Dr James, 0s:

Welcome everyone, another episode of Dentists Who Invest Podcast. We're here today to talk about restrictive clauses and how they can be changing or they may be changing for us dentists in the near future based on recent legislation changes. How much of this is true, how much of this is speculation, all we revealed in this podcast. Fair to say it could be a massive shakeup. I'm joined today by Mr. David Nezri, expert lawyer to dentists to discuss the legal ramifications of this and also Luke Moore, expert practice broker and owner of Dental Elite, so we can discuss how this will affect practice valuations and all of the potential implications there. As ever, you can claim your CPD for this episode within the official Dentist Who Invest Smart Money Members Club. Smart Money Members Club also includes multiple mini courses and webinar series on finance for dentists, including how to become as tax efficient as possible, as well as understanding investing. All of this content counts as verifiable CPD, and you can download your certificates there and then upon completion of each lesson. In addition to this, we also include a whopping 10% discount on your dental indemnity and a 5% discount on lab bills for dental principals, amongst other perks and discounts for members. Please use the link in the description to claim your verifiable CPD for this episode. Now then, let's cover exactly what we were discussing in the intro, which is potential changes to restrictive covenants for dentists. Because from what I understand, David, these are pretty much par for the course in every associate contract. Have I got that right? Or they are they in every contract or are they just in some? Interested to know.

David, 1m 45s:

Well well, they they should be in they should be in every contract, every associate agreement, really. Um in reality, sometimes, sometimes they're not, um, but they should be in all associate agreements that basically um serve to protect the legitimate interest, business interests of um of the practice and you know protect patient goodwill, um, confidential information and general stability during a you know transition period if associate if and when associates move on.

Dr James, 2m 19s:

And maybe what it's a good idea to do is just start from the very, very, very start and cover what restrictive covenants are. And I know that might be staring obvious for a lot of people that are out there, but sometimes when you ask these sorts of questions, there's a little bit of nuance that maybe not everybody's aware of. So I think that's probably a good place to begin.

David, 2m 38s:

Yeah, of course. So um, well, normal restrictive covenants are basically um restrictions in the associate agreements that prevent um an associate from working normally within a radius of of the practice for the term of their engagement and for a certain period afterwards. Um so that can also relate to them working elsewhere and soliciting patients from their current practice as well. So that's normally the um the starting point, and all associates should have those in their agreements, really, um, purely to um protect the legitimate business interests of the of the practice owner.

Dr James, 3m 22s:

Understood. And what might a typical restrictive covenant look or sound like, as in uh ex-dentist can't work within Y radius for Z number of years, something along those lines?

David, 3m 35s:

Yeah, so it to it it depends on the location of the practice. But I would say in if you'll if you're somewhere in in London, for example, it might say, well, you can't work at um another practice for maybe six months in a radius of two miles. If the practice is in the countryside with not too much else around, that radius might um go up to 10 miles.

Dr James, 4m 0s:

Okay, right. So this can really vary then effectively. And I guess my other question then, David, just to now that we've sort of set the scene, I guess a little bit, is how enforceable are these contracts? I mean, is it routine that they're observed to the letter of the law in terms of how they're described or framed within the contract, or how does that actually pan out in reality, is what I'm getting at.

David, 4m 27s:

I mean, listen, it's it's I'd say it's very much a case-by-case basis, but at the end of the day, they need to be they need to be reasonable in, I suppose, the um, you know, the radius in which they cover and and their duration. So it would be difficult for someone working at practice in London to enforce a restrictive covenant that basically covers, let's say, the whole of the UK, because that goes well beyond protecting the legitimate business interests. But if it's within a mile, then that would very much be enforceable because it's serving to you know protect protect the interests of the practice at heart.

Dr James, 5m 8s:

I see. Okay, cool. So it's fair to say that they can't people can't go too crazy with these, you know, they they have to be within reason, they have to be reasonable.

David, 5m 17s:

Yeah, yeah, I think that's this, and that's the bottom line is that they do they do they do need to be reasonable. Um, and if they are very unreasonable, then you creep into territory where they might be unenforceable, or on occasion a court might look at it and say, well, you know, saying 30 miles might be unenforceable, but if it would have said two miles, that would have been enforceable, so they will change it themselves basically to say, well, that is what what the number's now going to be, because that would have been reasonable.

Dr James, 5m 48s:

Understood. And just one final question, just to round that off. What might a typical penalty look like for someone who doesn't adhere to the terms of their contract when it comes to uh you know these the these sorts of agreements? Uh what what what what how would that be enforced? Would it be a penalty? Would it be a fine? I'm interested to know.

David, 6m 9s:

Yeah, I I listen, I think at the end of the day, it depends on what the um what the loss would be for the um for the original practice. So worst case, you would probably have the um the practice owner try and get an injunction stopping them, stopping the associate from seeing seeing the patients or setting up next door. Um, but in terms of what the actual outcome and penalty of that would be, I would it would be very much dependent on the loss suffered by the pr the original practice.

Dr James, 6m 40s:

I see. Okay, so potentially money might change hands, potentially they they could they could a practice could sue you, basically. Uh and yeah, just one more question. Sorry, I I keep thinking, okay, this is the final thing that that it is essential to know. Uh, but then just each time you talk, just one more thing comes into my head. And I'm just thinking, how many times in your experience, how frequent is this that dentists run afoul of this? Is this very common? Uh is it quite unusual? Uh, do they generally uh keep things on good terms and observe their restrictive covenants? I'm interested to know.

David, 7m 12s:

Um, in my experience, I haven't seen it happen that often, really, at all from a from a transaction point of view. Um, but then at the same time, I sometimes I come across um associate agreements that have no restrictions in at all. Um, and some associates don't even have associate agreements in place. So, for in these instances, then there are no there are no restrictions anyway.

Dr James, 7m 38s:

Okay, fine. And that's on the presumption that they have a contract, which they don't always do. Well, exactly. I get that nowadays, I think I I think nowadays it's it's a lot less common for that to be the case. I remember I had a job once that we didn't have a contract, um, but I regret the fact that we didn't have one, actually, because I think it's it's probably more beneficial for the associate from their point of view. It's it's definitely beneficial from the associate. I can't speak for the principal. Actually, I'm gonna backtrack slightly on that one. It's definitely beneficial for the associate to have one, uh, 100%. So, yeah, something to chew on. Anybody listen to this podcast? Okay, we've got a good lay of the land. Thank you, David. And now moving on.

Luke, 8m 17s:

Look, maybe this is where we move on, because um I missed the message that I celebrated. It's the fact that six months used to be that barometer. I mean, I think that was in EU law, wasn't it? About you could buy someone out for six months for like a normal level of employee. And you use the term legitimate business interest, but of course, with nice sidelines as they are now, a lot of patients don't come on six months intervals, you know, it's often an extended interval. So is six months still that lickness test, or would a a year or maybe 18 months uh again.

David, 8m 48s:

Do you know what I think it it I think it it depends? I think the uh norm from what I see, they do they tend to be six months, some even even 12 months, and that's just with um standard associate agreements. Um when if someone's selling a practice, they that tends to be two years, um, and that tends to be the standard kind of position on on that. Again, I don't think there's a a this is the exact time period that it needs to be, really. I think again, it just it it does just depend because if you know a pay um an associate who's working you know a couple of times a month, that it would be maybe different time period for them than someone that's in every day seeing loads more patients. So I think it again it just depends on the particular circumstances around their engagement.

Dr James, 9m 38s:

Excellent. And yeah, by all means, if you guys have questions for each other in uh the spirit of the conversation or in the interest of furthering the conversation, absolutely this is a three-way podcast. So, yeah, that's uh a great a great question that might have been on people's minds there. Thanks, Luke. So moving on now to I guess how things might change, as in David's given us a great lay of the land, and we we know there's been some rumblings or potential that this might move around. How concrete is that, Luke?

Luke, 10m 7s:

All very news at the moment, and I feel it pains to say that we're recording this on the 5th of February, and we're not even sure if we're gonna have the same five minutes to come Sunday. Um so actually anything anything could change in the course of things. But the the current situation is that when they did the budget back in the autumn, there was a piece of um, if you like, not legislation, but um you know, term uh discussion um around the fact that they were looking at changing restrictive covenants because there is precedent, if you like, in California um uh over in the States where actually you know they don't really have restricted covenants, they have non-solicitation, that's legal, and they have some covenants that protects people from stealing other employees, but they but what they do openly permit, and they've outlawed covenants, is that if you work for a company, so let's say you work for Microsoft and you get a really good job offer from Google, you can literally jump on um get off your desk on the Friday and walk into your new employer on the Monday, and you're not bound from doing that. And potentially, Peter Carl, the business secretary, is talking about changing the law in this country so it reflects similar. So, what that would mean in the application of dental practices is whether it's an associate, or actually, I think it's more and more relevant now treating coordinators and practice managers as they as that role becomes more advanced within the within a business and of course their employees, so that's a slightly different treatment to the self-employed associate. Um, it's what potentially that would mean is that if you've got um a dental practice at one end of the high street, it's actually quite reasonable if this law changed that they could literally pack up on a Thursday night and the following day they could they they could be working four doors down. Um and as we know, I think it's generally accepted principle that in dentistry, you know, most goodwill is is personal to the dentist. So people go see the dentist um that they they they like and they're comfortable with. So percent perceivably this poses a real risk to goodwill if all of a sudden we're all used to seeing Dr. Jones, and it's very easy for you to still go see Dr. Jones when he's changed job because he's actually in pretty much exactly the same location and it's not inconveniencing you. Um and also, I guess the question we've probably gone to in a minute with David is even with non-you know, whilst we think non-solicitation will still be um a covenant, and which means that you can't open the advertise for patients, of course, in the modern world, you know, that's more difficult to prove that you're not um breaching that because, of course, with social media as they are, you're I believe, and I'll get David's correct ones in a second, you know, you'll you know technically wouldn't be deemed a solicitation if you've got your social media profile that you've just updated. Um, and likewise people can search and Google themselves and they can find where a dentist may now be working. And I'm guessing the mere presence of you on a website will technically not be solicitation. I don't know. I'll pass to David at that point as to what class is a solicitation and what doesn't.

David, 12m 43s:

Yeah, I mean, I think this I think is a really, really good point. And I think the reality is we we we just don't know. I mean, you know, at the end of the day, if a patient goes to see, you know, their dentist that's moved down the road, um is a court gonna stop them, stop them from doing that? Is a court gonna stop someone from seeing the dentist they want to do when that dentist, you know, hasn't gone and actively tried to try to solicit them? Um because I I think that would be you know who who knows who knows where that where that will kind of um how that's gonna pan out. Um but that I suppose is all is all speculative because at the moment we have these these non-compete um clauses there.

Luke, 13m 28s:

I think it is particularly relevant nowadays, particularly with associates with building up their own social media following. Now, if we've gone back 10 years, most associates were associates within the practice. And if you like the point of information for where to find them is the practice website, so if they left, they were just removed from the practice website um and they might prop up somewhere else. Whereas actually what you have more so nowadays is them to have their own social media profile, um, even if they are associates within a practice. So it means that technically someone's following them because they don't know their mates had a really good, you know, bit of cosmetic industry done, and all of a sudden they're not working in Sloan Square, they're now working somewhere else in the West End. Actually, technically that there's been no change. The social media profile is still there. Um, and from a practice perspective, I guess that carries a risk that actually is the goodwill with the practice, or actually is there a bit of a change in argument, if you like, that actually the goodwill sits with the associate because a lot of that, you know, in transactional dentistry, if you like, is down off the back of their own social media profile, and that probably gives the associate dentist a lot more leverage than the male radius probably has, you know, it means a lot less in situations.

David, 14m 32s:

Yeah, I mean, yeah, I think that's that's you know, that's a good point because I can't see a scenario where the law will turn into, you know, you can't advertise your personal services on social media just in case that can be considered solicitation in the future. Because I suppose at that point it's like, you know, where where where does it end? Um, so I suppose if if they're not, and we don't obviously we don't know this, but I suppose if it's a case of they're not actively soliciting them, I you know, I think it would be difficult for a court to turn around and say, um, you can't go and see the dentist you want to.

Dr James, 15m 12s:

Yeah, so I guess that begs the question, what is considered what what would you traditionally can or what is traditionally considered in the eyes of the law, David, uh salisoning for patients, or how can I say it is breaking these restrictive covenants? What how is that actually how does that transpire in practice? Like what does a dentist have to do necessarily in order to break that? UK dentists, Dentists Who Invest now has an official platform where you can learn about finance and obtain UK compliant, verifiable CBD at the same time. The only platform that exists on which you can do both. The Smart Money Members Club has hundreds of hours of mini courses, webinar series, and live day recordings on all things finance slash tax efficiency for UK dentists. This includes complete courses on how tax works for UK dentists, finance so that you can invest and grow your own money, business so you can improve your profitability as an associate or principal, and for those out there that want it, there's also a mini course and how you can responsibly enter the crypto space using measured amounts of capital. I've gathered this content from the best of the best I could find in each respective area so that you know that this is how people at the forefront of each field advise their clients. The Smart Money Members Club also contains discounts on common things that UK dentists need to pay for on a regular basis. This includes a whopping 10% discount on dental indemnity, the offer to beat your income protection deal no matter what you're paying, and for the principals out there, 5% discount on lab bills and 10% discount on practice insurance. These are designed to offer hundreds, if not thousands, in annual savings. The purpose of this members club is to not only boost your monthly income but also manage your outgoings as much as possible and therefore create more profit. To celebrate the launch of the Smart Money Members Club, and given that the CPD deadline is coming up soon, I've decided to offer the first month of this platform entirely for free. This offer will end in the coming weeks as soon as the current CPD cycle is up. To collect your CPD for this podcast episode using the Smart Money Members Club, feel free to use the link in the description of this podcast.

David, 17m 23s:

I mean again, it's supposed to be case by case, but it's it's anything, anything that they're doing, I suppose, act actively to try and take those patients from that practice, really. But I suppose again there's not really a a one-size-fits-all kind of kind of scenario, and it's it's also got to be it's also got to be provable.

Dr James, 17m 45s:

Yes, yes, I understand.

Luke, 17m 49s:

Because I I live relatively close to a tower called Frimley. And if you drive over the the bridge by Frimley station, they've got a big billboard. Now, if you fill that big billboard with uh hello, you know, I'm I used to work in Frimney High Street and I now work in County High Street, which technically would probably be more than two miles by my radius, I think, and then that would probably be a breach of covenant because that would be solicitation, particularly if said practice was in Frimney. Whereas I guess that just updating the website of County Dental Practice for Argument's sake and saying that this associate has arrived and putting it on social media profiles, which may have a following with the various community Facebook groups, that probably, as I understand it, wouldn't be deemed a solicitation because that is just purely updating social media profiles. Even if you're doing so a little bit more active, it's not as active as a break-big billboard as you go over, go over the brink.

David, 18m 38s:

Yeah, I think yeah, I think that's that's fair enough. And and and again, you know, that that new practice restricting them from putting out, you know, a social media post which in their business interests would again, I imagine, be difficult to to kind of kind of restrict. Otherwise, I suppose you've never no one ever's ever even necessarily gonna know what what businesses are doing.

Dr James, 19m 0s:

So this and with you know, this is this is really good. We're getting into the nuance of it, and maybe just one more question just to round that off. David, in terms of how these contracts are usually designed or created, um is it is the onus more on the geographic radius of the associate? Is that where the disputes tend to arise? So, for example, if it says, hey, you can't um work within two miles and actively solicit patients, right? Does that mean that you can you can work within two miles but passively uh acquire patience? You know, how's the contract usually worded? You know, is it usually a geographic component and a component that defines do you have to break both of them at the same time in order for you to break the contract? Or is it their issue with the fact that you can't be within a certain radius and do this? But if you you could still potentially move within that radius but not do it if you had more of a passive style, like something along those lines. How does it work? Is that is that usually how it works?

David, 20m 1s:

I mean, I mean ordinarily, I mean they're basically two separate things. So I suppose you've got one leg, you know, you can't work within, let's say, two miles. Um, but the other one is you know, you can't solicit patience, and soliciting patience doesn't really isn't really restricted. So if you were working at a practice at say five miles away, but your non-compete is only two miles, that still wouldn't allow you to try and solicit patience to try, you know, travel an extra 10 minutes by car or however it is to see you at that other practice, you'd still be in in breach of that one because it's not um limited by radius.

Dr James, 20m 38s:

That's exactly what I'm getting at. So it's not an and, it's an or. You can't do this or this, right? Yeah, it's not it has to be both of them together to contravene the the contract that's laid out. Okay, fine. So I guess that brings us on to look, you were saying just a second ago that, well, I mean, by the looks of it, they're going to be abolished, the uh the the ability of people to place these clauses in the contract.

Luke, 21m 4s:

I mean, there's certainly you know a school of thought within sort of the unions um and within sort of a largely left-wing government that actually this would be something that would be beneficial for employees. And I guess that's quite difficult to argue because it it would give, you know, the these in essence don't protect the employees, uh, or unless you really take the long-term view that it protects other employees within a business from a business going deadly up. Um, you know, so I can see percentage of why they would want to change them. Um but I guess I think the important thing I just don't want to mess with confuse the issue here, um, is the fact that actually these are the changes for people probably more on the associate end and employees within a practice. I don't think it will change the commerciality of when you sell a dental practice about preventing a principal dentist from opening up elsewhere, because correctly for a long debut, but I think when you're handing over or you're accepting, should I say, consideration for exchange for taking these covenants, then they hold a much more significant weight um in law than they did if you were just a work in a vertical.

David, 21m 59s:

Right. Yeah, I mean I suppose at the end of the day it it that's true, but the the reasonable test still still needs to still need to apply. So again, if you're studying your practice for a million quid and you're getting that that million pounds, um it may not it wouldn't necessarily be reasonable to have a you know a hundred mile restriction in there because it's still beyond what would be considered reasonable to protect you know the the legitimate interpreters of of that practice, really.

Dr James, 22m 32s:

Yes, on a look, what you're saying is that should these clauses be abolished? Actually, yes, the associate and principal dynamic is one thing to consider, but really where it can potentially make a huge issue is principles to assolutely practice and they have some sort of R night potentially, or maybe not even an R-night, maybe well, I guess it could be an R night, couldn't it? Um, I don't know how that's usually done.

Luke, 22m 56s:

Yeah, I guess it would make us consider what we change the advice that we give because the only advice that we give is the fact that you want to, you know, if you like decrease the risk of your practice of making sure that the goodwill was spread across a number of different senses. So when you get we get approached by principle, they say doing 600 grand personally, um, and they want to start their practice and let's say two or three years away from it. We would normally say what we probably quite like to do um is to take someone at 600 grand and move 200 grand into an associate service because actually that means that when someone comes to look at your practice, you're not seeing that's big a risk because if you drop dead from say all of a sudden we haven't got a 600 grand home in the practice, you've got 400 grand, which I would argue is easier to replace with another job in associate than a 600 grand racing private dentist. And a lot of people make those kind of changes, and particularly if they don't want to be bound to work for five days a week to get that third consideration for three years post-completion, they move they almost removed that sort of part-time philosophy before they actually come to start, which works quite well. Now, um, and that means of course that is that they're normally the buyers quite happy because they're protected for income. And let's say this example is a million growth, they're taking a deal on the other 600 grand. Yes, they're such a covenant, it's so chased reasonable stripes of covenants. Um actually, you know, we can work around that. It's actually the risk is that if your associates can't be bound by any kind of real strip of covenants in terms of where they were, because actually they they are associates that are not receiving any consideration for the scale, then potentially it would be better to have your principal vibration because the principal you can lock into that reasonable radius, as David said, for two to three years because you're giving them maybe a minute and a half quid in order to do so. Um, so I guess it may well change the dynamics in terms of some of the advice that we give. Um, and notwise going back to talking about that spread issue. Again, if you've got a practice like using the minimum example, and you've got dentist number one do 400, tentative number two do 400, and the IG two couple of hundred grand, in theory, four set of income relies on one associate dentist, but may or may not up sticks and go five doors down, but we can't do anything about it if it does. Whereas actually what will be stronger in theory if you took that million pounds and you divided it by say five or six heads, and my dentist's worth in one or two days a week, so that's if you lost one, okay, you've got a hundred and fifty grand day of income, but it's the risk profile is lower. Um, and it'll be interesting to see whether those those kind of impact. I mean, don't get me wrong, I think if this law comes in, I think it will dampen the will. Um, because I think it by nature it will make dental price transactions more risky because you can't protect the income in the same way you can protect it right now. Um, but I do think it may also change how some dentists and how dental price owners behave in terms of how they approach agreement and how they approach um the diversity of where the income competition comes from.

Dr James, 25m 45s:

Very interesting. David, anything to add?

David, 25m 47s:

Um I just to Luke, um, if you know, if this does come into play, um you know, I suppose from a from a practice owner point of view, are they going to be less likely to want to grow the practice and get more associates in? Because I suppose there's always the risk that they can, you know, leave, set up next door and obviously massively damage damage all the goodwill.

Luke, 26m 13s:

No, I think that's definitely a consideration to end on two folders. First of all, the investment. If you're going to put a lot of market investment or even capital investment in putting extra chairs in, um in order to grow your business, I need to do that because it is just about copying the cost and then the associate moves moves on again without any kind of covenant. I do think that would make some different question whether they want to do it. And we still make practice that is now if they've got a free or four-chair practice and they're working similar hands. Um the question is you know, why why are you similar handing this? Why would they have an associate when it's there in the back side and I decided never wanted to do it again? I think it will move the mentor much more that much more that way. Um, I also think going back to what I just said a second ago, is I think it will make people question whether they do give up for more of their Wednesday and their Fridays if they play golf or similar. If the risk is they can hand over a cohort of patients hoping to find the associable drop with them a year later, um and they're in comes testing it.

Dr James, 27m 11s:

There we are. Brilliant. Well, I mean, guys, I think we've done a good job really of describing where we're at, what might change things, uh, what how this might change things, and also who's implicated in this. Anything else to add?

Luke, 27m 28s:

Um it has at the moment is this is what we're talking about right now, is conjecture. So we've seen not a lot of the workers' rights bill, which I think comes in a very call to the particular life. It's not rolled into that. So this is potential legislation that might potentially come down alive if you like we're just moving overwards in that.

Dr James, 27m 47s:

And is there anything Dennis can do right now, even though I get that this is in the pipeline or it may it may not even transpire at all, uh, given how things are somewhat volatile uh whenever it comes to, I guess, the stature of the UK government. Is there anything that Dennis can do either way to protect themselves and mitigate things?

David, 28m 5s:

Well, I think if anything, they should just be a um a note practice owned to check they do have associate agreements in place um for now because uh quite often they don't or they don't have restrictions in. So whether you know, even if this this doesn't come into play, um then they can't be bound by something that they don't have, basically. So if there's no associate agreement now, then it won't I suppose it obviously doesn't matter.

Luke, 28m 35s:

If they come else, maybe it tends to go through on loads of practice owners who've got the associate agreement with effective restricted covenants within it. Um but then before they gave it to the associate, they crossed out the five miles and changed it to 20. Uh, and take note of what he said about the reasonable covenant is that that twenty miles probably doesn't work.