Veterinary Practice Purchase Price Consideration: Corporate Equity

One form of potential purchase price consideration paid in the sale of a veterinary practice is the equity of the buyer.  This "corporate equity" is typically ownership in a company that owns a portfolio of hospitals, including the hospital you sell them.  However, the type of equity received can vary from being akin to preferred stock to being akin to common stock.  Common equity is the "last to eat" in the pecking order of claims (debt, for example) and interests (equity interests), where preferred equity is typically the "second to last to eat."  The preferred equity might, for example, come with something like a 10% preferred dividend that is paid out before the common sees any return.  This is NOT typically convertible (into common equity) preferred equity, so the 10% per annum return is the most one might hope to receive.  The common equity will have all of the appreciation value that one typically associates with equity, but it is "the last to eat." (meaning all other claims and interests are paid out before it gets paid out).   The documents executed at the time of the practice sale will dictate when, under what conditions and for how much a seller can exit any corporate equity received.   As noted above, these documents may specify multiple classes of shares with different rights or economic terms.

Corporate Equity can offer substantial opportunity for value appreciation.  Holders of corporate equity, the most substantial of which is typically the company's private equity investor, can benefit as the company grows and, hopefully, becomes more profitable.  Private equity-backed consolidators typically have access to attractive debt capital which can “leverage” the growth in the value of the equity relative to the growth in the value of the enterprise, assuming things go well.  Of course, using too much debt, or failing to run the Company effectively can also degrade the value of the corporate equity.  In either case, the practice seller who owns corporate equity is a passenger with very limited influence, if any, over whether the Company -- and the value of its equity -- appreciates or depreciates in value  

This type of purchase price consideration is illiquid.  The terms of this form of purchase price consideration will generally strongly incentivize retaining such corporate equity 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 a result, selling corporate equity prior to such a recapitalization may be impossible, or may require a seller to accept a substantial discount to the market value of the shares.  

Like an investment in publicly-traded equity, the risk reward profile of corporate equity as an investment will be different for each Company, but unlike an investment in publicly-traded equity, this investment is not liquid.  Some of these corporate veterinary consolidators have a large diversified portfolio of practices, while others have fewer practices or are more focused on owning a specific type of practice. Companies which have more debt in relation to their EBITDA, may also carry more risk of financial distress.  This corporate equity is typically periodically and privately valued by the company or a 3rd party.  The valuation, usually distilled into a price per share or unit, is used to determine how much corporate equity a practice seller receives in leiu of each dollar of purchase price consideration.  Some Companies value their equity annually, some as frequently as quarterly.  Whatever the cadence, these valuation estimates can differ materially from the true fair market value of the equity (the equity valuation obtained in an arm’s length sale of the Company) which cannot be known unless the Company is sold.    These issues make it critically important to diligence, to the extent possible, the drivers of value in the corporate equity offered.  Employing an expert financial advisor is advisable.