When a veterinary practice changes hands, the buyer’s investment depends heavily on client retention. A seller who opens a competing clinic nearby or reaches out to former clients can undermine the value the buyer paid for. That is precisely why restrictive covenants, specifically non-compete and non-solicitation clauses, play a central role in veterinary practice purchase agreements.
Peter Tanella, Esq., Chair of the National Veterinary Law Group at Mandelbaum Barrett PC, explores this topic in his “Legal Lingo” column in Today’s Veterinary Business. In the February/March 2022 issue, his article titled “Stay Away, Please” examines how restrictive covenants serve a critical purpose in protecting the buyer’s investment in a newly acquired practice.
What Restrictive Covenants Do in a Veterinary Sale
As Tanella explains, restrictive covenants in a veterinary purchase agreement are designed to prevent the seller from soliciting clients and competing with the buyer after the closing. Through these restrictions, buyers aim to protect themselves and ensure that the acquired practice does not lose value due to the seller re-entering the market. To fulfill those objectives, restrictive covenants should be carefully negotiated, clearly stated, and calibrated to a reasonable duration and geographic scope.
A restriction that is too broad may be unenforceable under applicable state law. One that is too narrow may fail to adequately protect the buyer’s investment. Getting the balance right requires both an understanding of the law and a practical knowledge of the veterinary industry.
The Elements of an Enforceable Restrictive Covenant
Courts in New Jersey and most other states evaluate restrictive covenants under a reasonableness standard. A covenant that is enforceable in one context may be struck down in another if the court determines that the scope or duration goes beyond what is necessary to protect a legitimate business interest. For veterinary practice transactions, where the goodwill of the practice is often the buyer’s primary asset, the stakes of getting this wrong are significant.
Several key elements determine whether a restrictive covenant in a veterinary sale agreement will hold up:
- Duration: Restrictions that endure for a reasonable period, generally two to five years, are typically viewed more favorably than open-ended or excessively long restrictions.
- Geographic scope: The covered area should reflect the practice’s actual service area, not an arbitrarily large radius. A restriction covering an unreasonably large area may be reduced or voided by a court.
- Scope of prohibited conduct: The covenant should clearly define what the seller is and is not permitted to do, including whether it covers owning a competing practice, working as a veterinarian for a competitor, or soliciting former clients.
- Consideration: The restriction must be supported by adequate consideration. In the context of a practice sale, the purchase price typically provides that consideration, but this should be clearly documented in the agreement.
Non-Solicitation vs. Non-Compete Provisions
Practice purchase agreements typically include two distinct types of restrictive covenants. A non-compete provision prohibits the seller from operating or working in a competing practice within the defined area for the restriction period. A non-solicitation clause prohibits the seller from reaching out to former clients to draw them to a new practice, even if the seller is operating outside the geographic non-compete zone.
Both types of provisions serve important protective functions and are commonly included in well-drafted veterinary practice purchase agreements. However, their scope and enforceability may differ depending on the jurisdiction and the specific facts of the transaction.
Drafting and Negotiating Restrictive Covenants
For sellers, restrictive covenants represent a real limitation on post-closing professional options. A seller who wants to continue practicing veterinary medicine in the same community after a sale needs to understand exactly what the proposed restrictions prohibit and for how long. Negotiating the scope, duration, and geographic limits of these provisions before signing is far more effective than attempting to challenge them after the closing.
For buyers, poorly drafted or legally vulnerable restrictive covenants may offer less protection than anticipated. Ensuring that the provisions are enforceable under applicable law and clearly tied to adequate consideration is essential to protecting the value of the acquired practice.
Veterinary Law at Mandelbaum Barrett PC
Peter Tanella and the attorneys in Mandelbaum Barrett PC’s National Veterinary Law Group have represented buyers and sellers in veterinary practice transactions throughout New Jersey and nationally. The firm’s attorneys have drafted, reviewed, negotiated, and when necessary, addressed the enforceability of restrictive covenants in connection with practice sales across the country.
To read Peter Tanella’s full article in Today’s Veterinary Business, follow the link provided. To speak with a member of the National Veterinary Law Group about a practice transaction or restrictive covenant matter, contact the firm through the contact page. Our attorneys are prepared to assist buyers and sellers in veterinary practice transactions throughout New Jersey and beyond.