Veterinary Practice Purchase Price Consideration: An Overview

When one "sells a veterinary practice" what that really typically means is that the legal entity that owns and operates the veterinary practice and its assets sells all of the assets of that legal entity to a buyer.  This is referred to as an "asset sale."

The buyers typically prefer not to purchase the equity of the legal entity that owns the practice assets itself in order to better shield themselves from any potential legal liability and to make the purchase more tax-efficient.  Purchasing assets, rather than equity, enables a write-up of the values of those assets for tax purposes to the value paid for the practice assets by the buyer.  Then the buyer can amortize the value of the intangible assets, and depreciate the value of the tangible assets, over time to secure valuable tax deductions.  

When the buyer purchases the practice assets, including goodwill, from the legal entity that owns the practice, it pays for it with what is referred to as "purchase price consideration."  This may be cash, paid at closing of the purchase transaction, but it may also include other types of valuable assets, as well.  The value of cash paid at closing is easily understood.  The value of other types of financial instruments or commitments is less obvious, but may be quite valuable or become quite valuable over time.  

The other forms of purchase price consideration typically used, beyond cash at closing, may include, but are not limited to:

Deferred fixed payments, which can be viewed as simply junior, unsecured obligations of the buyer to be paid out in cash at either a fixed or event-dependent future date.  These obligations may include some amount of periodic interest paid -- or accrued and paid at redemption -- over the period that the obligation remains outstanding.

Deferred contingent payments, typically referred to as "earn outs," that are paid out at a fixed later date, where the amount is typically based upon a well-defined element of financial performance of the practice between the time of closing and that future date when the payment is computed and paid.

Corporate equity, which is equity in the buyer's company, which is unlikely to enjoy any liquidity (be converted into cash for the holder) until the company next recapitalizes (refinances its private equity partner via a sale of the corporate to a strategic investor, a new private equity partner or to public shareholders in an IPO and/or follow-on offering of shares, any of which might also including raising new debt capital, as well.  Corporate equity is an investment in the buyer's entire business, so this type of investment offers investment diversification for the practice seller that receives it, but the practice owner has very little influence over how the value of this investment changes through time.

JV equity, which is either actual equity in a new legal entity that is the purchaser of the practice assets, where you, as the practice seller, are now "partnering" with the buyer, who owns the remainder (and virtually always a controlling majority of) the JV equity.  This is essentially an investment in "your four walls," so as a practice seller that continues in the leadership role at the practice for years after the closing of the practice sale, you are likely able to have a great deal more influence over how the value of this investment evolves over time, even though you may no longer technically "control" the practice.  Two points about JV equity.  First, it may be executed as either actual JV equity in the legal entity that owners ONLY the practice assets in question OR it may be structured as "synthetic JV equity," which is simply an unsecured obligation of the company (which owns all of the practice assets, but may own a great deal more than that) where the timing and amount of the payoff into cash is contractually agreed to and is dependent upon the performance of just the practice, rather that the rest of the buyer's company.  Second, both of these forms of JV equity are illiquid, where the determination of its ultimate value and liquidity timing is dictated by the terms of the purchase agreement for the practice sale.

Understanding each of these forms of potential purchase price consideration is important for practice owners who are considering selling, so that they can understand "what they are getting in exchange" for selling their practice.