What Went Wrong Wednesdays: 3 contract issues that got expensive
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.
This week, we will examine three scenarios where contract misunderstandings turned into more serious problems. The ADA Center for Professional Success offers an eBook, Dentist Employment Agreements: A Guide to Key Legal Provisions, that includes a wealth of details and sample contract language.
Scenario 1: I had a change of heart
Dr. A intended to sell the practice to a new associate, Dr. B, after two years. They signed a simple contract that lacked details. However, Dr. B changed his mind. With a growing family, he no longer wanted the hassles of owning a practice or working full time.
Dr. A became frustrated because his retirement was postponed and he had to start over to find a new buyer. If Dr. B wanted to remain on part-time, he would need to be officially re-hired by the new owner. This meant more headaches and paperwork for everyone.
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 non-compliance, including promissory notes, voiding/alteration of non-compete clauses, and voiding/alteration of contractual obligations to remain in the practice
Scenario 2: I didn’t read my contract carefully, and now I owe my employer money
Dr. X 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. X’s husband was offered a fantastic job in another city where they had family. Dr. X started looking for a job in the new city and turned in her notice. Her current employer invoiced her for the signing bonus. Dr. X then realized that the contract required her to stay for at least 24 months to keep the full bonus.
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 3: I didn’t bother with a written contract
Dr. M 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. M was offered the job with just a handshake agreement, he did not hesitate.
In his first year, Dr. M was a rockstar, 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. M felt he had to leave the practice.
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
- Non-compete terms
- Agreements on how a transfer of ownership will occur
- How coverage and other responsibilities will be divided
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.
Need help navigating your own practice transition? Start your ADA Practice Transitions profile today!
This article by Dr. Suzanne Ebert originally appeared in the ADAPT Blog.
For more information pertaining to practice transitions, visit ADA Practice Transitions blog.