Safeguard Your Practice's Most Valuable Asset: Goodwill

Oct. 2, 2009
Here are some ways to protect the goodwill of your practice, that intangible that represents the majority of the value of any dental practice.

by Barry F. Levin, Esq. and Philip M. Bogart, Esq.

The majority of the value of any dental practice is based on the goodwill of that practice. However, goodwill is not like a lab chair, air compressor, or panorex. Goodwill is the intangible value of a dental practice, based on the reputation of the practice as a whole and its individual professionals, staff, and physical plant. Patients and those who refer patients (usually other dental specialists, other patients, or family members) develop relationships with the practice through its dentists, staff, and the “feel” of the physical plant.

A dentist’s goodwill is an important asset to be developed and protected. There are numerous books, tapes, and consultants that assist dentists in developing their goodwill — marketing and advertising are two proven methods that are often recommended. Even after a dentist’s goodwill has been established, it’s equally important to protect it. Goodwill can be protected in a number of ways. First and foremost, dentists should recognize its importance and work every day to ensure that it is maintained and expanded. This can be accomplished through consistent, positive interaction with patients and those who refer patients. There’s an old expression that you can do 100 things perfectly, but it only takes one failure to ruin your reputation (i.e., goodwill)!

Goodwill should be protected legally. Specifically, a dental practice should develop well-crafted agreements and policies, including 1) non-competition agreements, 2) non-solicitation agreements, 3) non-disclosure (or confidentiality) agreements, 4) employment agreements, and 5) employee handbooks.

Non-competition agreements
If a dentist decides to leave a dental practice, safeguards should be in place well in advance to prevent the departing dentist from taking advantage of the practice’s goodwill and “stealing” patients and those who refer patients. These protections should bind every dentist, whether the dentist is an employee or part owner of the dental practice. It is likely that patients have developed strong bonds with the departing dentist, especially if he or she is from a different generation. In most states, the “non-competition agreement” is the agreement of choice to protect a practice’s goodwill. In short, it restricts competition by prohibiting a departing dentist from opening a new practice or otherwise being involved in a dental practice within a certain geographic area for a certain time period after the departure date.

These agreements are difficult to enforce unless they are narrowly drafted to protect the practice’s goodwill, without unduly restricting the options available to the departing dentist. One size does not fit all. The legal advisor who prepares the non-competition agreement must ensure that the agreement conforms to applicable state statutes and case law dealing with the enforceability of non-competition agreements. In fact, not all states allow non-competition restrictions in the context of a departing employee.

Non-solicitation agreements
Non-solicitation agreements may be even more important to dental practices than non-competition agreements. Non-solicitation agreements provide that a departing dentist may not solicit the rendition of dental services to any patients of the practice or those who refer patients to the practice. A non-solicitation agreement should also restrict a departing employee from recruiting another employee of the practice for the departing dentist’s new practice. A great receptionist can be a significant component in a practice’s goodwill. You do not want a former employee to hire him or her away.

Those who draft non-solicitation provisions sometimes overlook the importance of prohibiting the departing dentist from soliciting referrals from the first practice’s referral sources. This clause is essential if the dentist is a specialist who relies on general dentists and other referrers to refer new patients. Arguably, any goodwill that exists between the dental practice and the referral source is owned by the dental practice; it should be protected accordingly.

Also, in some situations, when a specialty dentist such as an orthodontist meets one member of the family, other family members are likely to be treated by that same specialty dentist. As a result, non-solicitation agreements sometimes prohibit the departing dentist from soliciting his or her prior patients, as well as family members of prior patients. Again, special attention should be made to applicable state statutes and case law governing the enforceability of these restrictions.

Confidentiality/non-disclosure agreements
While employed by a dental practice, employees (including hygienists, receptionists, and other staff) will have access to confidential information, including lists of patients, lists of those who refer patients, and marketing plans. As a result, these employees should enter into confidentiality agreements with the dental practice, which restricts the disclosure or use of confidential information while employed and following termination of employment. These agreements also make clear to employees and part owners of the practice that all lists and other non-public data are owned by the practice.

Employee agreements
While the typical employment agreement sets forth, among other things, 1) compensation, 2) the duration of the employee-employer relationship, and 3) a description of the requisite services to be provided by the employee, the employment agreement of a dental office should also include provisions designed to develop and protect the goodwill of the practice. For example, employers often expand the scope of the services of a dental associate to include marketing or administrative duties. Some employers require dentists to visit local elementary schools and attend community activities to gain visibility in the neighborhood.

Also, in order to avoid negative publicity, employment agreements may provide that a dentist may be terminated in the event that he or she commits a bad act that could tarnish the reputation of the practice, such as conviction of a crime.

Keep in mind that it is possible to have one employment agreement include 1) a non-competition provision, 2) a non-solicitation provision, and 3) a non-disclosure provision, instead of preparing three separate agreements.

Employee handbooks
The employee handbook conveys the philosophy and goals of the dental practice to its personnel. The hygienists, receptionists, and other office staff are the face of the dental practice. They create the ambiance of the practice, which will either enhance or diminish the goodwill of the practice. Handbooks may provide personnel with guidance to ensure a consistent attitude throughout the practice. For example, if the practice prides itself on being professional and orderly, as well as kind and compassionate, the employee handbook should express those goals to all employees.

In addition, because the personnel of a dental practice have a key role in developing the public image of a dental practice, it is imperative to manage the personnel effectively. Happy and satisfied employees are more likely to provide excellent service. Effective communication between employer and employees cannot be overemphasized. Employees need to know what the practice expects of them, and what they can expect from the practice. Typically, only a dentist enters into an employment agreement with the practice, while other employees do not have written agreements with the dental office. As a result, the employee handbook may include:

  • A reminder that all employees (other than dentists) are “at will” employees, and may be terminated at any time
  • A dress code
  • A vacation/leave policy
  • An e-mail and Internet policy
  • An explanation of the HIPAA requirements
  • An explanation of available benefits.

Remember, for best results it is imperative for the dentists to comply with these rules in order to set an example for the other employees of the practice.

To protect the goodwill of a dental practice, many legal options should be considered. Working with a trusted legal advisor who understands the unique challenges of protecting goodwill can help ensure that the dental practice takes advantage of all legal options at its disposal to maximize the value of the goodwill, which in turn helps maximize the value of the practice.

Barry F. Levin is a partner and vice chair of Saul Ewing LLP’s Business Department.

Philip M. Bogart is an associate in the business department in Saul Ewing LLP’s Baltimore office. They represent dentists, and the business entities in which clinicians practice, in all aspects of the dental practice structure including the structuring, negotiation, documentation, and implementation of associateships or employee arrangements, partnership arrangements, acquisitions, sales, and mergers of mature practices.