Selling your practice is a major life event and often the biggest deal you'll ever make. As Peter H. Tanella, Partner at Mandelbaum Barrett PC, told us, the key to a successful transition is preparation.

Watch our interview with Peter below:

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Here is a breakdown of the main legal and financial issues you should be prepared for when selling your practice:

The Importance of Preparation

The biggest challenge facing clients is not taking enough time to prepare. The market generally suggests you should prepare five to seven years in advance. This advanced preparation allows you to adjust financial, regulatory, and operational issues to maximize the value of your practice.

The advice is simple: "Prepare, prepare, prepare". Being prepared means your practice is ready to transition successfully. When you are ready to sell, you need to be ready to move on a buyer. This includes having your:

• Financials in good order.
• Associates under contract.
• Loan documents readily available if you have an outstanding loan.
• Legal house in order.
• Operational house in order.

You should operate your practice as if it is going to be sold in six months. Being prepared minimizes the opportunities for a buyer to renegotiate the purchase price.

Documents Involved in a Practice Sale

The transaction starts with a few critical documents:

• Non-Disclosure Agreement (NDA): This first document enables parties to discuss the transaction and share information.
• Letter of Intent (LOI): After information is shared, the buyer typically offers an LOI to the seller with the proposed terms. This document is non-binding, except for the crucial provision of exclusivity. A buyer requires exclusivity to ensure the seller is focusing only on them and not "shopping it around" while the buyer spends time and money looking at the practice. The LOI does not require the seller to sell or the buyer to buy; it simply lays out the terms.
• Asset Purchase Agreement (APA): Once the LOI is signed, attorneys use it to create the Asset Purchase Agreement. This is the typical document that enables the seller to sell and the buyer to buy the practice.
• Real Estate Documents: Depending on how the real estate is held, additional documents will be necessary:
  • If the seller is selling the real estate with the practice, there will be a contract for the sale of real estate.
  • If the seller is leasing and not selling the real estate, there will be either a new lease or a lease assignment between the landlord and the buyer as the tenant.
• Employment Agreement: A key document will be an employment agreement for the seller or their key associates who will stay on after the sale.

Understanding Asset Sales

Most sales are structured as asset sales. This is preferred because, in an asset sale, the buyer only assumes the liabilities that are specifically set forth in the agreement. A stock purchase or membership purchase is very rare in this industry.

A major component of the Asset Purchase Agreement is the allocation of the purchase price, which has significant tax implications. In an asset sale, 80-90% of the purchase price is typically allocated to goodwill.

• Goodwill is advantageous for the seller because it is taxed as a capital gain, at a lower rate (15% to 20%).
• The remaining purchase price is taxed as ordinary income and is typically allocated to furniture, fixtures, and equipment.

Key Provisions in the Purchase Agreement

Attorneys spend considerable time negotiating the key provisions of the purchase agreement:

• Representations and Warranties (Reps and Warranties): These are like "doors" that a buyer can use to go after the seller if the seller was not truthful or honest. Reps and Warranties include assurances about no litigation, clear title to assets, and paid taxes. These warranties typically "survive" for a period of one to two years after closing.
• Indemnification: This provision ensures that if the buyer is sued after the closing for something the seller did while they were the owner, the seller will "stand in front of that buyer" and take responsibility. Indemnification obligations are negotiable in terms of what items they cover and how long the seller is responsible, often one to two years.
• Restrictive Covenants: These include non-competition and non-solicitation clauses. Unlike in an employment situation, restrictive covenants in a business transaction are enforceable because the buyer is paying consideration to take the seller out of the market for a period of time.
  • Non-Compete Term: Typically three to five years post-closing.
  • Radius: The geographic radius depends on the practice location and the type of practice (e.g., blocks in New York City versus 25–30 miles in rural Wyoming).
  • Non-Solicitation: Prevents the seller from soliciting the practice's clients, employees, or referral sources. The term is typically the same as the non-compete.

Managing Risk and Payment Terms
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• Seller Financing: This option arises when a buyer may be unable to get conventional financing due to student loan debt or other credit issues. The seller agrees to finance the transaction, with the buyer paying a percentage (e.g., 10%) in cash at closing and the remaining balance financed over time via a promissory note. Sellers may entertain this if they are interested in helping a key associate.
• Earnouts: Earnouts involve risk, as the seller is betting that the practice will continue to perform. The buyer pays a certain amount at closing and an additional amount later, provided the practice reaches a certain performance level. This provides an incentive for the seller to remain vested and help transition the goodwill. A key pitfall is setting benchmarks the practice has not previously met.

The Advisory Team

It is critical to have the right team of advisors. Your team should include:

• A practice broker who can guide you through the process.
• A good accountant who understands the veterinary industry.
• An attorney who understands the veterinary industry.

Hiring an attorney who does not specialize in the industry can create unnecessary issues. The goal is to hire people who will be "deal makers, not deal breakers," focusing on the issues that matter to get the deal done.

Post-Closing Obligations

As a seller, you must understand your rights and responsibilities post-closing. Liabilities can be retained by the seller after an asset sale, and you may be exposed to risks. The extent of these obligations will vary depending on what is negotiated.

If you receive equity in a parent company or a joint venture, you must understand the documents related to your equity interest. Without an attorney reviewing these documents, you might unknowingly agree to restrictions that limit future business ventures. You need to know how you can effectively exit, whether through a "put" right (forcing the buyer to purchase your equity) or a "call" right (waiting for the buyer to purchase it).