The dental attorneys at Nardone Limited are experienced in representing both buying and selling doctors in dental practice purchases and sales. Most buying doctors recognize the importance of restricting the selling doctor from competing with the practice within a specified distance from the practice location, and from soliciting the practice’s patients and employees. And, most selling doctors understand that they will be subject to restrictive covenants as part of the sale of their dental practice. Thus, while specific terms of the non-compete and non-solicitation covenants may vary from deal to deal, both parties generally expect to see restrictive covenant language in the purchase agreement. In the absence of restrictive covenants, the selling doctor could simply lease the space next door to his prior dental office, hire his former employees, and immediately start soliciting and treating his former patients—with whom he has an established relationship.
Common sense dictates that the selling doctor must be restricted from engaging in the activity described above. But, what about the associate dentist who has worked at the selling doctor’s practice for the last 5 years? What’s to stop that associate from moving next door and taking the practice’s patients and employees with him? The answer is that nothing would prevent the associate from taking those steps, unless he is subject to restrictive covenants that are enforceable by the buying doctor.
The Buying Doctor’s Due Diligence
Regarding Associate Agreements
As part of the buying doctor’s due diligence in any dental practice sale, the buying doctor should request copies of all employment agreements from the selling doctor, including any agreements with associate dentists. Once the buying doctor obtains copies of the selling doctor’s employment agreements—assuming he has required employees to sign written agreements—the buying doctor should review the agreements for, among other terms, the existence of comprehensive restrictive covenants. In particular, the buying doctor should confirm whether the agreement contains covenants-not-to-compete for a specified period and distance that are sufficient to protect the practice; non-solicitation covenants covering the solicitation of employees, patients, and referral sources; and other common restrictive covenants. It is also important to check whether the restrictive covenants are assignable by the selling doctor under the terms of the agreement.
Assignability of the Restrictive Covenants
To the extent the restrictive covenants—including non-compete and non-solicitation covenants—are assignable, and the terms are sufficient to protect the practice, then one option is to simply require the selling doctor to assign the associate’s restrictive covenant agreement to the buying doctor as part of the sale transaction. The purchase agreement should be made expressly contingent upon the parties executing the assignment at closing.
If, however, the associate’s non-compete and non-solicitation are not assignable, or the terms of the restrictive covenants are inadequate, it is advisable for the buying doctor to enter into a restrictive covenant agreement with the associate dentist—or a new associate employment agreement containing restrictive covenants—as a condition to closing on the sale transaction. The difficulty for the buying doctor is that the associate dentist may be hesitant to agree to restrictive covenants, or more restrictive terms, especially if the associate was not previously subject to restrictive covenants. This could potentially kill the deal. Thus, in most instances, it is important that both the selling doctor and the buying doctor openly discuss the transaction with the associate dentist prior to the sale and communicate the importance of fair non-compete and non-solicitation covenants to a dental practice. From our experience, an associate is more likely to sign a restrictive covenant agreement if the associate fully understands the restrictions and that the restrictions are necessary to protect the dental practice. Not to mention, when the associate understands that his continued employment with the buying doctor is contingent upon signing a restrictive covenant agreement, the associate will typically cooperate.
Assessing the Potential Harm Caused by an Associate Without Restrictive Covenants
At the end of the day, if the associate’s non-compete and non-solicitation covenants are not assignable, and the associate is unwilling to enter into a new restrictive covenant agreement with the buying doctor, then the buying doctor will need to assess the potential harm that the associate could cause the practice if he opened a new practice down the street. For instance, if the associate has only been working for the selling doctor for 6 months, then the associate likely did not establish strong enough relationships with patients or employees to harm the practice. And, in that scenario, the buying doctor may be comfortable moving forward with the sale without restrictive covenants in place for the associate.
On the other hand, if the associate has been employed at the selling doctor’s practice for 3 years, it is much more likely that the associate could persuade patients or employees to come with the associate to his new practice. Further, if the sale price is low, the buying doctor may be willing to accept the risk and move forward with the sale. Whereas, if the buying doctor is paying $1 million for the practice, the investment is likely too large to accept that risk. Furthermore, the buying doctor’s lender likely will not loan the funds to purchase an expensive practice without restrictive covenants in place for the associate.
Contact Nardone Limited
The dental attorneys at Nardone Limited have vast experience representing buying and selling doctors in dental practice sales and can properly advise you regarding restrictive covenant agreements for associate dentists. If you need guidance regarding your dental practice transition, contact Nardone Limited.