Selling a practice: negotiating the deal

SELLING YOUR PRACTICE WILL PROBABLY BE THE LARGEST financial transaction that you will ever undertake and the purpose of this short article is to inform you how to maximise the price you will receive on completion. I have acted for practices that have sold for more than double the initial offer; similarly, I have heard of practices failing to achieve the right price because of poor presentation or poor negotiation. The jungle drums may tell you that a neighbour got £1 million for his practice, but that doesn’t mean you will get the same. Every deal is different and needs to be handled on an individual basis. To get the best price you will need to have:

1. a profitable practice, as the price will relate to true profitability;
2. a practice that has a particular or special attraction for a purchaser;
3. a realistic expectation of price;
4. a comprehensive and informative sales memorandum;
5. negotiations handled by an experienced person and in a professional manner.

Understanding the corporates

“Corporate” veterinary businesses are either funded by:

• public and private investors – raising money on the Stock Exchange when required, e.g. CVS UK on the AIM) and Pets at Home (Vets4Pets and Companion Care) on the LSE; or
• equity groups such as Summit Partners, August Equity and EQT Partners – these equity groups invest funds into corporate ventures such as IVC and Vetpartners and hold the vast majority of the shares in the veterinary corporate business, and they will get their return either by selling on the business to another equity group or by flotation on the stock market.
• Smaller corporates are usually funded by private fund, bank or equity funding or a mixture of these. Outside the corporates there are the independent private practices: whether these are incorporated or not, they are usually owned by veterinary surgeons and their purpose is to produce profits to allow a lifestyle, both vocational and private.

Corporates’ buying rationale

When they undertake an offer, it will be based upon the true profit of a practice and will use EBITDA (Earnings Before Interest, Tax, Depreciation, Amortisation) as the basis of calculating the value of your practice – where earnings are equivalent to profit after the normal practice running costs have been deducted. The major corporates want the means to increase the true profit that is produced over a two-year period by:

• improved purchasing power for supplies and services;
• increased fees;
• additional marketing;
• additional referrals income to their own clinics.

This improved profitability will increase the value of the corporate
either:

1. on the stock market by improving the share price; or
2. to another equity group which may wish to buy out the present investing group.

Selling

The major corporate groups have probably undertaken a thousand or more acquisitions between them so they all have the experience and knowledge to know what a practice is worth to them and how to approach a purchase.

What you need to do as a seller

1. Get the base price right – know what is achievable from experience of previous sales.
2. Prepare for the sale – ensure that you present everything that a potential buyer will require.
3. Find the right potential buyers, usually not the first one who has approached you and made an offer.
4. Ensure dealing with the potential buyers is professionally done – there are plenty of practices willing to sell, so the corporate groups will want the best practices at the best price. I know of owners who have turned down a good offer because they were convinced they would get more, only for the corporate not to bother coming back.

Preparing for the sale

In practice, you should have a professional sales memorandum that
covers the information that every buyer will want to know: this is something that comes with the experience of dealing with corporate buyers.

Negotiating the deal

Have you played poker with a professional? And won? A potential buyer may guess, or assume, but should never know, who else is interested in purchasing the practice. If you have more than one potential buyer, an experienced negotiator will know how to manage the situation to obtain the best price. Potential bidders should never know what another bidder is offering; it will not necessarily lead to your obtaining the best price. Corporate businesses prefer to have a structured approach to buying, rather than an auction.

Play poker

1. Once they have decided they want your practice, they will know how much they are prepared to pay.
2. They will not know what price you will accept.
3. They will assume other parties are interested – let them assume.
4. They will not know what any other parties have offered – let them guestimate.
5. It is a question of getting their maximum to your acceptable level. It can sound easy when you start talking in telephone numbers, but think rationally: when you are offered £1,500,000 and another offers £1,555,000, you can do a lot with £55,000 taxed at only 10% – so think! You will need an experienced lawyer to give you legal protection and an accountant to ensure you only pay the tax you need pay. Many deals structure the price on the future earnings of the practice, which you should not accept as the practice will no longer be under your control. All final negotiations when dealing with the preferred bidder should take place before any offer is accepted. Remember, know what is achievable and what is acceptable to you by making sure you take the right advice at the outset.