What You Should Know Before You Sign A Non-Compete
Most medical practitioners who have developed a solid practice will have a consistent stable of patients with whom they have created exceptional relationships.
As practitioners, we know that our return patients form the backbone of our clinics, providing us with everything from word-of-mouth marketing to financial stability to the very pleasure we get out of the practice of medicine itself.
So when it comes time to sell the practice, if you’re not staying with the new owners as an employee, will you want to keep practicing? And if so, where?
Many states frown upon non-competition agreements or anything like them that would prevent or limit a person’s ability to make a living. But if those agreements have certain limiting elements, a judge may see the reasoning of why a buyer wouldn’t want to purchase a business if the sellers were going to be in immediate, direct competition after the sale.
Some of the most important elements to have in a non-compete agreement include:
- The length of time that the agreement is in force
- The geographical area included in the agreement (usually listed as a certain number of miles from the practice)
- The specifics of the kind of work covered by the agreement
If the person/people selling a medical practice plan to retire or no longer work in that field of medicine, a broad non-compete is no big deal. For instance, I sold my practice in California, and I now live out of state and plan to for many years, so I had no problem with a strict non-competition agreement.
But if you hope to keep working in the same field and do not plan on moving, the terms of a non-compete can be a point of contention, a point of negotiation. You can negotiate the length of time, the distance, and/or the actual specialty or kinds of patients seen.
Money & Tax Consequences of a Non-Competition Agreement
If your medical practice sales agreement includes a non-competition piece, it will need to be spelled out as a separate document, perhaps an addendum, to the agreement. In order for it to be legally enforceable, you will also be required to attach a monetary value to it.
A Quick Comparison
If your sale is an asset sale, the value will be taxed at ordinary income tax rates, so you will want to keep the value of the agreement as low as possible.
Generally speaking, when it comes to an entity sale, for a C-corp, the seller will want the monetary value assigned to the non-compete to be as high as possible in order to avoid double taxation.
Most shrewd buyers are aware that your popularity as a practitioner is part of the value of your practice, and it’s a reasonable assumption that they will want to have signed an agreement not to compete to preserve their investment.
The details—when, where, how much it’s valued at; these are the areas that can get sticky and are usually negotiated between the parties. These agreements also have a value when tax time arrives, so be sure to check with your accountant to see how you can allocate the value of the non-compete as part of your deal.
If you’re in the dark about non-competition agreements and would like some help, please reach out to us and allow us to provide it. We can provide you the guidance you need, or refer you to the appropriate legal or accounting people if more assistance is needed. Reach out now.
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The Mandatory Disclaimer
It is important that you consult a CPA and a good attorney before making a final decision on how you transfer the business. The advice we give here is based on our knowledge and experience, but we’re not CPAs or attorneys, and we want you to know that.