Key Terms to Consider When Hiring an Associate Before Your Practice Transition

For many dentists, the sale of their dental practice marks a significant milestone in their professional journey. However, what some may overlook is the critical role that a well-drafted associate agreement plays in safeguarding, maintaining the value, and protecting the goodwill of their practice during this transition. If the associate agreement does not contain adequate protections, buyers may be wary that the associate will leave and take the patient base or staff. In this article, we’ll delve into the importance of a well-written associate agreement and its impact on the sale of a dental practice.

The following are the key terms from the practice owners perspective that should be incorporated into every well-written associate agreement:

Fair Market Value Compensation: Profitability is one of the most important factors in dental practice value. Associate compensation can take up a large portion of overhead. While guaranteed minimum salaries are typical for newer graduates, these should be limited to the first six months or one year of employment. It’s better to keep the associate motivated to produce, which is why all associate compensation should be based on a percentage of adjusted gross production. That is, gross production insurance adjustments, discounts, and bad debt. Additionally, laboratory fees should be reduced from gross production.

As far as the fair market value, the percentage of adjusted gross production that should be paid to the associate is dependent on the overhead of the practice. A general dental practice with standard overhead should not have compensation above 35% of adjusted gross production. 

Termination Clause: A termination clause with a 90 to 120-day notice period prevents an associate from abruptly quitting, ensuring sufficient time for the practice to find a replacement. This clause is especially important in areas where finding qualified dental professionals is challenging.

Confidentiality Agreement: A well-drafted confidentiality agreement prohibits the associate from taking or using practice information when he or she has left the practice. This can include patient lists, financial records, or other sensitive materials you may have developed that are crucial to your success as a practice owner. We like confidentiality agreements because they do not have an expiration date, which is different from non-solicitation and non-compete clauses which are generally limited to one or two years. 

Non-Solicitation Clause: A non-solicitation clause prevents the associate from soliciting patients or staff members to leave the practice. This may be the most important term of the agreement as this protects from the associate stealing the patient base, staff, and referral sources (in the case of a specialist) when he or she has joined a new practice. The importance of this term is magnified with the staffing shortage that many of our clients currently face. We recommend a minimum of one to two years to adequately protect the goodwill of the practice. 

Non-Compete Agreements: While unenforceable in some states, if allowed, an associate agreement must have a broad non-compete agreement. Now, state-specific laws will govern enforceability, but a minimum of six months to one year will be sufficient to protect the practice’s goodwill. The radius will largely be dependent on the practice’s market and patient base. With a rural-based practice, the patient base will travel a greater distance, which will allow a broader geographic scope for the non-compete clause. Conversely, a suburban or urban dental practice will be limited in geographic scope because its patient base is narrower. Ultimately, the geographic scope is limited to the range necessary to protect the practice’s business interest or goodwill.

The Impact on Practice Sale: A well-drafted associate agreement not only protects the practice during the associate’s tenure but also enhances the practice’s value during a sale. If an associate agreement does not have sufficient protections, many potential buyers will be reluctant to make an offer on a practice or will greatly reduce the purchase price offer to mitigate risk. Further, if the compensation or benefits are over market value, the profitability of the practice will suffer, making the practice less valuable at best or, in a worst case scenario, unsaleable.

As with all things involving the contracts affecting your dental practice or your practice transition, we highly recommend consulting a dental-specific attorney or practice transition specialist.