Are you buying a dental practice? Even if you have a great relationship with the selling dentist, it’s still a business transaction. As such, you want to take measures to protect yourself and your future practice with restrictive covenants. Below, we outline the two main types of restrictive covenants – non-competes and non-solicitation – and explain how each one factors into your dental practice acquisition.
Non-Compete
A non-compete agreement binds the selling dentist from practicing dentistry within a certain timeframe and/or geographical area. Even if your selling dentist is retiring, it’s still important for you, the buyer, to secure a non-compete agreement. Who’s to say Joe Dentist won’t decide that retirement isn’t for him after all, and wants to continue practicing? He should be able to do so, but not at the expense of your practice.
If the practice you’re buying has dentists who are not owners, consider including them in the non-compete, too. They may be motivated to go out on their own once their boss leaves, and if that’s the case, their established relationships with the staff and patients that are now part of your practice could be problematic. You’ll probably need to be flexible with the associate dentist, and offer them additional incentives such as higher compensation or better benefits. Otherwise, the buyer asking the associate dentists to sign a non-compete could start your working relationship on a negative note.
If a seller refuses to sign because she or he wants to keep options open, be extra vigilant.
Non-Solicitation
A non-solicitation agreement prohibits the selling dentist from interfering with your dental practice by poaching staff, patients, or referral sources. Referral sources are important to protect, especially for specialists who rely on referrals. In general, the relationship that exists between the dental practice you just bought and a staff member, patient, or referral source is owned by the practice – not the selling dentist.
A non-solicitation agreement should specify employees who leave to work for other dental practices; a great receptionist is part of a dental office’s goodwill, after all. You may also want to expand the non-solicitation clause to include family members of current patients.
How to Enforce Restrictive Covenants
By their nature, restrictive covenants are… well, restrictive. To be enforceable, avoid being too restrictive. Courts will usually require time limits, reasonable geographic limits, and overall balance – in other words, don’t be too strict. Also, in a non-solicitation agreement, you can’t prohibit the selling dentist or associate dentist from treating patients if the patients themselves seek him out.
You also want to clearly define the terms in the covenants. Let’s say one of your associate dentists, who signed a non-solicitation agreement when you bought the practice, is now opening her own practice. She’s far enough away so as not to violate the agreement, but she’s still in the region. Will her promotions on Facebook or LinkedIn violate the non-solicitation clause? It depends how you defined solicitation.
When it comes to the courts, include a clause that allows a court to reduce the limits of a restrictive covenant in the future if those limits would be unenforceable. You should also include injunctive relief in the agreement, should the seller violate the terms. We also recommend agreeing on damages before you sign any covenants. While the conversation may be uncomfortable or difficult to imagine now, you could save yourself a lot of problems down the road.
The majority of a dental practice’s value lies in its goodwill. Creating and enforcing restrictive covenants allow you to maintain and build upon the goodwill you bought during the acquisition. Our dental CPAs are available to answer any questions on restrictive covenants and other aspects of the buying process. Contact us to set up a conversation.