Veterinary Due Diligence: What Sellers Need to Know

Before we start, let us share a recent conversation we were having on a call with a practice owner who had just signed a massive Letter of Intent (LOI) to sell their veterinary hospital to a major corporate platform. They were absolutely thrilled. The offer price was higher than they ever expected and they were already starting to mentally spend their retirement money. They thought the hard part which is the negotiation was totally over.

But three weeks later when they called us back they looked completely panicked.

The buyer’s legal team had sent over a massive checklist requesting everything from seven years of employment records to controlled logs and deep-dive IT audits. Because the owner didn't have these files organized. The corporate auditors started finding minor discrepancies. With every missing document, the buyer began quietly chipping away at the final purchase price.

This happens constantly. Most independent practice owners assume that once an LOI is signed, the deal is basically done. But in reality the signing of an LOI is just the beginning of the most stressful phase of the entire sale: Due Diligence.

During due diligence the  professional buyers bring in experienced accountants and lawyers whose entire job is to find the issues in your business. If your records are messy they will use that confusion to lower your valuation right before closing. If you want to protect your equity and survive this audit without losing your sanity then you have to be prepared. Here is exactly what sellers need to know to bulletproof their clinic before the corporate auditors arrive.

Understand the Quality of Earnings(QoE) Audit

The very first thing a buyer will do is send in a forensic accounting team to perform a Quality of Earnings (QoE) report.

You and your local CPA have probably spent the last ten years trying to minimize your taxable income to save money on April 15th. You might run your family cell phone plans, your continuing education travel and your vehicle leases straight through the clinic.

The QoE team is going to completely tear apart your profit and loss statements to verify every single one of those add-backs. They want to prove that your Normalized EBITDA is actually real. If you claim that $50,000 of travel was a personal expense then you better have the receipts and documentation to prove it. If the auditors cannot verify your add-backs, they will strike them from your profit column.

Because buyers pay a multiple on your EBITDA and losing even $10,000 in verified profit during this phase can easily cost you $100,000 or more off your final purchase price. You must review the complete role of EBITDA in selling your veterinary practice and have your financials scrubbed and defended by a professional advisor long before the buyer's accountants show up.

The HR and Employment Trap

One of the biggest areas where solo practice owners fail due diligence is in human resources. Veterinary medicine is a messy, fast-paced business and a lot of owners rely on handshake agreements or outdated employee handbooks.

A corporate buyer is terrified of assuming undocumented liabilities. Their legal team is going to audit every single employee file. They will look for signed associate doctor contracts, clear non-compete agreements, verified technician licenses and accurate payroll records.

If your lead associate veterinarian does not have a signed, enforceable employment contract then the buyer will see a massive flight risk. They know that if that associate quits the day after closing the revenue will crater. If your HR files are disorganized the buyer will delay the closing and demand you get new contracts signed (which tips off your staff to the sale)  or simply drop their offer price because they view your team as unstable.

The Real Estate and Environmental Review

Whether you are selling the physical building alongside your practice or you just lease the space.  Real estate is a major component of due diligence.

If you own the real estate, buyers will often require an environmental site assessment (Phase I ESA). They want to ensure there is no historical contamination on the property especially if the building used to house older x-ray developing chemicals or if there is an underground storage tank nearby. Before you get deep into negotiations. You need a clear strategy for how to sell veterinary practice real estate so you aren't blindsided by property inspections at the final hour.

If you lease your clinic the buyer needs to verify that the lease is transferable and that there are enough long-term renewal options left to protect their investment. 

Build Your Digital Data Room Early

The absolute worst time to start looking for your 2021 tax returns or your current DEA registration logs is when a corporate lawyer is aggressively demanding them on a Friday afternoon.

To survive due diligence, you must build a secure, highly organized digital data room before you ever list your practice for sale. This is a centralized cloud folder where you proactively upload your trailing three years of financials, your anonymized payroll registers, your equipment leases, your IT software contracts and your compliance logs.

When a buyer sends over their due diligence checklist then you can immediately grant them access to a perfectly organized data room.  The entire tone of the negotiation shifts. You look like a highly sophisticated business owner. It removes their fear, speeds up the closing timeline, and prevents "re-trading" (the industry term for a buyer dropping their price at the last minute).

Don't Face the Auditors Alone

Due diligence is an exhausting, emotional, full-time job. Trying to compile hundreds of financial documents and argue with corporate lawyers while simultaneously trying to manage a full clinical schedule of sick patients is a recipe for total burnout.

This is exactly why you need a strategic partner in your corner. At DVMelite, we do not just find you a buyer but we act as a shield between you and the corporate auditors. We help you scrub your finances and build your data room and defend your valuation so you can stay focused on practicing medicine.

If you are thinking about selling in the next few years and want to make sure your business can actually survive a corporate audit.  Let's get organized now. Book a free strategy call with us. We will look at your current systems and show you exactly where a buyer will poke holes and help you build a great exit plan.