accepted. The strings attached to these associate ownership agreements can include:
- An offer to become a “junior partner” that involves an up-front cash commitment by the associate.
- A consolidator retaining all voting rights in perpetuity, making any partnership strictly a financial one, with the associate having no say over operations.
- A price for shares or equity in the clinic that’s unjustifiably expensive, particularly if cash or salary reduction is required to participate.
- A “mandatory sell-back” provision that requires the associate to sell back his or her equity upon leaving the clinic-often at an unjustifiably low price.
- A stipulation that the corporate buyer may end up selling out to another, larger roll-up. This might be profitable to the associate holding equity, but it might not. If Corporation No. 1 fails to operate the clinic efficiently, a stock-holding associate may get hammered should the selling price to Corporation No. 2 be substantially lower than what the associate anticipated-or what Corporation No. 1 guesstimated when it was selling the idea of participation to the associate in the first place.
Employee beware
In the final analysis, it’s always wise for veterinary associates to evaluate every aspect of the potential marketability of any clinic they work for, as well as the skills and experience they bring to the table, when accepting a position at an independently owned veterinary clinic that could eventually be sold. There may be nothing to prevent your employer from selling at a moment’s notice-it could be a phenomenal price, a health crisis or just a sudden decision to shift careers.
If associates keep these possibilities in mind, they can maximize their own potential career and financial benefits suddenly arising from such a sale. They’ll need to figure out the best way to handle the old boss as well as how to negotiate with the potential new one-especially when the sale is about to close and the whole deal balances on whether the buyer can keep the old DVM engines in place and running on all cylinders.
Dr. Christopher J. Allen is president of Associates in Veterinary Law PC, which provides legal and consulting services exclusively to veterinarians. He can be reached via email at [email protected].
