Written by: Doyle Watson, DVM, Simmons Southeast
The great majority of today’s small animal practices operate their lab services with an out-sourcing company under a formal service agreement. Unfortunately for many, however, we see that the practice signatory is often unaware of the ingredients of the contract and the significance of their signature. It is typically not as simple as “I sign and purchase products and services, and you provide (give) me lab equipment, digital X-ray, and purchase credits.”
It is important to realize that these contracts are binding, and the signatory is typically held bound in the event of default. Moreover, these contracts are often negotiable so that many of the unattractive features can be eliminated at the outset by an educated practice owner.
Who is the responsible party? Unless you noticed and made the correction, you have signed personally, not as a corporate officer. So you sell your practice and dissolve the corporation. Prior to closing, the buyer committed verbally to assume your laboratory agreement. However, there was no formal assumption agreement signed at closing. You closed anyway. However, the buyer did not actually assume and maintain the agreement. Perhaps she entered into another agreement with another company or brought it in-house. Nevertheless, the balance of your original agreement becomes your personal obligation, which could be huge depending upon how far you are into the agreement and the remaining deficit.
The takeaway here is that the buyer assumption commitment should be included in the Asset Purchase Agreement (Contract), and the lab service company should be contacted well in advance of closing to ensure that the assumption agreement is in place and signed by the buyer at closing.
What are the terms?
Is there an automatic renewal term? I.e. your agreement may automatically renew for an additional period of time (say 24 months) upon the expiration of the initial term or any renewal term unless written notice is given to terminate several months (say 12 months) prior to the expiration date. For many reasons, you may not want the agreement to continue. A major reason could be that you are selling your practice, and the buyer does not intend to assume it. And three days prior to closing, you discover it has automatically renewed for two more years. Now you are stuck with the financial obligation for fulfillment. Your contract does not require the buyer to assume it, and you are forced to close. Big problem!
What happens when agreement minimums are not met? Again the shortfall becomes the obligation of the signatory. If you are a practice buyer, you should verify that the minimums are being met. If not, you may want to renegotiate the agreement prior to assuming it.
A complication of this is that some of the lab fees paid to the lab company may not apply to the minimums. Not all lab service purchases apply to the minimum obligation.
For example, your agreement may call for say $2000 per month. You are spending that, but only $1000 may apply to your minimum. The balance may be for non-credited purchases. Therefore there is a $12,000 shortfall at the end of the year.
So be aware of the services that are applicable to your Volume Rebate and how that affects your minimum commitment.
Is there an exclusivity requirement? This means that you cannot work with another lab service company. While this may present no problem, it could if you are unaware of this provision and violate it. Again, just be aware of it and its possible contractual consequences.
Is there a confidentiality provision preventing you from discussing the terms of your agreement with another user? You may want to compare notes with a colleague or share your terms with a colleague who is considering contracting the service with the same company.
Considering that these agreements are often negotiable, it may behoove you to be aware of the terms others have been able to negotiate.
Use restraint by not taking unnecessary risks when entering into a reference lab agreement/contract. Empower yourself to make changes to the agreement/contract.
As a prospective practice buyer, one should ensure and obtain at closing a letter of good standing from the lab company stating that minimums have been met. If the agreement is assumed by the buyer, and there is a deficit from the previous owner, the buyer can become liable.