- Restraint of Trade in Dental Practice Sales
Dental practice sales involve large sums of money changing hands. Hundreds of thousands (if not millions) of dollars being paid in compensation for goodwill.
But how does the buyer know that they will get that goodwill? The success of this transfer will depend largely upon how the vendor behaves post sale.
- Will they endorse the new owner?
- Will they work for the new owner post sale?
- Will they disappear, never to be heard from again in the community? OR
- Will they work against the buyer’s interests and try to induce the patient base to leave the practice?
The vendor’s capacity for help or hindrance in the successful transfer of patient goodwill is the reason why most sale of business contracts will include restraint of trade clauses.
There is a lot of misinformation about restraint of trade clauses. These misconceptions have led to an array of problematic scenarios, including the following:
- buyers being under-protected in their transactions
- buyers overreaching and asking for unreasonable restraints, which ultimately cost more time and money for lawyers to negotiate and may not even be enforceable;
- vendors agreeing to overly restrictive covenants that could impact their ability to provide services within the region; and
- vendors refusing to agree to reasonable requests.
With these situations in mind, it is important that buyers and vendors alike both have a solid understanding of restraint of trade clauses.
Here are some frequently asked restraint of trade questions and answers:
Q. What is a restraint of trade clause in relation to the purchase and sale of a dental practice?
A. Restraint of trade clauses are clauses in the practice sale agreement and/or the vendor’s post-sale work contract where the vendor agrees to restrict their future liberty to carry on trading as a dentist.
These clauses are usually expressed as “non-compete” and “non-solicitation” clauses that have a geographical restraint area and a restraint period of time that they are valid for.
In a non-compete clause in the sale of a dental practice, the vendor usually agrees that, for a specified period, they will not open a new practice, or provide dental services to another practice, within a certain geographical radius of the practice they are selling to the buyer.
In a non-solicitation clause in the sale of a dental practice, the vendor agrees not to solicit or canvass patients, or staff members, to leave the vendor's practice for a competing business.
Q. When there is a restraint of trade in a contract that is expressed as a radius from a place of work, is it as crow flies or by road?
A. If the area of a restraint is expressed as a radius, it refers to the distance from the practice as the crow flies.
Q. We are often asked if restraint of trade clauses are enforceable – are they?
A. Courts have been willing to enforce post-sale restraint clauses to protect a buyer who has purchased the goodwill of the business, particularly in circumstances where significant money has been paid to the vendor for the goodwill.
While an excessively harsh restraint on a person's right to work will be unenforceable, if the geographical restraint and duration of the restraint are reasonable in protecting the goodwill that was paid for, then a restraint of trade clause is perfectly capable of being enforced and has been in many cases.
Q. How do you determine what constitutes a reasonable restraint of trade for a dentist in a practice sale?
A. There is no fixed formula for working out what would constitute a reasonable restraint distance or period of time for a restraint clause. It is generally accepted that the restraint must go no further than is reasonably necessary to protect the commercial interests that the buyer purchased from the vendor.
Timewise, a restraint clause may be for the amount of time it takes for the buyer to reasonably form a relationship with the vendor's patients following the sale (i.e., to 'absorb the goodwill').
In terms of geography, it will vary, depending upon how densely populated an area is and the competition for dental services in the area. For example, in a transaction for the sale of a practice in the Sydney or Melbourne CBD, it is more likely to be reasonable to have a shorter restraint radius (i.e., 1-2 km). For a transaction in city suburbs, a restraint of 5-10 km is more likely to be reasonable, and in a transaction for the sale of a practice in a regional or rural area, a larger restraint radius will likely be appropriate (i.e., 15 km or more).
Q. What could the consequences be for breaching a Restraint of Trade?
A. If the vendor has violated their restraint of trade, a buyer may apply to the court for an order to stop the vendor violating the restraint of trade (i.e., an injunction) and/or damages. The court will calculate damages according to the lost income or profit the buyer suffered as a result of the vendor’s actions in breach of the restraint.
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