During the transfer of ownership or control of a veterinary practice, the party assuming control may also have to assume rights and obligations under the practice’s contractual agreements, such as real estate leases, equipment leases/financing agreements, or supplier contracts. As a result, buyers of veterinary practices need experienced legal guidance to understand the consequences of assumed contracts. Contact Mahan Law today for an initial case review with a knowledgeable attorney to discuss the agreements you may need to take when acquiring ownership or control of a veterinary practice.
Understanding Assumed Contracts
An “assumed” contract refers to a business agreement in which the buyer of a business agrees to assume the business’s rights and obligations under the contract. Thus, the buyer of a business steps into the seller’s shoes upon acquiring the business. Assumed contracts differ from other contracts associated with the purchase and sale of a business, such as newly created contracts that the business enters into in conjunction with the purchase and sale, or excluded contracts for which the seller of the business agrees to retain responsibility.
In veterinary practices, assumed contracts frequently include commercial leases, equipment financing/lease contracts, supplier contracts, and employment/independent contractor agreements with veterinarians and other practice staff.
When Do Assumed Contracts Matter for Veterinary Practices?
Addressing assumed contracts can become important for veterinary practices in various circumstances, such as:
- Acquisition of an existing practice: When a veterinary practice acquires the practice of another veterinarian who chooses to sell their practice, the acquiring practice may need to assume some of the sold practice’s contractual obligations.
- Mergers or corporate restructuring: Merging veterinary practices may require the combined ownership to assume contractual obligations from each other’s practices. Similarly, a corporate reorganization of a veterinary practice may involve transferring contracts among entities within the practice’s corporate structure.
- Ownership/management transitions: Transferring ownership or control of a veterinary practice from one owner or partnership group to the next may require the new owners/managers to assume contractual duties.
Key Legal Considerations for Assumed Contracts
When handling assumed contracts during corporate transactions for veterinary practices, some of the top legal considerations that practice owners should keep in mind include:
- Assignability of contracts: First, parties negotiating the transfer of an assumed contract must determine whether the agreement permits the assignment of a party’s rights and obligations to a third party. Certain types of contracts may require consent from the counterparty before assigning the contract, such as lease agreements that allow the landlord to approve any assignment or assumption of the lease
- Allocating risk and liability: Parties may also consider allocating risk for assumed contracts. In most cases, the party assuming the contract assumes all liability and risk associated with the contract. The seller may insist on indemnification provisions, which entitle the seller to seek compensation from the acquirer if the seller has to make any future payments or incurs any future liability under the assigned contract.
- Due diligence: Buyers should also conduct thorough due diligence before assuming a veterinary practice’s contracts. Due diligence can help parties understand the contractual rights and obligations they will assume and identify “bad” contracts they may not want to assume.
Common Types of Assumed Contracts in Veterinary Practices
Some of the most common types of agreements that become assumed contracts in transactions of veterinary practices include:
- Real estate leases: A veterinary practice may lease its clinic location(s), requiring an acquirer to assume obligations under the leases. However, commercial leases may have assignment clauses that place requirements or restrictions on transferring the lease, such as giving the landlord the right to approve any party assuming the lease.
- Supplier agreements: Veterinary practices may have supplier agreements to acquire medical supplies, medications, or laboratory services.
- Equipment leases or financing contracts: A veterinary practice may either lease the medical equipment it uses to treat animals or buy such equipment through loans or seller financing. When an acquirer takes possession of leased or financed equipment, it must assume the contractual obligations under the lease or financing agreement.
- Employment/independent contractor agreements: Practices may have employment or independent contractor agreements with the veterinarians who work in the practice or with other employees, including office managers and veterinary technicians. An acquiring practice must assume the workers’ contracts in the acquired business, which may involve salary obligations, employment benefits, or restrictive covenant agreements.
- Software licenses/SaaS contracts: Veterinary practices may have licenses or SaaS (software-as-a-service) agreements for various computer software used to run the practice, such as practice management software, patient recordkeeping software, customer relations management software, and telehealth platforms.
Assumed Contracts in Asset vs. Stock Purchases
Structuring a transaction involving a veterinary practice may affect how a buyer assumes the practice’s contracts. Parties typically structure transfers of veterinary practices as either asset purchases or stock purchases. In an asset purchase, the buyer acquires all or substantially all of the practice’s assets rather than acquiring the business entity that owns the practice. In a stock purchase, the buyer acquires the business entity that owns and controls the practice.
With asset purchases, parties must identify specific contracts that the buyer will assume, since the business entity that owned the practice remains in existence and therefore continues to hold the rights and obligations under the contract. However, with stock purchases, the buyer assumes the business entity’s rights and responsibilities under the practice’s contracts.
How Can Our Veterinary Law Firm Help?
An experienced attorney from Mahan Law – Veterinary Law Firm can guide you through the process of handling the assumption of a veterinary practice’s contracts by:
- Reviewing contracts to understand the rights and obligations imposed by the agreement
- Drafting and executing the necessary paperwork to effect the assumption of agreements
- Evaluating risk allocation and negotiating liability waivers or indemnification agreements
- Ensuring that the contract assumption complies with applicable laws and regulations
Contact Us Today for Experienced Advice
When you purchase, merge with, or assume control of a veterinary practice, you may also have to take on contracts binding that veterinary practice. Contact Mahan Law today for a confidential consultation with a knowledgeable attorney to learn more about the legal importance and effect of assumed contracts.