Trasitions Roundtable

We ask two experts the same question to give you two different answers on a complex issue

QUESTION

"I am trying to finalize a contract with an associate candidate. My advisors want me to include a Restrictive Covenant. The associate refuses to accept a covenant because I live in a small town. I really want to hire this associate and do not want to lose him. What options do I have?"

Tom Snyder, DMD, MBA

This is a very common issue that dentists who live in small towns or rural areas face. If you think about it, having a young doctor move to your area, work at your practice, establish residence, and then have the relationship fail, can become a real problem. So, you offer a "covenant buy-back" option that will allow your associate to effectively buy out his or her restrictive covenant using a predetermined formula. Therefore, the associate purchases the list of those patients he or she has been treating. One way to determine value is to agree to a multiple of gross revenue that the associate has generated over the last 12 months prior to departure. Using this approach, you are being compensated for the potential lost revenue that you may experience if your associate were to establish a practice in your locale.

Furthermore, from a bank financing perspective, if your associate contract contains a clause allowing for a covenant buy-back using a predetermined formula, your associate can not only request a loan for a practice start-up but can request additional funds to purchase his/her patient list. Absent agreeing to a covenant buy-back option, the only other recourse you have is a properly crafted non-solicitation clause in your associate contract, prohibiting direct patient as well as staff solicitation.

Many practice owners are not devastated if an associate leaves and takes patients, but the economic loss can be magnified if the former associate recruits one or several key employees. Therefore, citing monetary damages for each patient directly solicited as well as payment of a significant fee for the loss of staff members is good business. So, if your associate balks at signing a restrictive covenant, at least put them on notice that tampering with your patients and/or staff will have a price to pay.

Tom Snyder, DMD, MBA, is the director of transition services for The Snyder Group, a division of Henry Schein. He can be reached at (800) 988-5674 or [email protected].

Guy Jaffe, MBA

The senior dentist has the following three options:

1. Listen to his advisors and require the associate to sign a restrictive covenant.
   The associate is understandably hesitant to sign a restrictive covenant because if things don't work out, the associate will be prohibited from practicing in the community for a certain number of years.
2. Waive the restrictive covenant and let the associate work in the practice without one.
   A senior dentist should not permit an associate dentist to work in his or her practice without the associate dentist first signing a restrictive covenant. If the associate quits without having a restrictive covenant, the associate would be free to open a new office down the street and attract many of the patients from the practice from which he or she recently departed.
3. There is a third option that might provide a middle ground or compromise for the senior dentist and the associate dentist. Keep in mind that there are two components to a restrictive covenant -- the non-solicitation agreement and the non-compete.

I would recommend a six-month trial period. The senior dentist and associate dentist should know within six months whether or not they are compatible. During the trial period, if the associate were to leave for any reason, he or she would be subject to a non-solicitation agreement that would prohibit him or her from soliciting any of the patients in the practice now and in the future. The associate would be free to work for another dentist in the community or start a practice, as long as he or she did not solicit patients from the previous practice.

After the six-month trial period, if the associate leaves for any reason, he or she will be subject to the non-solicitation agreement, and in addition would not be able to compete with the senior dentist within a certain geographical area for a certain number of years (the non-compete).

At some point in the future, the parties may want to move toward an associate buy-in or sale of the practice to the associate dentist. If that were to happen, the associate agreement would be terminated and a purchase agreement would take its place.

Guy Jaffe, MBA, is a principal of ADS Midwest and past president of American Dental Sales. He provides brokerage, appraisal, and consulting services in Missouri, Illinois, Iowa and Arkansas. You can reach Mr. Jaffe at (800) 221-6927 or www.ADSMidwest.com.