Episode 15 – Dental Contract Law with David Cohen (Part 1)

“In my opinion, there are 3 phases of a contract: how you get into it, how you operate through it, and how you get out. The goal is for the business owner to set things up so there are no surprises later on.” – David Cohen

In any Investment Grade Practice, there are 3 levels: Investing in yourself, growing your asset, and protecting your asset. As you grow your own Investment Grade PracticeTM, the legal aspects can be the most challenging and confusing for many new (and experienced) business owners. Which is why I am so pleased to be talking to David Cohen who can really speak to all three of these levels with his expertise in dental business law. 

For those who don’t know David, he is the founding partner of Cohen Law Firm and has extensive experience in representing individuals, mid-size corporations and small-size corporations in partnership and limited liability company law. One aspect I especially appreciate about David – and that we dive into in our conversation – is that he advises employers about their relationships with their employees and independent contractors, as well as creating legally binding agreements documenting the details of those relationships. 

Today, he and I discuss the basic aspects every business owner should know about dental contract law. The dental world is unique and there are a few special factors that need to be considered. So David is joining me to empower you with information that allows you to grow – and most importantly protect – your Investment Grade PracticeTM, including:

• 3 things doctors should understand about contract law
• Writing contracts so you can proceed proactively and not have any surprises
• Termination clauses and how to protect your business and your working relationships

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EPISODE TRANSCRIPT

David Cohen 0:00
So I think that it’s important to make sure that not only are these three phases covered, but that they’re covered thoroughly enough so that, you know, the doctor can kind of proceed forward on a preventative, proactive basis, and not have any surprises later on. So I think what normally, the doctor should be looking forward to answer your question more specifically, in operating through the deal is one of the terms under which the contract is going to be governed by

Narrator 0:34
Welcome to investment grade practices podcast where we believe private practice dentists deserve to get the lifestyle today, while building an asset for tomorrow, join your host Victoria Peterson to design the practice of your dreams and secure your financial independence. Let’s get started.

Victoria Peterson 0:56
Well, I will be recording this and transcribing it for the new book investment grade practices. And I’m so thrilled that you’re willing to support this.

David Cohen 1:08
Yeah, I’m thrilled to be part of it and honored to be a part of it. I’m really looking forward to it.

Victoria Peterson 1:13
That’s great. Do you mind if I just jump right in? Let’s do it. Okay. So the format of the book has three sections. The first is invest in yourself. So doctors investing in their leadership and business acumen skills. And the second is grow your asset. And then the third section is protecting your asset. I think that you you probably could speak to all three. Right. In this first section, though, on investing in your legal education, I’m wondering if you can give some thought to Akashi such experience, right? Of what are what are some of the basic things that every business owner should know about contract law?

David Cohen 2:07
Yeah, it’s a really interesting question. I think, even before getting to contract law and what they should know about it, it’s really important as a part of investing in one so that they connect with a teammate, that is an attorney that specializes in helping dentists with their business, legal matters and the practices. And I say that because the dental world is unique. And there are factors that need to be considered that are special, or, you know, I guess I would say, that are specialized towards the dental realm that are just different than in the normal business law realm. So I think that that’s really critical components. But as far as when a contract what is what a doctor should understand about a contract is that every contract has three elements, there is an offer, there’s an acceptance, and there’s consideration. So an offer is pretty self explanatory, that’s when an offer is made, you know, hey, marketing company, we’re offering to hire you. Exchange for blank services that you’d be providing. And then once that offer is accepted, and there you’d have the offer and the acceptance and the consideration would be the money that’s being paid to that marketing company exchange for those services that are being provided to the practice. And I think just important that every dentist knows from the foundational level really what a contract means and what it is. And in that contract, that is typically what is going to govern the relationship.

Now, yes, there are some laws and always specific to states that a doctor is in that may Trump what’s in a contract, but for the most part, the contract is going to govern. And a lot of times default laws with respect to contracts come into play only when the contract is not on that item. And then I think the final thing that I would say is so I guess in other words, just to kind of expand a little bit on that. Sometimes doctors will ask, Hey, what are my rights and do X, Y or Z? And the answer typically would lie in their actual legal contracts. That is what typically governs. And so the normal attorney response that everyone hates is, quote unquote, it depends. Well, attorney will typically say, based on what their contract actually said, So I think that’s really important for the doctor to know. And then I think also, what’s important for the doctor to know from a sort of like a fundamental level about the contract is that if there’s any ambiguity in a contract or vagueness or something that the contract is not we speak on, what the court would typically do is look at the intention of the parties. So if the contract is something that the parties have a disagreement on, usually, it would be its job if it got to point of getting to a court, which typically is done, but if it does, they’re going to look at the intent of the parties. And so they’ll look at outside communications, typically, or emails or oral etc, to try to determine really what was the intent of the parties. And they went into this. And although formulate their answer, despite the fact that most contracts, they get settled prior, they get agreed to prior, it’s important to understand what the final outcome is based on to try to understand the legal positioning of the client hat. So I would say that, what I just mentioned would be fundamentals of contract law that the doctors should be aware of.

Victoria Peterson 6:21
And that is so rich.

David Cohen 6:24
I’m speaking too fast, too.

Victoria Peterson 6:27
This is going great. One of the things that you’ve helped me understand over the years is that relationships are easy to get into. It’s easy to buy a dental practice, it’s easy to form a partnership, all that’s easy. Getting out of it is a part that can be tough. So you’ve you’ve really focused my business mind on the very pragmatic about writing into the contract, how could this be? How could I unwind it? You know, what happens in the event that either party decides, like, that’s no longer the path I want to go down? Do you have any advice on how to protect yourself or what to look for? As you’re setting up the relationship?

David Cohen 7:14
I do, I think that the first thing that I’ll say is that, in my personal opinion, and this isn’t what the law says. So it’s a little bit contrary to what I just talked about when I defined what contracts really are to the doctor. But in my personal opinion, there’s really three phases of a deal. There’s how you get into the deal, how you operate through the deal, and how you get out of the deal. So in terms of trying to be pragmatic, I really try to break things down. Very simply and straightforward for the doctor. So there’s getting in, operating through and there’s getting out, getting into the contract is the negotiation of the deal. operating through the contract is really governed by the language of the contract in terms of how things will operate, if you go along in the relationship, and then getting out of the deal should be governed as well in that contract, to provide for an exit strategy for the parties, if things don’t work out, or even if things do work out, but the task is unsatisfied and the parties are moving on. So I think that it’s important to make sure that not only are these three phases covered, but that they’re covered thoroughly enough so that, you know the doctor can kind of proceed forward on a preventative, proactive basis, and not have any surprises later on. So I think what normally the doctor should be looking forward to answer your question more specifically, in operating through the deal is, what are the terms under which the contract is going to be governed by and that’s something that has to probably stay vague for the purpose of conversation, because there’s so many different things a contract can be about, but in the in the sample of getting contract? Well, I’m sure it would govern all the marketing services that that marketing company would provide for the practice in exchange for the fees that are being paid by the practice.

With respect to getting out, though, usually there’s a termination clause and a termination clause the doctor really needs to be aware of because that clause governs how to get out of the deal, and usually contract can be terminated. No, well, number one, I will say that a contract can be terminated. However, the contract says that it will but usually there are certain phases there’s the doctor can terminate, or either party can usually terminate the agreement like with cause, meaning like somebody breaches the agreement, and therefore the other party gets to terminate the agreement or cause immediately because the other party breached meaning the other party does not fulfill They’re promises that they’ve made in the agreement. So that would be one example of a termination for cause that oftentimes allows the contract to be terminated immediately, then there’s often termination without cause. And sometimes a contract doesn’t have that sometimes the contract will only go for the term of that the length of the contract and no party, she’s going out. And the doctor has to be just as aware of that as they are in as a contract where it does stipulate that the parties do get out. And, you know, on that note, if there is a termination without cause, provision, normally there’s a notice period. Not always, but normally, the contract will say, either party can terminate this agreement without cause voluntarily upon blank days notice. And so that’s what the doctor is to focus on is how can I get out of his deal. And there are situations where the doctor is going to want different exit strategies where they want to be able to get a deal whenever they want. And there’s certain situations where a doctor might not want to let the parties out of the deal, because the service provider is providing to them so badly that they can’t really afford for the other party to get out of the deal, and that they’ll sort of operated just on a term, this contract is blank months or years long. And each party has fulfilled their obligations during that period without being terminated. That was sort of a long answer. But I think that’s, those are the three phases of the in operation through and out, and really focusing one out because I think doctors get nailed all the time, not really strategizing, standing Yes, when and how they can get out of a deal. Yes.

Victoria Peterson 11:49
And you and I have worked on so many deals over the years through productive dentist Academy and our clients, you’ve been such an advocate on their behalf. And I love the example that you’re using the marketing group. And so for example, we have a product called Forever site. And what we do is we amortize most of the costs of that website build over three years, we found that doctors weren’t really excited about paying, you know, 8000 bucks a year 1000 bucks to rebuild their website every year and a half. So we said, what, what does it need to maintain your site, keep it fresh for three years, we’ll amortize that cost. And if you choose to leave before that the termination clauses, you can leave early, and there’s $1,000 transfer fee, which goes to recoup all of our hard costs that we may have invested in that site, you know, and all the things that that we had to do. So I love that as an example of really looking for those terminations, we’ve had other clients that we bring on. And in marketing, let’s say, and there’s so rigid, you can’t get out of them for practice management that seems so rigid, the doctor can’t get out of it. And they end up paying 1000s of dollars a month for something that didn’t work. And then they had to go seek another solution. So paying attention to that termination clause is huge. I’m glad that you’re broadening this up. When I when I brought you on to interview I thought we’d see really close to like partnerships and Associates and things like that. But there are what would you say two dozen different types of contracts you might enter into with your software, with your advisors with marketing with associates with your building lease when your mortgage with your lenders, a there’s a ton of contracts?

David Cohen 13:45
Yeah, absolutely are. And I think that one other need to comprehend, and this does to the transitions, territory. And maybe that’s a good segue that oftentimes when you as a doctor make a business decision to enter into an agreement with a doctor also need to factor in that whatever agreement you enter into, is an agreement that you may have to pass on if you decide to transition or sell your practice. And that can be in the form of a new form of partnership. And simply all you get the same parties involved, except there’s, you know, obviously, there’s a new party involved, but you’re still involved as a doctor, but maybe there’s a new entity that the partnership is going to operate out of and you need to be sort of fluid and flexible to be able to move the contracts to the new partnerships so that you as a doctor aren’t stuck with 100% of the cost. You should be stuck with whatever cause your partnership agreement governs. And then on a more extreme level, if you are selling 100% of your practice, then certainly you’d want have the ability to be able to assign that contract over to the buyer of the practice. And I think that’s good for both parties, because the marketing company in that example, wants the ability to work with the new party that can be involved as well, I think that that can often be a win win. But also the party that’s getting transferred, the contract, obviously needs to want to engage in that agreement as well. So it’s important that the contracts with great company like great companies, obviously, like a PDA, like you guys, to where it would be sort of a seamless transition, and the doctor that’s buying or transitioning in would obviously really want to take that on, and want to make sure that that contract can be transferred.

Victoria Peterson 15:47
Right. And I see that a lot, too. If you’re selling into a DSO framework, they likely want the choice to get out of some of the software contracts that you may have, because they have a different platform. So keeping that fluid and flexible, would you say, having it fixed or flexible, increases or decreases the value in the cell ability? Or does it depend?

David Cohen 16:16
I think the main thing, the main element that increases cell viability, and marketability is assignability, where you as a doctor are able to assign the contract to the party, that’s going to be the successor and no in the sense of like an Associate Agreement, the ability to assign that is going to be huge, because the buyer in a transition is going to want to know that whatever non compete clauses you had, with your associates, that they can be transferred over to them so that they don’t have your associate opening up right next door to them. When they move in. Right, that decreases marketability, if they know the associate can open up right next door to that. Whereas with a with a marketing company, and that type of thing. As long as it is a source, like again, like a PDA or something like that, it’s very credible, that I think that you’re in really good position, because the buying party is gonna want that contract, they’re gonna want to take advantage of it. And maybe you signed up for something and it’s a three year deal or something and the rates have gone up since so the buying party wants to lock be able to lock that in and being able to be a sign that agreement is really valuable. So I think assignability is really the key element that keeps the contract around the practice. marketable.

Victoria Peterson 17:46
So let’s go into that you gave me two examples of where assignability increases the value one with the Associate Agreement, and the non competes totally agree with that. And probably you’re building leases, if especially if you’re grandfathered into a sweetheart deal and you know, got the landlord locked for five years, and they can’t take advantage of the upswing. So other than those, what else would have great transferable value.

David Cohen 18:13
So I definitely think just to kind of recap, Associate Agreement, forsure marketing or third party vendor contracts, assuming that they’re vendor vendors that are really sort of reputable and that most buyers would want. Because obviously, if you enter into an agreement as a doctor with a third party that is really specific to you, and nobody else would want. And that’s going to decrease your marketability, right. So that that should be taken into account. But then the third one that I’ve mentioned is you nailed it, the lease the lease, it’s huge to be able to assign that lease over to the buyer, I mean that can often make or break a deal. Now, it’s probably unrealistic to think that a landlord is going to permit you as a doctor to assign the lease to whoever you want, whenever you want. without their consent. Most leases say that the tenant can assign the lease as long as the landlord consents. But what you want as a dentist in that agreement is that the consent of the landlord can’t be unreasonably withheld or delayed, meaning they can’t be unreasonable or can’t just not respond in the event that a contract is going to be transferred. And they have to be fair about it and that way that the landlord can’t restrict your marketability of your practice because when you when you hit the nail on the head there with the lease and you’re talking about marketability versus non marketability.

There’s nothing less marketable than the landlord doesn’t have to let you assign your lease and they’re basically are the gatekeeper to whether you get to sell your practice or not. That is definitely not something that you want. And then I take the leap to a further level and not to get like too deeply into the weeds here. You want to as a doctor look out for when you do a sign your lease, if you still have to remain a guarantor on the lease when the other party comes in to the lease, and that’s something you really want to negotiate as heavily as you can on the front end, because oftentimes doctors get surprised when they’re selling, that they have to remain a guarantor. And then as an attorney, you look at their lease, doctor, well, hey, Dr. Jones, or Johnson or so and so you, by the way, already agreed that will stay on as guarantor. Did you know that? They’ll usually not know that. So I think that that’s obviously a really a really key item. But as far as what’s assignable, I think for doctors, the main ones are the associate agreements, least and third party vendor contracts. with companies such as marketing companies, those would be the main ones. When we talk about contracts, assignability and a tradition, you’re,

Victoria Peterson 20:57
you’re walking me down a road that we’ve been down many times.

David Cohen 21:00
Right.

Victoria Peterson 21:00
I remember one of the practices that I bought, was in a condo, it was three units, the three doctors each own their condo, and the practice I bought was right in the center. And the seller didn’t really realize until the end, he knew he had to get permission from the other two partners to sell his condo, he didn’t realize that he needed to get permission to lease it, as he sold his practice. So we really got into that quagmire that you’re talking about. And it almost flipped the deal. In some ways, I wish that it had because I came in between two very established doctors, our young doctor walked in and 400 patients walk into the doors of the other two, they should have been very happy. I now know why the other two owners were happy to allow a new doctor to come in. But it was a tough lesson to work. area, you’re just given such goal to what to negotiate upfront, right? So you started out with really looking at the offer the acceptance of consideration. How do you get in? How do you operate? How do you get out of the deal? And two of the things here the assignability of the contracts? And whether you remain a guarantor after the assignability? That’s a very big thing to look at, in the how do you get out? And also for termination clauses or the lack of termination clauses, whether it’s for cars or not for cars? How do you get out? I those have been some of the things that I think have been the most costly to me. When I hadn’t when I failed to realize, you know, and look at them ahead of time. Is there anything else that you could think of like, mistakes that you make getting into it? And then you go, Man, I wish I had met you when you sign this, I wouldn’t let you sign it. What do you what do you have stakes,

David Cohen 23:12
one pops in my head immediately. Because if this happened last night, I have a client that selling to a DSO and this is a fairly significantly large deal. And then they email me and say total after the fact that Hey, David, by the way, you know, a week before this deal, I bought a new panel machine. And I want the DSL to like take that off that contract on now. And I was like why would you do that? week before you sell and not tell the buyer because if the buyer doesn’t want it, what are you gonna do a bit and you’re responsible to make the payments. I mean, if you want to talk about another type of contract that you might want to be assignable. It’s possible, but he would be you know, any type of maybe like equipment contract or something like that. But of course, I think one of the bigger mistakes that I that I see happen is that doctors don’t consult their team and team is really important in team doesn’t just consist of attorneys team also consists of consultants and accountants and you know, other advisors that are part of the team and consulting your team before you sign any contract, I think is a really good principle for doctors to have because sometimes it’s not about the contract you’re signing in whether it’s good or bad deal or whether it’s good or bad for the practice. Sometimes the timing of when you’re signing Doctor significantly matters. And so talking to your team can help you save time, money and headaches. I always say that that’s one that’s definitely popped out as a mistake off the top of my head.

Narrator 25:00
Thank you for tuning in to this episode of investment grade practices podcast. If you find value in this episode, help us spread the word by passing it along to a dental friend. Subscribe and give us a Like on iTunes or Spotify. Learn more about building your Investment Grade Practice at productivedentist.com Today