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

April 19, 2016
I've interviewed potential associates who don't want to sign a restrictive covenant when they start. 

Question:

I've interviewed potential associates who don't want to sign a restrictive covenant when they start. I guess I can understand their concerns, but I want to protect my practice. What's the solution?

Steve Wolff, DDS

While this seems like a difficult problem with mutually opposing solutions, the fact is that the other party's needs and fears can be dealt with by a little understanding and flexibility. In this issue, each party has legitimate concerns that must be addressed in order to successfully go forward.

Let's first take a look at the host doctor's position. There are two legitimate reasons the host needs a restrictive covenant agreement with his or her employees, the first being the most obvious concern that the associate might leave the practice, take patients and staff, and do measurable harm to the practice. The second and perhaps less obvious risk is the loss of value to the practice should the owner have an associate who does not have a covenant not to compete in place, and who poses a threat to any potential buyer of diminishing the practice. The uncertainty will cost the host doctor dearly, perhaps even undoing the sale.

The associate doctor has another set of problems. The associate is likely to be a recent graduate who is just getting started in his or her career. The person cannot afford to drastically affect his or her future by signing large and long covenant agreements on the first day of employment. Suffice it to say that the associate's motives for not signing an initial covenant agreement are much more about the future than any ulterior motive about destroying the host practice.

Obviously the associate doctor cannot effectively sign the first day of employment. Likewise, the host doctor has every reason to protect his or her practice and practice value. An initial honeymoon period of 90 days (maybe 180 days in some cases) should pass before the terms become effective. The associate cannot pose a long-term threat and yet the associate should not expect to be able to work indefinitely without promising the employer this protection.

Tom Snyder, DMD, MBA

Of course you have the right to protect your practice and the goodwill that you've established over the years. We often see this reluctance to sign a covenant, especially in situations where the practice is located in a small town or rural area. Understandably, relocating one's family and purchasing a home can be a major financial impediment for an associate if the person is required to sign a restrictive covenant and things do not work out!

A fair solution is to offer the associate a "covenant buy-back option" as part of the Employment Agreement. This allows the associate to remain in your area without legal ramifications. The covenant buy-back option payment negates the restrictive covenant and thus allows the associate to take any patients with him or her without any costly litigation.

The buy-back option can be calculated by multiplying 100% of the associate's gross clinical production over the last 12-month period of employment. This buy-back option payment equals the value of goodwill the associate has developed with your patients as well as any potential financial loss of patient revenue. This is particularly true in a general practice where the loss of patient revenue from the recare program is akin to losing an annuity stream of income that a recare program generates.

It is strongly recommended that this buy-back option payment be made in cash. Lenders may also consider providing funds for a buy-back option to your associate, along with startup financing. The concept of a buy-back option is a fair and equitable way to protect your business interest in the event your associate chooses to leave and remain in your area.

Steve Wolff, DDS, is a member of ADS and the broker/partner in EMA Dental Practice Sales (formerly Evan Myers and Associates) in Kansas City, Missouri. Contact him at (888) 419-5590, ext. 816, or visit the company's website at emadental practicesales.com.

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 [email protected].

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