Non-Competition/Non-Solicitation Covenants on the Sale or Purchase of your Dental Practice
A main point of negotiation for the purchase or sale of a dental practice will be the non-competition/non-solicitation covenant (Non-Compete). If you are the purchaser, a large portion of your purchase price will likely be allocated to goodwill and goodwill is worthless unless you have the proper Non-Compete in place. The biggest negotiation points will
likely be how long the Non-Compete will be in force for and how large the restricted area will be. The restricted area (“Restricted Area”) means the geographical location in which the seller cannot practice dentistry being a specified number of kilometers from the Practice.
The non-competition aspect of the Non-Compete protects the buyer from the seller opening up a dental practice down the street (or in some cases much larger geographical distances). The Non-Compete in the agreement of purchase and sale will prohibit the seller from carrying on any business related to dentistry within a certain distance and for a certain amount of time. The more reasonable the time and distance the more likely the courts will be to uphold the Non-Compete.
Length of Non-Compete
The length of the non-compete will vary on every deal. For the most part industry standard is between 3-5 years from the later of (i) the date that the seller no longer associates with the buyer and (ii) the date of closing. This is negotiable as between the buyer and seller.
The Restricted Area will also vary depending on the deal. If for example the dental practice is in a remote area the Restricted Area tends to be larger. If the dental practice is located in a more urban location the Restricted Area tends to be smaller. It should be kept in mind that when negotiating the length of the Non-Compete and the size of the Restricted Area the courts will look to the reasonableness of the Non-Compete. If the area is too large or the length too long the courts may deem the Non-Compete unreasonable and consequently unenforceable. However, it is extremely rare that the length of a dental non-compete ends up in court to argue it is unreasonable.
The other concern buyers have is what stops the seller from convincing his/her old patients to come to his/her new practice which may be outside of the Restricted Area. The non-solicitation clause in the Non-Compete will cover this. This clause will prohibit the seller from soliciting any of his/her old patients, putting out advertisements in the Restricted Area, soliciting former employees or continuing to use the old practice address on the seller’s website. We like to remind our clients that even though the Non-Compete may be in place there is nothing stopping patients from leaving on their own and when buying a practice losing some patients is par for the course.
Will the Non-Compete be upheld by the Courts?
Courts have held the position that Non-Competes are against public policy as they are a restraint on trade where there is no purchase and sale of a practice. The good news, however is that courts have also generally upheld Non-Competes in the context of the purchase of dental practices. Courts have found that the consideration paid justifies the entering into of the Non-Compete by the seller. The courts will still look to the reasonableness of the Restricted Area and the length of the Non-Compete.
In our experience we have had several dentists who have purchased practices only to see the seller set up a new dental practice within the Restricted Area. In each of these circumstances the courts granted our client an injunction preventing the seller from operating its dental practice within the Restricted Area.
Keep in mind that although the courts have upheld Non-Competes within the context of a dental practice purchase they are less likely to uphold them in the context of an associate leaving your dental practice to compete.
It is sometimes possible to negotiate a damages clause if you are purchasing a practice. This is especially important if the seller has another practice and patients are in the habit of moving from one of the seller’s practices to another. We have sometimes been able to negotiate damages clauses thereby the seller pays the buyer anywhere from $500.00 to $1,250.00 per chart for each patient that leaves the practice to be treated by the seller elsewhere.
When buying a dental practice one of the most important items you can have in place is the Non-Compete. It’s important to ensure that the clause is properly drafted, reasonable and understood by both the buyer and seller. If you would like to discuss this issue or any other issue with us please do not hesitate to contact us for a free consultation.
This blog post is for informational purposes only and any issues should be discussed with a lawyer familiar with dental law.