Unlock the secrets of M&A legal strategies in our latest blog post as we delve into the fascinating world of professional service business acquisitions. Explore the intricate dance between buyers and sellers, focusing on a compelling case involving the sale of a veterinarian practice and the critical role of noncompetition agreements. Dive into real M&A stories, dissecting the nuances of safeguarding goodwill and navigating legal challenges. Join us on this journey through the courts and discover the California-specific insights that could shape your M&A endeavors. #MandA #LegalStrategies #BusinessAcquisitions #NoncompetitionAgreements #CaliforniaLaw
M&A Stories
January 18, 2024
Acquiring a professional service business, such as a veterinarian practice, often involves gaining valuable goodwill. The buyer’s objective is to safeguard this goodwill by securing a written commitment from the selling professional not to compete with the sold business.
In a noteworthy 2014 acquisition, a veterinarian and her husband sold their El Cajon practice in the greater San Diego area for $5.3 million. As part of the deal, the vet signed a noncompetition agreement, pledging not to compete with the buyer for the later of the following: 5 years from the closing or 5 years from the vet’s termination of employment with the buyer.
Fast forward eight years, the vet left the buyer’s employment and promptly opened a competing clinic next door. This led to the buyer filing a lawsuit in San Diego Superior Court, resulting in the court granting a preliminary injunction prohibiting the vet from practicing next door pending the lawsuit’s outcome.
The vet appealed to the Court of Appeals, arguing the existence of two noncompetition agreements. The first, expiring in 2019, prohibited competition for five years following the closing and was permissible under California law. The second, preventing competition for five years following termination of employment, was the basis for the preliminary injunction and, according to the vet, unenforceable under California law.
The appellate court disagreed, emphasizing that the value of goodwill persisted beyond the sale’s conclusion. The court recognized that the vet continued building goodwill during her employment, with client relationships and goodwill acquired by the buyer extending as she worked. Consequently, the noncompetition agreement’s termination periods acknowledged that the goodwill from the pre-sale period would remain protected after the vet terminated her employment.
In summary, the court ruled that the noncompetition agreement safeguarded the goodwill acquired by the buyer, even after the vet’s separation.
California will generally not enforce a noncompetition covenant given by an employee. But it will enforce a noncompetition covenant given in connection with the sale of the business to protect the good will of the sold business.
Case Reference: VCA Animal Hospitals, Inc. v. Hampel, No. D081424, Court of Appeals of California, Fourth District, Division One (Filed December 22, 2023).
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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