There are plenty of stories of veterinary practice owners selling up, especially to the big corporates. Similarly, there are accounts of practice owners passing away, leaving survivors to deal with the practice’s future. The reality is that no small privately held business will stay static forever; change in ownership is inevitable.
But what are the considerations for those owners looking to the future? How can they plan ahead, and what are the core issues to think about?
It’s all about the why
Understanding the motivations for sale – retirement, de-risking or seeking additional funding for growth – will determine how to approach the project
According to Freya Summers, corporate partner at Wright Hassall LLP, those looking to move their business on need to think about why they’re looking for a change. As she says, “understanding the motivations for sale – retirement, de-risking or seeking additional funding for growth – will determine how to approach the project”.
From then, as soon as the discussion around the sale starts to take shape, Freya believes that engaging experienced advisors early in the process “allows plenty of time to assess an exit strategy and afford time for a thorough review of the business”. Experience has taught her that this will identify potential areas that may affect the valuation and type of purchaser or funder for the transaction.
But who?
There are multiple routes to an exit – and Freya lists them.
Trade or competitor purchase
The first she highlights is a trade or competitor purchaser. This, she says, is the most traditional method of sale, one where “the business is marketed and ultimately sold to a trade purchaser. They may be a competitor, an expanding company or an overseas operation looking for a UK enterprise.” An example of this is the 2016 takeover of Ashleigh Vet Clinic in Knaresborough by Minster Veterinary Practice in York (Knowlson, 2016).
Private equity purchase
Next is a sale to a private equity–a sale is made to a private equity group that acquires the shares in the company. Of this Freya says, “Typically, private equity groups will buy mature proven businesses with demonstrable growth strategies.” Sales to big corporates are perfect examples of this, and they’re doing it with abandon. Since 2013, some 1,500 of the 5,000 veterinary practices in the UK have been acquired by six of the largest corporate groups: CVS, IVC, Linnaeus, Medivet, Pets at Home and VetPartners (Makotoff, 2024).
Management buyout and employee ownership trusts
Then there’s the “management buyout”, or the acquisition of a company by its existing management team, often supported either by private equity finance or by traditional institutional debt finance. This was done by “Supervet” Noel Fitzpatrick when Fitzpatrick Referrals Oncology and Soft Tissue Hospital in Guildford was rebranded as AURA Veterinary following the completion of a management buyout (MCRVS Online, 2022).
Another option that Freya observes is an employee ownership trust. Akin to a management buyout, this option differs in that “an employee ownership trust transfers the shares in the company to a trust established for the benefit of all employees of the company”. Archway Veterinary Centre, with branches in Chepstow and Caldicot, did this when it transitioned to an employee-owned business in 2023, the first veterinary practice to do so in Wales (Cwmpus, 2024). The practice is now owned by 26 of its staff and is governed by an employee ownership trust.
Succession
It’s also possible to pass a company to the next generation. However, Freya says that this requires meaningful thought and succession planning, including whether:
- The company or business is set up for this option
- The children are actively working in the business
- There are any third-party shareholders who may be affected
She says, “Where non-related parties have gone into business together, it may be the case that those individuals are reluctant to agree to an automatic transfer to a child.” Beyond this, there is the matter of how the children will fund the acquisition.
How best to move the business on?
Changing the ownership of a business is, in essence, about moving value to a new owner
Changing the ownership of a business is, in essence, about moving value to a new owner. Freya highlights that there are two mutually exclusive ways to do this: a share sale or an asset sale, with buyers and sellers taking opposing stances. “They are,” she says, “very distinct transactions that result in different liabilities and tax positions which often have an impact on price.”
In a share sale, a buyer purchases the entire entity, which includes all assets, liabilities and obligations: a “warts and all” approach. But in an asset sale, the buyer “cherry picks” only the assets they want. Freya explains: “In a share sale, there would usually be far more detailed due diligence along with more detailed and lengthy assurances or ‘warranties’ provided by the exiting seller.” Generally speaking, a seller is likely to prefer a share sale while a buyer may prefer an asset purchase.
The need for good advice
Corporate finance advisors help the process through to completion and deal with sticking points
Since selling a business is often the result of a lifetime of work, it’s important that sellers surround themselves with the right team of advisors. In Freya’s view, it’s best to “appoint advisors that understand your marketplace, the type of business you have and have experience in similar successful exits”.
It’s possible, however, that the selling process starts after one has been approached by a buyer. In relation to this, Freya warns practice managers not to overlook the need for specialist corporate finance sales advice: “The process may go straight to the legal advisors, but this can prove troublesome if the commercials of the transaction have not been finalised.” She explains that could leave much of the commercial negotiations – price, for example – to the seller, which can be difficult to manage. In her opinion, corporate finance advisors help the process through to completion and deal with sticking points.
Maintaining confidentiality
Confidentiality is critical, particularly in the early stages of the transaction when one or more bidders may be interested in making an offer
Of course, confidentiality is critical, particularly in the early stages of the transaction when one or more bidders may be interested in making an offer – especially when such a bidder is a competitor. This is the reason why Freya says it is standard practice to put in place a non-disclosure agreement (NDA) that provides “stringent undertakings from potential purchasers that any information they acquire will be utilised solely for the purpose of analysing the transaction”.
Confidentiality also allows for reassuring conversations about the future of the business to occur when the time is right to introduce the new owners. However, it needs to be recognised that a purchaser may want access to some employees or key clients and that this can be difficult to manage and so may need additional NDAs.
Establishing value
Lastly, when it comes to what a business is worth, Freya states that “understanding what the market may consider a reasonable price may influence the type of transaction undertaken”. She points out that an “enterprise value” or “price-to-earnings ratio” are often used in sales or investments. These take the profits of a business and seek to determine an appropriate multiplier of that figure to land on a price. For example, using a price-to-earnings ratio of five for a business that makes £50,000 post-tax profits would mean that the business would be valued at £250,000.
However, determining the appropriate multiplier is often tricky. Certain sectors, such as tech start-ups, have higher multiples due to the level of rapid growth expected. Similarly, in-vogue sectors can carry higher multipliers – in 2023 there were good multipliers for e-commerce and professional services sectors. To this Freya adds that “proven annual profits can also realise a higher multiple as investors will give higher multiples to those businesses in which they can see scalability”. Known as a “buy and build”, she explains that private equity investors pay higher multiples for those businesses they believe can be grown quickly and then sold again. This is why the corporates are in such a rush to buy existing practices.
Private equity investors pay higher multiples for those businesses they believe can be grown quickly and then sold again
Ultimately, Freya thinks that a combination of thought, early planning and good advice will make for a good sale.
Take good advice
Then there’s the matter of tax law, which is another quagmire ready to swallow up all who go near it. There are issues over what happens if the business is run as a sole tradership or a partnership, and then there’s the matter of the business premises. On top of that are the issues relating to capital gains tax and distributions, but that, as they say, is an entirely different story.
In summary
Succession planning, or rather how to move the business on to another owner, is a tediously complex subject. There’s no DIY option here or, at least, none if the seller wants to agree a deal with a buyer and be tax efficient. Planning ahead and taking good advice is the only way forward.