The purchase/sale of a veterinary hospital is critical to the seller's and buyer's future financial security. This transaction requires an in-depth look at the detailed items which make the transaction a "deal" for both seller and buyer. Overall, the seller is looking for a monthly payment to cover their living expenses, while the buyer is looking for a cash flow which will pay the operating expenses of the practice, make the seller's payment, and pay their living expenses.

This Speech Will Focus On: 

• The Players

• Seller's Wants

• Buyer's Wants

• The Transaction

• Deal Breakers/Deal Points

• Problems - Allocation of Assets

• Legal Issues

• Tax Issues

I. Seller

A. Are They a Seller?

1. What is the Motivation for Selling?

• Age

• Change of Life

• Burn Out

• Clients

• Illness or

• Other

B. Security Oriented

1. Attitude of Teenager, Who is Starting New Life
   

C. Tough to Let Go - Usually Vacillates

D. Influenced by Circle of Friends and Veterinarians

E. Insecure as to Financial Consequences

II. BUYER

A. Are They a Feasible Buyer?

• Confidence

• Experience

• Ambition

• Energy

• Plan

• Capital

• Lines of Credit and

• Support

B. Exhibit Blind Ambition - The Blessing and the Curse

C. Impatient

D. Subject to Frustration

E. Bad Negotiators

• Youth

• Want to be Liked

• Can't Say "No"

• Impatient

• Non-Confrontational

SELLER/BUYER WANTS

I. Seller Wants

A. All Cash Transaction

B. Downpayment to Cover Practice

C. Security

D. Sell Stock

E. Give No Warranties

F. All Capital Gain Transaction

G. Defined Monthly Payment

II. Buyer Wants

A. 90% Plus Financed Transaction

B. Excellent Physical Structure and Equipment

C. Trained Clients

D. Trained Staff

E. Purchase Assets, not Stock

F. Purchase Price Allocated to Depreciable Assets

THE TRANSACTION

The Purchase/Sale of a Veterinary Hospital Usually Proceeds in the Following Order:

• Motivation

• Spirit of Negotiation

• Value

• Negotiations

• Document Signing

• Future Relationship

The Following are Three Types of Sales Which Usually Occur:

I. Straight Sale

A. Sale of Stock

B. Sale of Assets

II. Step Sale

A. Corporate

1. Stock

• Shareholder to Shareholder

• Redeem Shares/Issue Shares
  

• Treasury Shares
  

• Corporation Issues Shares

2. Assets

• Individual Buyer/Corporate Seller
  

• Corporate Buyer/Individual Seller

B. Partnership

1. Partnership Sells an Interest to New Partner

2. Partnership Sells Assets to New Partner

3. Partnership Distributes Assets to Seller, Who Sells to Buyer; They Create New Partnership

C. Individual

1. Seller Sells Percentage of Assets to Buyer

• Form Partnership

• Form Joint Venture

III. Partial Sale

A. Intent of the Transaction is the Seller is Not Going to Sell Their Entire Interest in the Foreseeable Future

...continued from bottom of left colum

DEAL BREAKERS/DEAL POINTS

I. Items to be Discussed as Soon as Possible at the Start of Negotiations:

A. Stock-Sell vs. Asset Purchase

B. Price Per Share vs. Purchase Price

C. Downpayment

D. Other Sensitive Issues:

• Special Terms of Sale

• Warranties

• Covenant-Not-to-Compete

• Asset Allocation

PROBLEMS

The following is a list of some of the consistent problems which usually arise in the Purchase/Sale of a Veterinary Hospital:

A. Value

B. Inadequate Downpayment

C. Security for Practice

D. Double Taxation

E. Non-Sold Assets

• Automobiles

• Accounts Receivable

• Cash

• Other Assets ie. Investment in Emergency Clinic

• Copyrighted Material ie. Tapes, Books, etc.

F. Post Closing Adjustments

• Inventory

• Accounts Payable

• Accounts Receivable

• Contingent Liabilities

• Audits

G. Value of Client Records

H. Landlord Negotiation

I. Insurance

J. Management/Control/Benefits

ALLOCATION OF ASSETS

The following are the typical practice assets utilized in an asset Purchase/Sale of a Veterinary Hospital:

A. Drugs and Supplies

B. Furniture and Fixtures

C. Equipment

D. Covenant-Not-to-Compete

E. Client Records

F. Goodwill

The following are varying practice allocations based on the concerns and negotiating skills of Buyer/Seller:

The land and building are usually appraised by Seller and Buyer, and the appraisal is the documentation which dictates the allocation between land and building.

LEGAL ISSUES

1. Warranties

2. Representations

3. Security

4. Contracts

• Sales Agreement

• Promissory Notes

• Bill of Sale

• Partnership Agreement

• Joint Venture Agreement

• Leasehold Interests

• Covenant-Not-to-Compete

• Buy/Sell Agreement

• Shareholder Agreement

• Employment Agreement

• Security Instruments

• Collateral Assignment of Lease

• Assumption Agreement

• Assignment Agreement

5. Enforceable Provisions

TAX ISSUES

The following are some of the potential tax issues which arise in the Purchase/Sale of a Veterinary Hospital:

• Sale of Shares (IRC 1001)

• Sale of Assets (IRC 1231-1245)

• Non-Sold Assets (IRC 1231-1245-1250)

• Installment Sales (IRC 453)

• Sale of Partnership Interest (IRC 743)

• Exchange of Stock for Property (IRC 1032)

• Value of Client Records (CA Central Animal Hospital, Inc. 68 T.C. 269 (1978)

• Goodwill (IRC 1221)

• Allocation of Assets (IRC 1060)

• Liquidation of Corporation (IRC 338)

• Election of Subchapter S Corporation (IRC 1361)

• Joint Ventures (IRC 453)

THE MATCH

ROUND 1: Seller alludes, on Thursday afternoon at 6:37 P.M., to staff member of willingness to sell. (Fishing).

ROUND 2: Buyer alludes to Seller of willingness to buy. (Interested in swimming).

ROUND 3: Seller discloses verbally their personal goals, and hints at sales price. (Real feel test-negotiations have begun).

ROUND 4: Buyer discloses personal goals, pleads poverty, and wants to evaluate financial feasibility. (Buyer still interested in swimming).

ROUND 5: Seller discloses all the fine aspects of practice; how long this 'n' that; how hard it was back then, reassures Buyer of their confidence; becomes real specific with terms. (Real negotiators love this).

ROUND 6: Buyer discloses all the negative aspects of practice; spouse, CPA, Attorney, Real Estate Broker, Banker have put in their comments; Buyer becomes real specific with Seller. (Buyer wishes it was round 2, legs are getting wobbly).

ROUND 7: Seller discloses all the find aspects of practice; how long this 'n' that; how hard it was back then; (You getting the hint!?!).

ROUND 8: Buyer is confused and tired; either returns to Round 4 or teams up with expert to help finish the rounds. (Maybe swimming isn't for me, but I have gone this far! Pride and credibility are exposed).

ROUND 9: Seller is starting to push the time element into the formula; not sure if hook is set; indicates willingness to compromise to save credibility. (Seller just took a left hook).

ROUND 10: Buyer reassures themself; with goals, advice, and conviction - Buyer offers compromise, and Seller accepts. (Done deal - Seller gone fishing; Buyer started swimming).

This is obviously a hind-sight-frivolous look at the largest, emotional, nerve testing, and conviction-testing transaction one goes through, but not far from the truth! Thank you, Ref, manager, coaches, spouses, fishermen and fish alike!

Copyright © 1999-2003 Gatto McFerson