The vast majority of the value of a practice lies in its goodwill. Goodwill is the value of the practice reputation and recurring business. A good reputation can reap the rewards from all important repeat patients.
Often, in order to grow the business, a practice owner will have to rely on associate dentists to maintain and enhance the practice goodwill. Understandably, the practice owner cannot see every single patient. Reliable associates can lead to the hugely beneficial process of the practice seeing more patients, patients returning to see those associates and the growth of the reputation of the practice. As a consequence, the practice becomes more valuable. The associates also reap the benefits of this situation. If the practice thrives, the associates treat more patients and in turn they get paid more.
All good things come to an end. For many reasons an associate may leave. This in itself is not an issue, if that associate is retiring or emigrating. However, if the associate is continuing in practice, particularly if doing so near to the practice; there is the real risk that the trusted associate goes from your goodwill generating asset to your main competitor, with instant knowledge of (and contact with) your patients.
You cannot directly restrict a patient's choices, but you can protect the loss of the practice goodwill by ensuring associates and other dental specialists are signed up to legally binding contracts containing the all-important restrictive covenants, also known as binding out clauses.
It is not only a warning to current owners who will want to maintain their goodwill. Buyers of dental practices will be buying into the goodwill that is currently being generated and maintained by the practice owners and their associates.
For a buyer, it is a double edged sword.
Firstly, it is important to ensure your seller has well drafted agreements in place with their associates. Then, even if due diligence investigations reveal suitable agreements, you must note that these agreements will only be between the associates and the seller. You’re not a party to these agreements.
It is extremely unwise to exchange, or even complete, on a purchase without a plan in place either to have the seller’s agreements novated to you or, better yet, your own agreements put in place.
You do not want to expose yourself to the risk of an associate of the practice immediately walking out of the door, setting up a practice next door and taking with them the goodwill you have just paid for. We came across a case like this, in real life, some years ago.
Aspects to consider
An associate agreement should clearly state that the goodwill of the practice belongs to the practice owner. The agreement should also be clear on the restrictions placed on the associate when their time at the practice comes to an end.
A non-compete clause is a must. This prevents the departing associate from setting up, or working for, a practice within a finite (and reasonable) distance of the practice. An area restriction should also be backed up by restrictions on the treatment of patients, and the solicitation of patients, staff and even referrers of work (particular in orthodontic and other specialist practices).
You may at this point want any associate who leaves you never to practice dentistry anywhere in the country (or even the world) or ever speak to a patient of yours, just in case!
There is however legal statute and case law that decide the enforceability of the restrictions you include. On a basic level, restrictions should be reasonable in terms of both geography and time.
The geographical restrictions will depend on the practice location. A practice in say London will have a smaller, but heavily populated catchment area. Competitors in a big city may only be within a mile. In rural areas, patients may travel in from further away and it may be reasonable for you to protect yourself from an associate leaving and competing over a much wider area.
Time should also be carefully considered and should only be for as long as the associate could reasonably cash in on the links to patients, etc. that they have made at the practice. If an associate who always sees your patient Mr X, leaves today; it is unlikely that their ability to perform dentistry on Mr X in 2 years’ time will impact materially on your goodwill because, by then, you should have bedded in Mr X with a new associate.
Overall, there is not one rule on restriction limits that can apply to all practices. The appropriate limitations should be carefully considered with a legal adviser. Remember, you not only have 2 incorporate restrictions within the associate agreement, but you also need to make sure that they are enforceable restrictions. Only in this way can you properly prevent associates competing nearby.
Get in touch
Written, enforceable associate agreements are essential. Without them, you cannot effectively protect your goodwill which, as a seller, you have likely spent many years developing and, as a buyer, you are spending a significant amount of money on.
This article includes a few elements of an associate agreement to consider. We can help in both the full review of what is in place as well as putting in place the most suitable agreements for your practice.
Great care is taken to build up goodwill; similar efforts should be taken to protect it.
Liam Mulvee, Solicitor, Abrahams Dresden LLP
Abrahams Dresden articles and guidance notes are for general information purposes only and generally state the law as at the date of publication. The information may not be relied upon as legal advice. We are of course always happy to advise directly on specific issues arising.