So you have decided to sell your practice – what next? Before starting any new journey, preparation and forward planning are crucial. Here we provide a guide to the process so you feel ready to begin the journey.
Is your practice ready?
Any prospective buyer will want information regarding the existing contracts, maintenance records and property used and/or owned by the business. The buyer will want to know about any ongoing liabilities including how much is left to pay on any hire purchase agreements and the details of all contracts, including what notice periods need to be given to terminate any contracts they do not want. It is therefore important that before you begin the sales process, you ensure that you have organised all paperwork in respect of your business. If your practice occupies the property by way of a lease, the lease may need to be assigned, or the buyer may want to enter into a new arrangement with the landlord. In addition, your bank will need to be informed of the sale nearer completion, and may need to assist you with the release of any security over the assets of the business. To avoid any delay, it is worth having the details of your bank’s relationship manager and your landlord to hand.
How will you sell your practice?
If you are a sole practitioner or in a partnership, the practice could be sold by way of an asset transfer. If the business and assets are owned by a limited company, there is the option of selling the practice by way of a share sale or an asset transfer. Early tax advice may help you decide which route is best for you, by identifying the tax advantages of choosing one option over the other.
But what is the difference to the buyer? In a share sale, the buyer will purchase the company “warts and all” by assuming all historical and future liabilities of the company. The buyer will become the new shareholder and also takes control of the company at board level. The company continues to be the contracting party in all contracts of the practice, including contracts of employment.
On an asset transfer, the buyer can “cherry pick” those assets they would like to purchase, and only acquires those assets specifically listed in the sale agreement. The buyer usually only assumes future liabilities. The employees will transfer to the employment of the buyer, their new employer, unless they opt-out. During an asset sale, the employees will need to go through a notification and consultation process regarding the change of employer and a timetable will need to be agreed with the buyer to schedule this within the process.
How much will you be paid and when?
The ideal scenario for sellers is to receive the full purchase price on the day of completion of the sale. However, buyers will often try to outline the payment structure of the purchase. Frequently, we see buyers wanting to defer part of the purchase price or adjust the price post-completion by reference to a completion balance sheet of the business. Sometimes the deferred payment will be linked with the generation of the profits of the business for a period post-completion, otherwise known as an “earn out”. Once you have agreed the mechanism for payment, we can assist you with terms within the sale agreement to achieve your objective.
A helping hand
Often we see buyers asking sellers to continue to work in the practice for a fixed period after the sale, to allow for a smooth transition. As the terms of this engagement are agreed prior to completion, give some thought as to the duration of any such “hand over” period and any terms you would like the buyer to consider.
To avoid the possibility of a seller setting up direct competition with their newly acquired practice, it is also usual for buyers to impose restrictions on the work a seller can undertake and the location of such work. You may already be planning your new venture, but it can be hard to completely draw a line under your veterinary career, so we recommend early consideration of your plans post-completion.
Drawing up a timetable
Creating a timetable can ensure that all parties remain focused at each stage of the transaction. However, it is important to have realistic expectations – allow sufficient time for the buyer to undertake due diligence of the practice and time for the parties to negotiate the terms of the sale agreement and any additional documentation to achieve their objectives. Any consultation with employees will also need to be factored into your timetable.
Usually the buyer and seller will enter into a heads of terms agreement which sets out the key terms of the proposed sale, including the agreed price, when it will be paid, a proposed date for completion and an agreement for both parties to keep the proposed sale confidential. Although this document is not usually legally binding, it provides early visibility of the parties’ intentions and should allow you to pencil in a timetable.
Questions and more questions?
Before buying your practice the buyer will want to know about all aspects of your business. By ensuring that your house is in order before the transaction gets underway, you will avoid any unnecessary headaches in this part of the process.
The buyer is using this exercise to accurately evaluate where the risks lie in your business. Be prepared for lots of questions: Legal due diligence enquiries usually involve questions regarding the structure of your business, compliance with RCVS registration, collection of clinical waste, supply agreements, membership of any buying groups, details of RPA inspections, HSE registration and consent, out of hours agreements, locum contracts, pet health plans, practice insurance, data protection registration and GDPR compliance, and domain name registration. The buyer will also will raise Commercial Property Standard Enquiries (“CPSEs”) and further property enquiries regarding your ownership or occupation of the property used by the practice. A number of financial due diligence questions will also be raised by the buyer’s accountants including your SAGE or management accounts, VAT, employee taxes, tax computations and the profit and loss of the business.
Be warned – there is sometimes an overlap between the questions raised by the buyer’s accountants and lawyers, because they are reviewing the information from different perspectives. This part of the process can feel laborious, but if you provide full information quickly and clearly, you can help speed up this process. Making sure your practice documentation is available will avoid the stress of a paper hunt.
The sale agreement is the main document for the transaction and be warned – can often extend to some 60-80 pages in length! The buyer’s solicitor usually prepares the first draft for review and it will set out the details of the price, any restrictions on you post-completion and warranties (these are ‘statements of truth’ about the business) which you will need to give at completion relating to the commercial and tax aspects of the business. In conjunction with the agreement, a disclosure letter will be prepared to disclose to the buyer any facts or circumstances that qualify the warranties within the agreement. Disclosure will limit the buyer’s ability to pursue a claim against you for a breach of any warranty in the sale agreement. Clear and full due diligence replies and supporting documents will help expedite this important step in providing you with this protection.
The agreement may also include indemnities in relation to specific issues or liabilities which have been identified by the buyer as part of the due diligence and disclosure process, and for which the buyer wants a higher level of protection and recourse. However, terms can be included within the agreement to impose a number of hurdles for the buyer to overcome in order to pursue a breach of warranty claim and limitations can be included for indemnity claims.
If the transaction is a sale of shares, then the agreement will also usually include a tax covenant from the seller. In such instances, your solicitor will discuss the terms with your accountant.
In addition, there will be a number of ancillary documents which act as the “legal glue” to ensure that the sale is properly approved and enforceable, including for example board minutes, letters of resignation and stock transfer forms. There may also be a consultancy agreement which will include the terms of your engagement post-completion during the hand over period. Your solicitor will explain the details of all the documents required to complete.
At Harrison Clark Rickerbys, we have a dedicated health and social care team which has experience in advising clients in both selling and buying veterinary practices. With this specialist knowledge, we can be proactive rather than reactive in our approach to issues. If you would like further information, please contact Rebecca Leask on 01905 744845 or at [email protected]