This week on the Cone of Shame Podcast, Dr. Andy Roark talks with Peter H. Tanella about his recent article titled How to Avoid a Messy Separation. Together they walk through the key items that buyers and sellers should look out for when entering contracts and how they can protect themselves.
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LINKS
TVB Article: https://todaysveterinarybusiness.com/consolidators-legal-lingo-1223/
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Uncharted Veterinary Conference: https://unchartedvet.com/uvc-april-2024/
Uncharted on the Road: https://unchartedvet.com/on-the-road/
Charming the Angry Client Course: https://drandyroark.com/charming-the-angry-client/
Dr. Andy Roark Swag: https://drandyroark.com/store/
ABOUT OUR GUEST
Peter is the Chair of the firm’s National Veterinary Practice Group. Peter is also a member of the firm’s Executive Committee wherein he strives to embody the firm’s core values while working closely with firm leadership to help drive the firm’s positioning and strategic plan. Peter is an experienced business lawyer and trusted advisor who has developed a national practice representing his clients in all facets of their business life cycle including corporate formations and start-ups, acquisitions, sales and mergers, associate buy-ins, non-veterinary ownership structures, real estate transactions, partnership agreements, employment agreements, joint ventures and succession planning. Peter regularly serves as outside general counsel providing counseling to his clients to efficiently find creative solutions to manage their practices, while acting as a key resource for facilitating transactions.
EPISODE TRANSCRIPT
Dr. Andy Roark: Welcome everybody to the Cone of Shame Veterinary Podcast. I am your host. Dr. Andy Roark guys. I am here with Peter Tanella. He is a business lawyer and we are talking about when veterinarians or practice owners, they don’t do veterinarians when practice owners decide to sell their practice and then the deal falls apart.
Who gets hurt? How do they get hurt? And how do we make it so that this is not as likely to happen? And how do we protect ourselves knowing that nothing is ever final until all the paperwork is signed?
If you like, I like to see how the sausage is made. I like to know what’s happening with our industry and the interface between independent practices and corporate practices and corporate consolidators, then this episode is for you anyway, I really enjoyed it. Peter’s a lot of fun. I fire lots of questions at him about how this actually happens and how do we protect ourselves?
And it’s fun. Anyway, I hope you guys will like it a lot. Let’s get into this episode.
Kelsey Beth Carpenter: (singing) This is your show. We’re glad you’re here. We want to help you in your veterinary career. Welcome to the Cone of Shame with Dr. Andy Roark.
Dr. Andy Roark: Welcome to the podcast, Peter Tanella, thanks for being here.
Peter Tanella: Thanks for having me, Dr. Roark.
Dr. Andy Roark: Man, it is my pleasure. So you and I are just meeting. You are the chair of the National Vet Law Group at Mandelbaum Barrett. You are a business lawyer. I became aware of you because you have a column called legal issues in today’s veterinary business And so you and I are just getting talked for the first time.
I want to ask you about this. So, you wrote a column that I was really intrigued by. It’s called How to Avoid a Messy Separation which, by the way, is a great title to get people to be like, what is this? And so I jumped right in. I’m really interested in sort of the corporate consolidation in vet practice.
I am interested in how corporate consolidation interfaces with veterinarians that own practices. And your article spoke to that. So when you talk about a messy separation, you started to talk about You were talking about practice owners and selling practices and then because of changing sort of economic landscape, those deals kind of falling apart.
Can you just sort of lay that out at a high level, Peter? Like, talk, to me what’s sort of going on. Set the background for me.
Peter Tanella: First of all, thanks Dr. Roark for having me on. It’s great to meet you. I appreciate you reaching out.
Dr. Andy Roark: Oh, thanks.
Peter Tanella: It’s really started last year and everybody knows with corporate consolidation, I’d say 2022, 2021, and 2020 was like the wild, wild, west of consolidation. All the practices being You know, consolidated.
Last year, you saw a slowdown in that and you saw the consolidators pivot in the direction where there are much, much more careful in their acquisition targets. And specifically, they would spend a lot more time doing diligence leading up to the overall closing and we had one deal in particular where this issue came up where our client had done everything and was ready to close and about 48 hours from the closing date.
The buyer just put their pencil down and said, we’re not buying. And he had no reason, no good cause to terminate negotiations. They just walked away from the deal. So you step back, you know, these deals and understanding how they work. Typically, the buyer, the seller receives a letter of intent.
Dr. Andy Roark: Okay.
Back in, during the Wild West days, no, the sellers were receiving 7, 8, you know, 9 LOIs to sell their practice.
Dr. Andy Roark: Mmm – hmm.
Peter Tanella: Last year when things started to pivot the sellers were getting 1 or 2 uh, or 3 LOIs. You pick an LOI. You negotiate that LOI, and it’s a non binding document, so it doesn’t bind either party to do the deal, except there’s an exclusivity provision in that LOI that will bind the seller for a period of time so that the buyer can do their due diligence really look under the hood of the practice to see, is this something I want to buy?
The only really legally binding document is when the parties get to the closing because most of the deals are what’s called a sign and close. So you go from the LOI phase, in the LOI those terms get baked into the deal documents. None of them are signed until you get to the closing. So during that period of time, either party can still walk away from the deal.
They’re not bound to do it. Back during The Wild West as I’d like to call it, you never saw buyers walking away from the from deals. It was unheard of because everybody was so anxious to get a practice. Last year, that changed and you saw the buyers doing–taking a lot more time during the buyer practice really, doing their due diligence and then you are hearing stories throughout the industry, a buyer is just walking away from the deal.
So, what we recommended once that happened to our client, we said, okay, how do you avoid that happening again? What can, the whole idea is you want to learn from different exposures. What can you do to incentivize the buyer to continue to move forward with the acquisition? So you put language in that letter of intent that if the buyer walks away from the deal, for what I like to say no cause whatsoever.
It’s one thing if they see something they don’t like, they don’t like the employees and associate leads, things make sense. if you’re just going to walk away and say, hey, you know what, Dr. Roark, I don’t want to buy your practice and you have no reason for it and no cause to walk away.
There should be in our mind, or at least the parties should negotiate what’s called the breakup fee. So there’s a dollar amount agreed upon at the very beginning of the deal. That’s in the LOI that if the buyer should walk away for no cause and really not act in good faith, then the buyer should know that the seller is going to incur significant expenses once they negotiate an LOI and leading up to the closing.
You’re talking legal fees, accounting fees. And if you’re just going to walk away a week, two weeks prior to closing and you don’t have a good reason to do it, there should be some type of deterrent or some type of monetary compensation to make the sellers somewhat whole. So they can recoup the fees that they spend on their professionals and maybe they can pivot to another buyer
Dr. Andy Roark: All right. So, I got a couple questions here. So, let me step back here for a second. With this change that we saw in the last year, Peter, is this a hundred percent driven by increased interest rates, the expense of borrowing money? Is this a change in the consolidation cycle that we’re sort of seeing in the industry?
Kind of, where is your head at as far as looking at drivers for this?
Peter Tanella: I–you know, I we’re just as interested of what’s going on in the market as everybody else. So I’m always the reading attending webinars to learn what the, market is doing. You know, from our observation last year, obviously with the, you know, interest rates rising substantially, it made the cost of money or borrowing the cost of money much more expensive.
So, so, a lot of the consolidators they put the brakes on and said, okay, we’re gonna, we’re, gonna, you know, we’re gonna stop what acquisitions. In addition going, you know, coming out of 2021, so many of them that sent so many of them did so many acquisitions that they actually had to take a step back and you’ll onboard all those practices.
If you’re acquiring 30, 40, 50, 70 practices in a year. You know, you know, you’re a practice owner, you got to onboard and, you know, practice management. You bring those people onto your platform. So I think it was a combination of things, but the main driver being the interest rates going up the way they did that made the cost of money so much more expensive.
Dr. Andy Roark: Are there flags or warnings that people sort of see with this? I mean, so, okay, so let me, I just sort of empathize with the veterinarian here, right? We’re 48 hours out from closing this deal. If I was going through with something like this and I was going to be selling my practice, are there warning signs that I should be looking for?
I’ve entered into this LOI. When should I start getting squirrely, Peter? Or should I just wait it out and say, Nope, I can’t do anything about it. I’m going to assume we’re going to move forward. Yeah, help me. I know that some people are going to hear this and kind of chew their fingernails. What would you say to someone who’s going, I don’t know, I’m nervous this isn’t going to happen?
Peter Tanella: I think if you’re somebody who’s listened to this, you ask your attorney who’s representing you. You know what? No, I’m here. I’ve heard some stories about buyers just walking away from deals for no reason. With no cause, you know, how do I protect myself, Mr. Attorney or Mrs. Attorney from that occurring?
I don’t know if you’re going to see signs because I think last year, one of the other things that we saw a lot of where the deals were taken longer. Before the three years before that, no, you’d get an LOI and you were closing a deal within 90 days, pretty much no lock, stock and barrel.
Last year, that 90 days may kick out to 120, may kick out to 150. The buyers just kept doing more diligence and diligence. And just think of it, you’re the seller, and your buyer says, I need another 30 days. What are you going to do? You’re already 90 days into it. Now you’re going 120. You’re, and as a seller, they get into this mindset.
It’s emotional. So once you’re, first of all, you’re dating to see which buyer that you want to work with, then you finally pick that one buyer, you’re working your practice, and then you’re focusing on that buyer, and you know, emotionally, you’re focused on that buyer and for them to all of a sudden say, Oh, I don’t want to do the transaction anymore, you know, I can’t have the emotional impact of that is significant.
So if your buyer who you’re focused on says, Oh, Hey Pete, we need 90 more days, you know, to look at Dr. Roark’s practice. Okay, I go back to Dr. Roark and say, you know, this is what they’re looking for. You and I are going to talk about an extension and you’re already in this thing. You know, it’s like I like to say, you know, In the deal terms, you’re pregnant, you’re fully in the deal.
So what are you going to do at that point in time? You’re obviously going to give the concession and give more time. But to answer your point, I don’t know if you’re going to see specific indicators. I think now that we’ve gone through a whole year of hearing rumblings of buyers walking away, sellers should be asking, what do we do in the event that the buyer walks away for no cause whatsoever.
Dr. Andy Roark: So, Peter, if, so we’re going through this deal, let’s just say I’m going to sell this practice and you’re representing me and then the, buyer, or the seller comes back and he says, or the, sorry, the buyer comes back and says Hey, I need another 90 days. That by itself doesn’t bother you. Does it?
Peter Tanella: Well obviously as your attorney, I’m going to ask, why do you need? Another 90 days, Mr. Byer. What are you looking for? And you usually you don’t see a kick out 90 days. Yeah, it’ll be in increments. So if you if the LOI says the parties are gonna close, No, 90 or do a good faith effort to close and 90 to 120 days Following the execution of the LOI, that’s where you’re kind of you’re tracking.
Now the by now as the parties are moving along negotiating the deal documents Getting closer to that time frame. If the buyer would typically reach out and say, Pete, I need another 30 days. We’re you know, our clients still, you know, still looking at this. Why do you need another 30 days? And that’s where I go back to you and you may say, Pete, you know, do you have any issue with another 30 days?
I said, no, you know, Dr. Roark, I see They’re acting in good faith, they’re moving everything along, you know, we’re negotiating documents. Everything in a transaction is moving along in the ordinary course. I don’t see any red signs. It’s when they’re not getting back to you and there’s delays. And remember it’s two parts here.
It’s the legal end and also, on the business end. Now the business folks are working directly with the sellers, the seller, you know, slowly getting acclimated and working towards an onboarding that’ll happen at a closing. So if the pencils are down by the by the buyer and you don’t see movement, that’s, I guess, I guess, don’t think about it.
That would be a red sign. If you don’t see movement going along as the deal is being negotiated, that could be an indicator that maybe something is up
Dr. Andy Roark: Yeah. if I’m the seller here and I’m looking at this LOI, I totally understand why a potential buyer would want an exclusivity agreement, right? They don’t want me to deal with somebody else while they’re doing their due diligence or things like that. But also, Peter, I’m incurring all the pain here.
Right? Like, I’m the one who I can’t continue to negotiate with other interested parties, you know, I can’t you know, I am incurring costs on my side to sort of go through this process, I’m investing time, especially if we’re having conversations about onboarding into the larger organization, things like that.
I, I, it seems to me like I’m incurring a disproportionate sort of amount of risk and so what I’m understanding from you is sort of with this sort of a breakup clause would be something like, at least if I go through all that process and then they just say, I don’t want to buy this and they walk away, I would be compensated.
Is there. Is there any other way? First of all, I’m curious if you agree that the seller is carrying a lot of risk going into this LOI compared to the buyer. And then second, are there other ways to sort of offset that risk where you feel like, okay, I’ll go through this dance with you, but I’m not going to feel like I’m sort of closing off a lot of opportunities for myself that you might just walk away from at the
Peter Tanella: Right. No, it’s a good question. I think they’re, I think they’re both incurring a risk because remember a buyer is also incurring legal fees too. So they’re moving forward together. So, you know, it’s the cost of doing business for both parties. I have no issue with the buyer requiring a seller to be bound by an exclusivity period within the letter of intent.
None whatsoever. I think that’s completely reasonable and fair and I also don’t have a real issue if the buyer while they’re doing their due diligence, they’ve signed the other way. Now they’re working with the seller and they’re no. They’re looking at contracts, they’re looking at the financials, they’re talking with employees.
When they’re doing their due diligence, if something comes up that makes them really uncomfortable, where they don’t want to go forward with that deal, and there’s a, you know, a justified reason to walk away, I don’t have an issue with that either. The point of what we were addressing was, if somebody’s not proceeding in good faith, and you all of a sudden say, I don’t want to do the deal.
I’m walking away and you have no reason whatsoever other than, you know, I don’t want to do the deal. That’s, you know, in my mind, to your point, that’s not fair to the seller because they were operating in good faith. They’re giving you all the information. If the financials check out, if the employees check out, everything checks the box then the buyer should want to go forward and do that acquisition.
Or that’s why, at the beginning, you had that conversation. Say, what if, you know, we’re doing this deal and you, buyer, all of a sudden aren’t interested in doing the deal a week or two weeks out from the closing? And you don’t give any reason to my client. Do you think that’s fair that my client should incur X amount of dollars in professional fees?
And see what, you know, I’d like to hear that answer. And we’ve been successful. Negotiating a breakup fee within that LOI and in the buyer, if you think about it, if you’re the buyer’s mindset, it shouldn’t really be an issue for the buyer because so long as the buyer proceeds in good faith.
And it’s, you know, doesn’t find any issues, it goes through with the closing, that break up fee doesn’t come into effect. It’s only when you say, hey, I’m not doing a deal, and you have no valid reason to walk away. That’s the only time it would come into effect.
Dr. Andy Roark: That makes sense. Are there ways that I, as the seller, should behave like that, just given the fact that, you know, no, nothing’s guaranteed. Like, nothing’s done until all the paperwork is signed. Are there, behaviors that you have seen practice owners who are selling make that have damaged them or made it so that deals falling apart were extra painful, are there things, you know, I’m just sort of, I’m thinking about the way that I either continue to run my business or the way that I continue to talk to my staff, or are there things like that are just sort of best practices going?
Nothing, nothing’s done until we sign the paperwork. How would you advise me in that regard?
Peter Tanella: All right. So obviously the buyer has an interest in your practice because you’re doing something right. I would say, continue to operate the practice in the ordinary course, don’t make any changes, continue to do what you’ve been doing, because obviously that’s interested the buyer, and so long as you continue to do that, there shouldn’t be any issues in that regard.
And then I would also say that I always like to say to clients, you know, one of the biggest things that kills deals is time. So when you’re an attorney, my job is to get the deal done for. You know, the client, you want to be a deal maker, not a deal breaker. So time kills deals. What do I mean by that?
If you’re a, when I have a client who comes on board, he’s looking to sell, we talk initially and I want to make sure they have the right mindset saying, okay, we’re going to go through this process. Who am I going to be dealing with? Am I going to be dealing with you, Dr. Roark? Am I going to be dealing with your practice manager?
Am I going to be dealing with some other member of the team? Who are you going to be dealing with? Because I want to set the tone for the deal and saying, there’s going to be a lot of moving parts here. And you, in order for us to be successful together, I need you or your practice manager or somebody on that team to be available to us because the buyer, rightfully so, is going to be asking for a lot of information.
And to your point, what can you avoid? In order for a deal not to go sideways, you as a seller want to have that information readily available. So there are no time delays. So as the days go by, each day is going by and the buyer is asking you for this, or you’re asking for that, where we know you’re working with your counsel to try to get it.
I got to wait until the weekend while you’re not working to get that information. I mean, I’m not saying it’s a problem. But it’s a delay, and that delay in time, you got a buyer that’s interested in your practice, let’s go, let’s move the deal. That’s how I, that’s, you want to move it along.
Dr. Andy Roark: That totally makes sense. Peter Tanella where can people find you if they have questions about their own practice? Where could they reach out to you?
Peter Tanella: Thanks, Dr. Roark. You know, we can, you’ll be found on our website. It’s www.mblawfirm.com. And we’re also, we, typically, we exhibit at the Western Vet Conference, we exhibit at VMX Conference on an annual basis. So our next stop will be out in Western later this month. I’m looking forward to it.
Dr. Andy Roark: Cool. Well, thank you so much for being here. Guys, thanks for tuning in and listening. Take care of yourselves, everybody.
Dr. Andy Roark: And that’s what I got for you guys. Thanks for being here. Thanks to Peter for making time for us. Gang. I hope you enjoyed it. If you’re still listening at this point then you are a certifiable business nerd like me. It’s a welcome aboard. Anyway, I also say if you are a certifiable business nerd and you’re like, that was great, I invite you to check out my other podcast.
It’s called the Uncharted Veterinary Podcast. It is all business nerd stuff. That is all we do over there. So anyway, if you’re not familiar with Uncharted Podcast or Uncharted Veterinary Conference. Definitely have a look at that stuff. Anyway, guys, that’s enough. Take care of yourselves, everybody. I’ll talk to you later. Bye.
