The nightmare scenario for any high street trader buying a business is for the seller to set up the same sort of shop just down the street, and take 90 per cent of his old customers with him.
In the world of dentistry, goodwill represents a significant proportion of a practice’s value, and goodwill and customer loyalty are two sides of the same coin. Prudent practice buyers should therefore always take steps to safeguard their investment from haemorrhaging patients as soon as the change of ownership becomes known. Patients who have confidence in their dentist are quite naturally averse to change. Given the opportunity many will follow the selling dentist if they set up another practice within comfortable travelling distance.
Whilst the buyer is powerless to prevent the patients from exercising their freedom of choice, the insertion of restraining clauses in the sales agreement can prevent the outgoing dentist from establishing another, compatible business in the immediate locality, or within a designated time frame. This allows the buyer to apply for a court injunction against the seller if he or she breaches these conditions.
The courts, as a matter of public policy, do not like to enforce a restriction of a person’s ability to earn a living, in doing so they will therefore look to see if the duration and geographical extent of such a restriction is reasonable in the specific circumstances of the case.
If the seller is retiring the question is purely academic, if not then becomes necessary to determine what would be a reasonable ‘no go’ area around the practice within which the seller will be prohibited from opening up in competition, and this can be the subject of much debate.
A rural practice in a sparsely populated area may be the only dental treatment facility for many miles, drawing its patients from relatively far away. A popular dentist setting up a rival practice even five miles distant could decimate its patient list; conversely, an inner city practice may already have several direct competitors within a couple of streets, and a restraining clause of even one mile would be unenforceable. While it is clear that a restraining clause is always necessary, flexibility is needed to reach a geographic solution which is fair to both parties, depending on the location of the practice changing hands, and also bearing in mind that if the conditions are too severe the seller may have a counter-case alleging restraint of trade.
The services of specialist staff may also be included in a goodwill valuation, although since third parties are involved the later poaching of such individuals by the seller is inevitably something of a grey area.
In terms of time, many lenders will insist on a period of at least two years before the seller becomes a potential competitor, thus allowing the buyer ample opportunity to establish a relationship with his ‘new’ patients.
The buyer should also seek to include comprehensive warranties in the sale agreement relating to the condition of the practice at the time of sale, covering such matters as the accuracy of the accounts (practice accounts are rarely audited), the state of the equipment, the practice’s compliance with CQC requirements, and perhaps most importantly that there are no outstanding patient issues concerning the quality of treatment received. The buyer will naturally seek as many warranties as possible, while the seller will be seeking to reduce his potential liabilities. It is important that lawyers negotiating such warranties are skilled and knowledgeable about dental matters.
The legal precept of caveat emptor (buyer beware) applies equally to the purchase of a dental practice as to a second hand car, or indeed anything else. While the seller should answer questions truthfully, he or she is under no obligation to volunteer information not requested by the purchaser. The onus is therefore firmly on the practice purchaser to perform due diligence with the utmost attention to detail to safeguard his own interest.
However, notwithstanding caveat emptor, there are instances where a warranty can come to the aid of the buyer after the sale – for example, if a patient makes a complaint some months later, the buyer would be covered by the warranty and be able to claim any damages awarded, or expenses incurred rectifying the complaint, against the seller. The actual time limit for such a claim in contract law is six years, but in the case of a dental practice a transfer of 12 to 24 months is more usual. At the same time neither party will wish to argue endless trivial warranty infringements, and at present a cut off liability figure of about £500–£1,000 is generally accepted as to be borne by the buyer.