What is a Restrictive Covenant Agreement in a Dental Acquisition?

A dental acquisition restrictive covenant agreement is a legal agreement that is commonly used in the dental industry when a practice is sold to a new owner. The purpose of the agreement is to protect the seller’s interests and prevent them from competing with the new owner after the sale. The agreement typically includes a non-compete clause, which prohibits the seller from practicing dentistry within a certain geographic area and for a certain period. This is designed to prevent the seller from taking their clientele and opening a new practice nearby. In addition to the non-compete clause, the agreement may also include other restrictive covenants, such as non-solicitation clauses, which prohibit the seller from soliciting the practice’s employees or customers. The terms of the agreement will vary depending on the specific circumstances of the sale and the preferences of the parties involved. In this blog, we will discuss the importance of a restrictive covenant agreement and the different clauses that make up a clear and satisfactory agreement.

Why is a Restrictive Covenant Agreement Important?

This agreement is significant because it safeguards the buyer’s investment in the dental practice by preventing the seller from using their knowledge and expertise to establish a competing practice that could potentially draw clients away from the new owner. Some of the specific benefits of a well-drafted restrictive covenant agreement in dental acquisitions include:

• Protecting the goodwill of the practice : The buyer’s investment in the practice is largely based on its established reputation and loyal client base. If the seller were to start a competing practice in the same area, it could erode this goodwill and negatively impact the buyer’s financial returns.
• Preserving patient relationships : Patients often develop close relationships with their dentist over time and may choose to follow the seller to a new practice if given the option. A restrictive covenant agreement can help prevent this from happening by limiting the seller’s ability to solicit patients from the old practice.
• Maintaining the value of the practice : A competing practice could also decrease the overall value of the practice if it results in a loss of clients and revenue. By preventing the seller from starting a new practice in the same area, the buyer can preserve the value of their investment.
• Providing legal protection : A well-drafted restrictive covenant agreement can provide legal protection for the buyer in the event of a breach. It can also help prevent disputes from arising by setting transparent expectations and guidelines for both parties.

A substantial level of value resides in the good will of the dental practice. By implementing a restrictive covenant agreement, you can preserve and develop on the goodwill you purchased through the acquisition.

The Clauses of a Restrictive Covenant Agreement

There are two different clauses you can put into a restrictive covenant, a Non-Compete and a NonSolicitation clause. Restrictive covenant agreements typically contain several clauses to define the terms and conditions of the agreement, as well as to ensure that both parties are aware of their rights and responsibilities. Here are some reasons why you need clauses in a restrictive covenant agreement:

• Clarity and specificity : Clauses provide clear and specific language that outlines the scope and duration of the restrictive covenant. This helps to avoid any misunderstandings or confusion about what is expected of each party.
• Protection of interests : Clauses help to protect the interests of both parties by outlining the specific rights and obligations of each party. This can help to prevent disputes and legal challenges down the line.
• Enforceability : Clauses help to ensure that the restrictive covenant is legally enforceable. By including specific language and terms, the agreement is more likely to be upheld in court if either party breaches the terms of the agreement.
• Flexibility : Clauses can also provide flexibility by allowing for modifications or amendments to the agreement if circumstances change.

A non-compete clause in a restrictive covenant agreement is a provision that restricts the seller of a dental practice from competing with the buyer after the sale is completed. This clause is designed to protect the buyer’s investment in the practice and prevent the seller from taking away valuable patients and clients. Typically, a non-compete clause will specify a geographical area within which the seller is prohibited from competing with the buyer, as well as a time-period during which the restriction is in effect. For example, the clause may prohibit the seller from practicing dentistry within a 50-mile radius of the practice for a period of two years after the sale. The specific terms of the non-compete clause will vary depending on the circumstances of the acquisition and the preferences of the parties involved However, it is common for such clauses to be included in dental acquisition restrictive covenant agreements to protect the interests of the buyer and ensure the long-term success of the practice.

A non-solicitation clause in a restrictive covenant agreement is a provision that restricts the seller of a dental practice from soliciting the clients, customers, or patients of the practice after the sale is completed. It’s worth noting that a non-solicitation clause may be different from a non-compete clause, which restricts the seller from competing with the buyer in a specific geographical area or market segment for a certain period of time. While the two clauses may be included in the same agreement, they serve different purposes and have different restrictions. The non-solicitation clause typically specifies a period during which the seller is prohibited from soliciting clients, as well as the types of clients that are covered by the restriction. For example, the clause may prohibit the seller from soliciting any clients of the practice for a period of one year after the sale.

Overall, clauses in a restrictive covenant agreement are essential for creating a transparent and enforceable agreement that protects the interests of both parties and helps to prevent disputes or legal challenges.

An Attorney’s Role in a Restrictive Covenant Agreement

Overall, a restrictive covenant agreement is an important tool for protecting the buyer’s investment in a dental acquisition and ensuring a smooth transition of ownership. It is important to work with experienced legal counsel to ensure that the agreement is fair, enforceable, and tailored to the specific needs of the parties involved.

If you are needing representation or have questions about leasing, buying, or selling a dental practice, do not hesitate to contact Aaron Bruner, Attorney at Law at (918) 392-9672.