Transitions Roundtable

This dentist is afraid he’ll drive the associate away if he asks her to sign a restrictive covenant. Here’s advice from two experts.

We ask two experts the same question on a complex issue.

Question:

I’m going to buy a practice in which the associate works three days per week. I’m fine with keeping her there, as I will only be working part-time in the practice. She doesn’t have a restrictive covenant and she’s only been there for one year. I’m concerned she’ll leave if I have her sign a restrictive covenant. What should I do?

Earl Douglas, DDS, MBA

Like many questions, we don’t have enough information to make a totally informed decision, so we’ll make the best decision possible given the facts we have and then err on the side of conservatism. In this instance, we should know what percentage of total production the associate performs, what services she provides, what plans or Medicaid she participates in, if she treats mainly fee-for-service patients, etc.

The buyer’s safest approach would be to make the practice purchase conditional on the seller procuring an assignable covenant not to compete and a non-solicitation agreement with the associate prior to the sale. The lack of a covenant is due to the seller’s carelessness, and a buyer should not have to pay for that carelessness. The problem is that the buyer is purchasing goodwill from a seller who neither owns nor controls it.

Another approach is to reduce the practice price by the percentage of projected income loss. If there were no competitive losses due to the associate’s removal of his or her goodwill, the price offset could be restored to the seller. This would ameliorate the price penalty of any lost goodwill. However, analyzing the buyer’s potential lost income is much more important to ensure the result is not an unsustainable net income for the buyer.

The worst transition experience I’ve seen with this issue involved not only the associate dentist, but the entire office staff moving to a neighboring practice immediately after the closing. Imagine the disaster that the buyer just purchased. If the seller had assured the buyer that the associate would not leave, then he just assured himself of a lawsuit.

My prime concern is that one’s career is too important to depend on unpredictable actors in a transition. My first advice is to have the seller remedy the problem by getting a covenant. If that isn’t possible, examine the cash flow to see if the buyer could survive the loss of the associate income. Then, if the loss is survivable, calculate a price reduction for the questionable goodwill. For further insight on the issue, read my article “The importance of associate contracts” in the March, 2006 issue of Dental Economics.

Tom Snyder, DMD, MBA

Assuming your state allows employee associates to be bound by some form of restrictive covenant, here are four strategies that you can consider regarding this situation.

First, you can ask her to sign a restrictive covenant. However, you should offer some form of monetary compensation to her for agreeing to sign a restrictive covenant. You should consult your attorney regarding the customary value ranges for these “consideration payments,” as they do vary in different states.

Second, if you are contemplating an investment in additional marketing efforts, consider offering her full-time employment as the practice grows. However, your offer to grant this additional time is dependent on her signing a restrictive covenant. Admittedly, this does not solve your immediate concern, but at least you get an idea whether she intends to remain in your practice.

Third, if a restrictive covenant is a “non-starter” as an option, ask her to sign a non-solicitation in the event she leaves the practice. Often times associates have no problem signing such an agreement since they will not be prohibited from practicing in the immediate geographic area, but not with your former staff or possibly some of your patients! We have found that losing key staff members to a former associate may be more detrimental to a practice than patient loss. Patient solicitation means any direct contact with patients, including correspondence, direct mail, or telephone contact. Your employment agreement should also state prohibitions on creating any lists of patients, access to confidential information, as well as access to your computer database.

A fourth strategy is to offer a covenant buy-back option whereby the associate is bound by a restrictive covenant. But now the associate has the option to purchase the list of those patients that she has been treating in the event she leaves. If the buy-back option is initiated, the restrictive covenant is voided once the associate makes the agreed-upon payment. This at least provides you with some financial remuneration for any patient loss in the event the associate leaves your practice. Finally, make sure that you add a staff solicitation clause to this agreement.

Earl Douglas, DDS, MBA, principle of ADS South LLC, began his dental career in 1971 and his dental transition career in 1982. In 1996 he founded ADS Transitions, a national association of practice brokers. His company, ADS South LLC, performs dental practice transitions and valuations throughout the Southeast. Reach him at earl@adssouth.com or (770) 664-1982.

Tom Snyder, DMD, MBA, is the director of transition services for Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or TomSnyder@henryschein.com.

More in Practice