This article is a continuation of the article titled Transitioning “Tails”: A Veterinarian’s Journey that was published in Issue Number 9, in 2024, regarding a veterinarian’s exit strategy. This is the fourth in a continuing series that guides the reader through the sale process. This installment focuses on the key agreements signed at closing—commonly referred to as “ancillary documents.”

“Ancillary documents” are documents that relate to the sale and purchase but are not included as provisions in the purchase agreement (though, they are at times attached as exhibits to a purchase agreement). Common ancillary documents are a restrictive covenant agreement, employment agreement, and a bill of sale.

Restrictive Covenant Agreement (“RCA”)

In most business sales, the buyer will require the seller—and any other owners involved (collectively referred to as “Restricted Parties”)—to agree not to engage in certain activities after the sale. These prohibitions are called “restrictive covenants.” The buyer wants a RCA to protect its investment (as the buyer does not want a Restricted Party to compete with it post-closing or poach its employees). Despite recent changes in laws affecting the enforceability of non-compete clauses in employment contexts, restrictive covenants tied to the sale of a business generally remain enforceable, provided they are reasonable in scope, duration, and geography.

Typical restrictive covenants are non-competition, non-solicitation (of employees and referral sources and business contacts), and non-disparagement.

A non-competition restrictive covenant prevents a Restricted Party from, among other things, owning, managing, controlling, working, or engaging in a competing business within a defined geographic area and time frame (i.e., usually 2-5 years and within 25 miles of the sold business). We advise our veterinary clients, who are a Restricted Party, to ask for carve-outs to the non-compete that allows a Restricted Party to engage in activities that would otherwise be prohibited (i.e., work under an employment agreement with a buyer, volunteer at shelters or teach a class).

There are different types of non-solicitation restrictive covenants. First, there is a non-solicitation of employees which prohibits a Restricted Party from soliciting its former employees for employment. Second, there is a non-solicitation that prohibits a Restricted Party from soliciting customers, clients, or other business contacts (such as vendors) from the business. These clauses are intended to safeguard the buyer’s workforce and business contacts.

A non-disparagement clause prevents a party from making statements that would have an adverse effect on the buyer or business. This is commonly a mutual restrictive covenant that binds both the buyer and a Restricted Party.

If a Restricted Party violates an RCA, the primary remedy is often injunctive relief—requiring the Restricted Party to cease the prohibited conduct—along with a tolling of the restrictive covenants (i.e. an extension of the RCA’s term), and potential monetary damages.

Employment Agreement

In many cases, especially when the buyer is backed by private equity, the seller may be asked to remain with the business postsale to help with the transition and maintain continuity. This is formalized through an employment agreement. It is important to include the key employment terms in the agreement, including, the employment term (in years), compensation (i.e., salary, production, or pro-sal, and if production, how production is defined or calculated), your schedule and how a “shift” or “day” is defined, restrictive covenants (which may overlap with restrictive covenants in the RCA), benefits (including CE, paid time off, health insurance), and termination provisions (including “cause,” “good reason,” and severance pay). Some of these terms should be addressed in the letter of intent, so it is necessary to think about these items at the letter of intent negotiation stage. If your goal is to retire immediately after the sale, be honest about it with a buyer – be aware, however, that depending on the buyer, your willingness to stay on could influence the purchase price or other deal terms.

Bill of Sale

The Bill of Sale is a relatively straightforward but important document. It formally transfers ownership of tangible personal property (such as equipment, furniture, and supplies) from the seller to the buyer. In many cases, the Bill of Sale acts as the instrument of conveyance itself. One practical benefit of having this document is that it can be presented to vendors, service providers, and financial institutions to demonstrate the change in ownership—without having to disclose the full purchase agreement, which may contain confidential or sensitive terms.

The next article will briefly discuss equity documents in the event that you choose to sell to a private equity backed buyer or a veterinary consolidator.