How to Protect Your Payout When Selling to a Corporate Group

You finally get that letter of intent from a corporate buyer and you see a massive purchase price right there on the first page. It feels like the ultimate reward after decades of building a great veterinary clinic. You might even start planning your retirement but you really have to slow down and look closely at every small details

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That big offer price is almost never the actual amount of cash you get to walk away with on closing day. Corporate buyers and private equity groups are incredibly smart with how they structure the deals. They use complex financial deal structures to hold back a big chunk of your payout. They want to shift the risk of the clinic's future performance off their shoulders and place it right back onto yours.

A lot of tired owners just focus on the total valuation multiple and they completely ignore how the money is actually delivered. You basically have to understand that two different practice owners can sell their clinics for the exact same offer price but walk away with totally different amounts of money in the bank because of how the deal was structured.

Before you engage with any buyers,  you need to make sure your bookkeeping is up to date. If your financial records don't match your expenses or you have untracked expenses then buyers may use those issues to lower their offer during due diligence. You can learn more in the Practice Elite guide on how to prepare your veterinary practice financials before selling.

Here is a breakdown of how corporate buyers try to hold onto your money and what you can do to protect your payout before you sign any paperwork.

What Is an Earnout and Why Is It Important?

An earnout is a deal structure where the buyer holds back a portion of your purchase price and only pays it if your practice hits specific performance targets over the next one to three years. Buyers often present this as a way for you to benefit from the future growth of the practice but it also shifts a lot of risk onto you.

Many earnouts never pay the full amount and some do not pay out at all because the business fails to meet the agreed targets. The biggest problem is that you are still taking the risk even though you are no longer in control.

Once the sale closes, the buyer owns the practice and makes the key decisions. They decide who to hire, how much to spend on marketing, what to charge clients and where to cut costs. If they reduce the marketing budget or change staff compensation, revenue may fall. If your best associate veterinarian leaves because of those changes, your practice may miss its targets.

As a result, you could lose part or all of your earnings even though you had no control over the decisions that caused the problem. You are still carrying the financial risk but someone else is driving the business.

That is why many practice owners try to negotiate a higher guaranteed payment at closing instead of relying on an earnout. If an earnout is part of the deal, make sure the performance targets are clear, realistic and based on factors you can still influence.

The Problem with Profit Based Earnouts

If you are forced to accept an earnout, you need to look closely at how the buyer measures your success. Many corporate buyers tie earnouts to EBITDA which is a measure of your practice's profitability. If possible, try to avoid this.

An EBITDA based earnout means your payout depends on the practice staying highly profitable after the sale. But corporate groups often have significant overhead costs. They may charge management fees to your practice, require you to use their preferred vendors or ask you to hire a corporate hospital manager. All of those extra costs reduce your profit.

You could work just as hard as you did before the sale and see the same number of patients but you could still miss your earnout because those additional corporate expenses reduced the practice's profitability.

A revenue based earnout is usually a better option. Revenue simply measures the money coming into the practice, so it is much harder for a buyer to reduce it through accounting decisions or additional overhead costs.

What Is the Working Capital Peg?

Many practice owners assume they can withdraw all the cash from their business bank accounts before closing the sale. After all, you earned that money over the years so it should belong to you. But corporate buyers usually see it differently.

Most buyers expect to take over a fully functioning practice that can pay its bills from day one. That is why they use something called a working capital peg. This is a negotiated amount of working capital that must remain in the business at closing so the practice can cover payroll, rent, inventory and other day to day operating expenses.

For example, if the working capital peg is set at $100,000 then you must leave at least that amount of working capital in the business. If your working capital is only worth $80,000 on the closing date then you may have to make up the $20,000 difference before the sale can close.

Buyers often negotiate for a higher working capital peg because it gives the business a larger financial cushion after the sale. That is why it is important to have an experienced financial advisor review the calculation. They can help make sure the working capital peg reflects your practice's normal operating needs instead of leaving more money behind than necessary.

The Trap of Escrows and Holdbacks

Private equity groups do not like surprises because they want to protect themselves from unexpected liabilities. That is why many buyers require five to fifteen percent of the purchase price to be placed in an escrow account at closing.

This money stays in a neutral escrow account for one or two years after the sale. It acts as a form of protection for the buyer. If a former employee files a lawsuit over an issue that happened before the sale or if an undisclosed tax liability comes to light then the buyer may be able to recover those losses from the escrow account.

The biggest risk is how the escrow terms are written. That is why you need to negotiate with them carefully. Try to keep the escrow amount as low as possible and the holding period as short as possible. You also want clear legal limits on when the buyer can make a claim. Otherwise, they may try to use the escrow to recover the cost of normal business expenses or equipment repairs that should be their responsibility after they take ownership of the practice.

Rollover Equity Gives You a Second Bite

Sometimes a private equity buyer will offer to pay part of your purchase price in rollover equity instead of cash. This means you reinvest a portion of the sale proceeds which is usually 10 to 20 percent, in exchange for shares in the buyer's parent company.

This is not necessarily a bad thing but it does involve more risk. Many corporate groups buy veterinary practices and then  combine them into a larger organization and then try to sell that business to another investor a few years later. If that happens and the company has grown in value, your rollover equity could be worth much more than it was at the time of the sale. This is often called getting a second bite at the apple.

The downside is that your equity is not liquid. You cannot sell those shares whenever you want or use them for everyday expenses. You only receive the value of your investment if the parent company is sold or another liquidity event takes place. If the company performs poorly, takes on too much debt or market conditions change then your equity could be worth far less than expected or even become worthless.

Before accepting rollover equity you need to  take a close look at the buyer's track record along with  their growth strategy and their financial position. Then decide whether you are comfortable keeping part of your wealth invested in their business or if you would rather take the cash and invest it on your own.

Steps to Protect Your Money Before You Sign

You have more power to protect your payout than you might think but you need to use it early in the negotiation process. Once you sign the Letter of Intent (LOI) then most of your negotiating leverage is gone.

The first step is to negotiate for the highest possible cash payment at closing. A strong deal often includes 70 to 85 percent of the purchase price in cash on closing day. If a buyer offers an attractive valuation but wants to tie a large portion of the price to a risky earnout take a closer look before you agree.

If you do accept an earnout then keep the timeline as short as possible. In most cases, you should avoid earnouts that last longer than two years. The longer the earnout period, the greater the chance that changes made by the new owner could affect your results.

You should also negotiate audit rights. If the buyer says you missed your performance targets, you need the legal right to review their calculations. That gives you a chance to challenge any accounting decisions that unfairly reduce your earnout.

Another important step is to retain your associate veterinarians before the practice goes to market. If a key veterinarian leaves soon after the sale, revenue may fall and your earnout could be affected. A well planned retention bonus can help keep your team together during the transition.

How We Can Help You Secure Your Payout

You have spent years building your practice, caring for your patients and earning the trust of your clients.Selling your practice may be something you only do once. The buyers sitting across the table have done it many times. They negotiate deals like this every day. So it is easy to overlook terms that could reduce the amount you actually take home.

That is where we can help.

At DVM Elite, we work with veterinary practice owners to review offers, explain the fine print and negotiate better terms. Our goal is simple. We want to help you keep more of what you have worked so hard to build. Whether it is negotiating more cash at closing, reviewing an earnout or challenging an unfair working capital calculation. We focus on protecting your interests throughout the process.

If you are thinking about selling your practice, we would be happy to help you understand your options before you sign anything. Book a free strategy call with our team and we will review your situation, answer your questions and help you build a plan for a successful sale.