BLOG: Thou shall not compete
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Key takeaways:
- Selling owners must be prepared for non-compete restrictions.
- Understanding these obligations will help sellers approach and balance competing perspectives.
After you have decided to pursue a sale transaction, inevitably one of the biggest topics you’ll come across during the negotiation phase with the buyer is the non-compete restriction.
What is a non-compete? Let’s start by answering some basic questions.
What?
Non-competes are contractual obligations that restrict physician sellers from competing with the buyer and the practice itself. Whether you are selling to a similar practice down the street or partnering with a private equity platform, the scope of a non-compete can vary from deal to deal and buyer to buyer.
In the world of private equity, a private equity partner is likely to ask for three categories of non-competes:
1. A non-compete tied to the sale of your practice assets, which will run for a fixed period of a few years from the closing of the transaction.
2. A non-compete tied to your post-transaction employment with the practice, which will run during the term of your employment (and possibly for a year or two after termination of employment) and restrict your competitive activity within a specified geographic area related to your practice locations.
3. A non-compete tied to your post-transaction ownership of rollover equity in the private equity platform, which typically runs for the length of time you own rollover equity (and possibly for a period of time after you are no longer an owner).
Who?
You. As a selling owner of your practice, a continuing employee of the practice and a new investor in the private equity platform, you can expect that the buyer will want you to be subject to a non-compete. Many times, buyers will ask that the non-compete also cover your affiliates, meaning that immediate family members or any company that you might own or control will also be subject to a non-compete.
Why?
For a buyer, the reason is simple: You are an essential part of the practice and the business. Buyers want to retain your knowledge and expertise of the business you worked so hard in building and want to disincentivize you from quitting on day 1 after the transaction and setting up a new competing business across the street.
You might be wondering, “Why would I ever give up my flexibility to work wherever and for whomever I want?” Well, not only will a buyer require this from you as a means to protect its investment and the practice going forward, it is also critical for you to think about the non-competes from the perspective of you (yes, you) remaining a part of the practice and becoming a partner (and investor) of the private equity buyer. After closing, you and your private equity partner are aligned in that both of you are working toward the goal of building on the success of your practice, building up the private equity platform and hopefully achieving a successful and profitable sale of the private equity platform in the future. Would you want the other physicians in your practice and in the private equity platform to be free to leave and compete against you?
Seasoned legal advisers can counsel you on how to approach and balance these competing perspectives in a way that works best for you and your practice.
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