Dental Practice Sales: Protecting a Selling Doctor’s Goodwill through Non-Compete and Non-Solicitation Covenants in Associate Employment Agreements

The dental attorneys at Nardone Limited are experienced in representing both buying and selling doctors in dental practice purchases and sales. In our previous article found here, we explained why it is important for a dentist who is purchasing a dental practice to ensure that the selling doctor has entered into non-compete and non-solicitation agreements with his associate dentists, and that those agreements are assignable to the buying doctor. To the extent the selling doctor does not have restrictive covenants in place with his associates, or the restrictive covenants are not assignable, then it is imperative that the buying doctor protect his investment by entering into separate restrictive covenant agreements with the selling doctor’s associates as a condition to the sale. But, what about from the Seller’s perspective? Why should a selling doctor require his associates to sign non-competes and non-solicitations as part of the associate’s employment agreement? The general answer is: to protect the Seller’s goodwill in the dental practice that he has worked for years to develop.

What is Goodwill?

In most dental practice sales, goodwill represents the selling doctor’s most valuable asset in his dental practice. What is goodwill? Generally speaking, goodwill is an intangible asset that accounts for the dental practice’s ability to continue generating business from its patients, and includes items such as the practice’s reputation in the community, the doctor’s relationship with patients, the practice’s internal systems and procedures, patient charts, and longevity of the practice’s staff. Goodwill typically represents the excess amount paid for the dental practice over and above its tangible and other assets, and often accounts for 60% to 80% of the practice’s value. Thus, once the Seller’s equipment and furnishings have been appraised, and values are assigned to the seller’s other assets, the remaining amount of the purchase price is attributed to goodwill. With goodwill representing such a large portion of a practice’s overall value, it is easy to understand why a selling doctor should take precautions to protect his goodwill, including requiring associate dentists to sign non-competes and non-solicitations.

Protecting Goodwill with
Restrictive Covenants

As a condition of employment, it is highly recommended that owning doctors require associate dentists to sign a written employment agreement containing certain restrictive covenants. In particular, the employment agreement should contain non-compete covenants prohibiting the associate from practicing dentistry or otherwise competing with the practice within a specified distance from the practice location and for a specified period of time. The recommended restricted area depends on where the practice draws its patients from. For instance, if 90% of the practice’s patients are traveling from within a 10-mile radius, then a 10-mile restricted area is likely a sufficient area to protect the practice. Further, in the context of an employment relationship, industry norm for the restrictive covenant period is generally no more than two years from termination of employment. A well-drafted non-solicitation covenant, on the other hand, should prohibit the associate from soliciting both the practice’s patients and employees.

The Selling Doctor’s Ability to Assign the Associate’s Restrictive Covenants

While including restrictive covenants in an associate’s employment agreement is imperative to protecting a dentist’s goodwill in his practice, it is equally important to include a provision allowing the owning dentist to assign the employment agreement—including the restrictive covenants—in the event the doctor sells his practice. To the extent the associate’s employment agreement lacks an assignability clause, the selling doctor’s goodwill could essentially be rendered valueless. The reason is that most well-advised buying doctors are unwilling to pay for goodwill if there is nothing preventing the associate dentist from opening his own practice next door and soliciting the selling doctor’s patients. A buying doctor will only purchase goodwill if he is confident that the selling doctor’s established reputation, relationship with patients, systems, and employees will help replicate the practice’s revenue from prior years. As long as an associate’s restrictive covenants can be assigned to the buying doctor, the selling doctor’s goodwill should remain wholly intact. Goodwill can disappear, however, if the buying doctor does not have the ability to enforce a former associate’s restrictive covenants. 

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.