Veterinary M&A: a legal perspective

The sector’s popularity brings with it numerous regulatory and strategic issues. There are tools to address them.

By Cyrus Abbassi, Sheppard Mullin

The veterinary M&A market has been white hot for quite some time.  There are numerous drivers of investment interest, including that veterinary businesses are largely cash-pay, non-cyclical, highly fragmented, facing high consumer demand and subject to a lighter regulatory framework relative to human health. There are a number of regulatory and corporate topics to track in the deal process.

Federal Regulatory Considerations

Over the last few years, the Federal Trade Commission has ordered the divestiture of veterinary clinic locations in connection with certain transactions, arguing that, without divestitures and certain safeguards, such transactions could unlawfully lesson competition in specific markets.  Dealmakers and advisers should proactively identify potential antitrust challenges and negotiate relevant covenants in acquisition agreements.

Cyrus Abbassi, Sheppard Mullin

Drug-related issues continue to affect veterinary groups as both federal and state laws typically regulate drug prescribing, dispensing and storing. One common problematic practice is utilizing “super prescribers,” where all drugs for a location are ordered using a single provider’s DEA and state controlled substance license. There are potential tools to address this issue, including the use of powers of attorney provisions in provider agreements and implementing operational safeguards.

State regulatory considerations

While federal Stark Law and the Anti-Kickback Statute do not apply to veterinary businesses, many state regulations prohibit payment or other remuneration for referral of veterinary patients; in some instances, prohibitions apply to non-veterinary services (eg pet food, supplies, burial services, etc.).  Dealmakers and advisers should track these laws and ensure that financial and other relationships with referral sources and other third-parties comply with applicable law.

Healthcare dealmakers should be very familiar with the corporate practice of veterinary medicine (CPOVM), which, like its human health counterpart, restricts the practice of veterinary medicine by unlicensed persons or corporate entities. These laws vary widely among states, and one cannot assume that a restriction relating to the corporate practice of medicine applies in the CPOVM context or vice versa.

Veterinary telemedicine continues to grow in popularity and stakeholders should understand telemedicine regulations, notably veterinarian-client-patient-relationship (VCPR) rules.  VCPR rules generally provide that in order to practice veterinary medicine, including prescribing or administering treatments or drugs, a provider must first establish VCPR, often by way of a face-to-face encounter. State laws vary and are evolving on this topic. This is an issue to monitor as platforms continue to expand their telemedicine offerings.

Alignment tools when negotiating a deal 

Rollover equity serves as a financing tool and alignment mechanism in veterinary transactions.  One essential task is negotiating appropriate “good leaver/bad leaver” repurchase rights for rollover equity issued to sellers. The more important the selling veterinarians are to ongoing business, the more vital to align their interests with the platform. As valuation multiples have climbed, we have seen some creative provisions regarding rollover equity. Incentive equity, often issued by a management company to non-clinical service providers, can also align economics among executives and other administrative professionals.

In any business where providers account for revenue, restrictive covenants are essential.  Restrictive covenants for veterinary groups are typically applied in the contexts of (i) “sale of business,” (ii) equity and (iii) employment.  Veterinary businesses have their own idiosyncrasies and dealmakers should identify restrictive covenant packages that are appropriate for the business-type (eg general vet, specialty, large animal/companion), geography and selling group, among other things.

Earnouts are another relevant deal term, often used to bridge value gaps between buyers and sellers. The alignment premise is that if the acquired business performs, sellers receive additional proceeds, and everyone wins. Though dealmakers should review applicable law, earnouts and similar forms of contingent payments may be available in veterinary deals whereas such terms undergo stricter scrutiny in human health deals.

Doctors of veterinary medicine (DVMs) are the core of any veterinary business. Accordingly, dealmakers should closely review DVM provider agreement terms, particularly term/termination/renewal, compensation, restrictive covenants and assignability/change of control, among other provisions, to determine the stability of provider relationships.

Investments to watch

As consolidation continues, we expect to see independent management services organizations or similar groups being led by veterinarians as alternatives to large platform buyers. They may take the form of joint-venture models or growth equity investments that may not pay the multiples of the larger aggregators but will provide support services and allow veterinarians to remain independent. Given the lack of broad control in some of these structures, the contractual arrangements between participants become paramount.

Finally, mobile veterinary groups are another highly fragmented segment, notably commanding lower multiples than brick and mortar groups.  If mobile businesses can recruit and retain talent, they can grow rapidly and even serve to backfill demand at physical locations.  They may even offer a path forward on the VCPR barriers, allowing for veterinarians to show up on demand and establish that all-important VCPR necessary to provide ongoing telemedicine services.

Cyrus Abbassi is a corporate partner at Sheppard Mullin with an emphasis on mergers and acquisitions and PE transactions in the health care and animal health industry. He can be reached at cabbassi@sheppardmullin.com