Smooth practice transitions start with a detailed contract
Written contracts protect both sides from misunderstandings and can put your relationship on equal ground. No matter whether you are joining a practice as an associate, intending to pursue a sale/purchase or hiring someone, a contract helps you start your relationship on the right foot.
Here are three scenarios where contract misunderstandings turned into more serious problems.
Scenario 1: I didn’t read my contract carefully, and now I owe my employer money
Problem: Dr. Sam was fresh out of dental school and excited to land her first job. The HR department assured her that she was signing a “standard contract,” so she skimmed it to double-check the salary, benefits and start date. She even got a signing bonus which she put towards home renovations.
Eight months later, Dr. Sam’s husband was offered a fantastic job in another city where they had family. Dr. Sam started looking for a job in the new city and turned in her notice. Her current employer invoiced her for the signing bonus. Dr. Sam then realized that the contract required her to stay for at least 24 months to keep the full bonus.
Solution: Every contract must be read closely, more than once and by more than one person. A lawyer should review your contract and point out anything that might be unusual or impact your future flexibility.
Pay special attention to:
- Bonuses that are tied to performance or production goals.
- How long you must stay in the practice.
- Any non-compete clauses that may limit your future career growth.
If you do receive a signing bonus or similar payment, resist the urge to spend it immediately. Instead, talk to your accountant or financial advisor about a short-term savings or investment vehicle where you can access it if the need arises.
Scenario 2: I didn’t bother with a written contract
Problem: Dr. Mike hit it off with the owner of a small practice. They shared a philosophy of care and even a love of hiking. From the initial interview, it felt like a great match. So when Dr. Mike was offered the job with just a handshake agreement, he did not hesitate.
In his first year, Dr. Mike was a rock star, exceeding his production goals and becoming popular with patients and staff. He expected a bonus and a raise — but was told that they had not agreed to it. The relationship became awkward and uncomfortable, and Dr. Mike felt he had to leave the practice.
Solution: As tempting as it can be to skip the hassle of a written contract, the reality is that verbal contracts are significantly more difficult to uphold and can lead to misunderstandings.
Push for a written contract that details:
- Every aspect of compensation, including how and when bonuses will be earned and paid.
- Noncompete terms.
- Agreements on how a transfer of ownership will occur.
- How coverage and other responsibilities will be divided.
Scenario 3: I had a change of heart
Problem: Dr. Alex intended to sell the practice to a new associate, Dr. Bob, after two years. They signed a simple contract that lacked details. However, Dr. Bob changed his mind. With a growing family, he no longer wanted the hassles of owning a practice or working full time.
Dr. Alex became frustrated because his retirement was postponed and he had to start over to find a new buyer. If Dr. Bob wanted to remain on part-time, he would need to be officially rehired by the new owner. This meant more headaches and paperwork for everyone.
Solution: A contract should clearly spell out every element of a practice sale — including penalties for changing the terms.
For example, the contract should include:
- The specific timeline and milestones for the sale.
- How and when the purchase price should be determined (typically a valuation is done at the beginning of the relationship and again at one year).
- Which method(s) will be used to value the practice.
- Valid reasons to void the agreement without penalties, such as death or disability.
- Penalties for noncompliance, including promissory notes, voiding/alteration of noncompete clauses and voiding/alteration of contractual obligations to remain in the practice.
Remember, a written contract protects both sides, and is worth the lawyer fees to avoid future problems. If the owner refuses a formal contract, write everything down and send it via email to the owner with a read receipt attached. Keep all these communications for your records.
A good contract takes some thought, but it can pay off by keeping things fair and open — the keys to a successful relationship and practice transition.
The ADA Center for Professional Success offers an e-book, Dentist Employment Agreements: A Guide to Key Legal Provisions, that includes a wealth of details and sample contract language.
About the Author
Dr. Ebert is an ADA Advisor for ADA Practice Transitions. She built a successful dental practice from scratch. After selling her practice, she became the Dental Director of a Federally Qualified Health Center where she provided high quality care to under served populations. She joined the ADAPT team as the ADA Advisor to provide real and tangible benefits to dentists as well as helping to address access to care issues across the country.
This article was originally published on the ADA Practice Transitions blog post “What Went Wrong Wednesdays: 3 contract issues that got expensive.” What Went Wrong Wednesdays is an ADAPT series that explores common problems of practice transitions – and offer tips to help you avoid them. Need help navigating your own practice transition? Start your ADA Practice Transitions profile today.