Associate Buy Ins: The Right of First Refusal
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.
I was talking with a dentist the other day. He was going to become an associate for a dentist. After about a year or so, he wanted to buy the practice. He spoke the magical words: “Right of First Refusal“. He didn’t really understand what those words meant. He just heard someone say it. So naturally, I asked: do you have an agreement in place that would give you said RIGHT OF FIRST REFUSAL? No, he responded. It was just mentioned nonchalantly between him and the dentist. That’s when I suggested he put something in writing (e.g. in an associate agreement).
The whole idea behind Associate Buy-Ins is that an associate will work as an associate for a practice where the dentist has a desire to sell in a few years or less. Perhaps the dentist is moving or retiring. The point is that the dentist has put in a lot of time and effort in building up the practice and doesn’t want to lose the goodwill. Even better: if they can show an associate the ropes for a few months / years, then it will be a smooth transition.
For the associate, it’s a win-win situation: they’re getting paid to learn the practice, get to know the patients, and then one day buy out the practice. Their major concern, however, is valuation: if they are contributing to the overall goodwill and value of the dental practice, then why should they end up paying FOR THEMSELVES when it comes time to purchase the practice? A dental practice appraisal company – such as ROI Corp. or Professional Practice Sales – may need to be engaged to factor in the goodwill that the associate has contributed to the practice.
How it all works in writing
Now, what about having something in writing? Well, we lawyers typically draft up provisions in an associate agreement, as an amendment to the associate agreement, or as a separate agreement that includes a right of first refusal. Here’s how it works:
If the dentist receives any bone fide offer from a third party dentist for the purchase of a dental practice (in its entirety), then that dentist will FIRST HAVE TO present that offer to the associate. The associate has a right to purchase, on similar terms to the third party dentist offer, the dental practice. The dentist will essentially be forced to sell the practice to the associate. If the associate doesn’t want to buy the dental practice, then the dentist may then proceed to sell it to the third party dentist.
Now, that’s the overall gist of the RIGHT OF FIRST REFUSAL. There will be other details that need to be negotiated – such as:
- The contents of what must be provided by the dentist to the associate when a third party dentist offer is received;
- The timeline which the associate has to exercise the right of first refusal;
- Any conditions which must be satisfied prior to or after the right of first refusal is exercised (e.g. completing the purchase and sale transaction within a certain time after exercising the right of first refusal).
Now, there could be other complicating factors to a right of first refusal. For example, if the dentist carries on a dentistry professional corporation and is going to sell SOME BUT NOT ALL of his shares in that corporation to another dentist, then a right of first refusal may apply in that situation to the associate. In other words, the associate would have the first right to purchase those shares if there was an offer from a third party dentist.
If you’re a dentist or an associate and you would like to have a right of first refusal reviewed / revised / negotiated, please contact me.