Episode 80 – Contracts: Learning the Basics
“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
Hi, Doctor. Regan Robertson, CCO of Productive Dentist Academy here and I have a question for you. Are you finding it hard to get your team aligned to your vision, but you know, you deserve growth just like everybody else? That’s why we’ve created the PDA productivity workshop. For nearly 20 years, PDA workshops have helped dentists just like you align their teams, get control of scheduling, and create productive practices that they love walking into every day. Just imagine how you will feel when you know your schedule is productive, your systems are humming, and your team is aligned to your vision. It’s simple, but it’s not necessarily easy. We can help visit productivedentist.com/workshop that’s productivedentist.com/workshop to secure your seats now.
David Cohen 0:46
Sometimes doctors will say what are my rights to X, Y, or Z and the answer typically would lie in your actual legal contract, that is what typically, normal attorney responds that everyone
Welcome to the Investment Grade Practices podcast where we believe private practice dentists deserve to get the lifestyle today, well 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 1:29
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 1:41
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 1:46
That’s great. Do you mind if I just jump right in?
David Cohen 1:51
Let’s do it.
Victoria Peterson 1:53
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 assets. I think that you probably could speak to all three. In this first section, though, on investing in your legal education, I’m wondering if you can give some thought to such an experience, right, of what are, what are some of the basic things that every business owner should know about contract law
David Cohen 2:39
Yeah, that’s a really interesting question. I think, before getting to contract on what they should know about it, it’s really important as part of investing in ones connect with a TA, that is an attorney that specializes in helping dentists with their 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 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’s really critical components but as far as what a contract doctors should understand about a contract is that every contract has three elements, there is an offer, there’s an acceptance and consideration. So an offer is pretty self-explanatory, that’s when, you know, hey, marketing company, are offering to hire you in exchange for blank services that you’d be providing and then once that offer is accepted, and there you’d have to offer and acceptance and consideration would be the money that’s being paid to that marketing company in exchange for those services that are being provided to the practice and I think just important that everything knows from the foundational level really what a contract means and what is in that contract, that is typically what is going to govern the relationship. Now, yes, there are some laws, always specific to states that a doctor is in that may Trump but 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 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 to X, Y, or Z?” And the answer typically would lie in their actual legal contract data is what typically, the average normal attorney response that everyone hates, quote, unquote, it depends based on what their contract actually. So I think that’s really important for the doctors to know and then I think also, what’s important for the doctors to know from a sort of like a fundamental level about the contract is that if there’s any ambiguity in a contract, or paying for something that the contract is not, please speak on, what the court would typically do is look at the intention of the party. So if the contract is something that the parties have a disagreement on, usually, it would be, obviously the point of view of court, which typically, they’re going to look at the independent party. So they’ll look at outside communications typically, or emails or etc, try to determine really what was the party they went into, and formulate their answer. Despite the fact that most contracts. Phil Meyer, they agreed to prior, it’s important to understand what the final outcome is based on and try to understand the legal positioning of the client. So I would say that I just mentioned with the fundamentals of contract law that doctors should be aware of,
Victoria Peterson 7:00
And that is so rich. This is going great. One of the things that you 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 can be tough. So you you really focus 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 and what to look for as you’re setting up the relationship?
David Cohen 7:47
I do, I think the first thing that I’ll say is that, in my personal opinion, and this is what the law says, 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, how you get out of the deal. So in terms of trying to be pragmatic, I really try to break things down, very definitely and straightforward for the day in operating through 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 as 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 party, if things don’t work out, or even if things do work out, but the task isn’t satisfied and the parties are moving on. So I think it’s important to make sure that not only are these three cases covered, but that they’re covered thoroughly enough so that the doctor can kind of proceed forward on a preventative, proactive basis, and not have any surprises later on. So I think what normally doctors should be looking for, to answer your question more specifically, and operating through the deal is what are the terms under which the contract is going to be governed by and that’s something that hasn’t been a perfect conversation, because there’s so many different things are contracts and DSO but in the in the example of a 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 a five practice. With respect to getting out though, usually there’s a termination clause and a termination clause that doctor really needs to be aware of because that was governs how to get, how to deal and usually contract can be terminated or not? Well, number one, I will say that our contract was terminated, however, the contract says, well, but usually there’s certain stages, there’s, the doctor can terminate, or it can usually terminate the agreement, like with cause, being like somebody breaches the agreement and therefore, the other party gets to terminate the agreement for cause immediately because the other party breached, the other party did not fulfill their promises that they made in the agreement. That would be one example of a termination for cause oftentimes allows the contract terminated immediately, then there’s often termination without cause, in sometimes a contract doesn’t have that the contract will only go for the term of the length of the contract, and no party can get 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 party to get out and you know, on that note, if there is a termination without cause, revision, normally there’s a notice period, not always, but normally, the contract will say, either party can terminate this agreement without cause voluntarily on blank notice and so that’s what the doctor needs to focus on is how can I get out of this deal and there are situations where the doctors gonna want different exit strategies where they want to be able to get the 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 provider is providing to them so badly that they can’t really afford for the other party to do. So they’ll sort of operated just on a term that’s contracted blank months or years long and each party has fulfilled their obligations during that period without being permanent. Those are a long answer but I think that’s those are the three phases of the in operation threw me out, and really focusing one out because I think doctors get nailed all the time, really strategize when and how they can get out of a deal
Victoria Peterson 12:18
Yes. Yes 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 protocol 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, 1000 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 will 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 they’re so rigid, you can’t get out of them, or 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 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 brought you on the interview, I thought we’d stay 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 you mortgage, with your vendors, and there’s a ton of contracts.
David Cohen 14:18
Yeah, There absolutely are and I think that one needs to comprehend and then the transition territory, a good segue that oftentimes when you as a doctor make a business decision to enter into an agreement for the doctor also need to factor in that whatever agreement you enter into is an agreement that you may have to pass it on. If you decide to transition or sell your practice, and that can be in the form of you form a partnership intent, we all used to get the same parties involved and said there’s, 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 a new partnership, so that you as a doctor aren’t stuck with 100% of the cost, you should be stuck with whatever costs or partnership agreement governs and then on a more extreme level, if you are selling 100% of your practice, then certainly you’d want 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, want the ability to work with the new party can be involved as well. I think that can often be a win. Well, also the party that’s getting transferred, the contract, obviously needs to want to engage in that agreement as well, it was important to enter contracts with great company like three companies, obviously, like a PDA, lets you guys to where it would be sort of a seamless transition, and the doctor that’s buying or transitioning would obviously really want to take that on, and want to make sure that that contract can be transferred.
Victoria Peterson 16:21
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 a fixed or flexible increases or decreases the value and the scalability or does it depend?
David Cohen 16:50
I think the main thing, the main element that increases scalability, 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 clause you had with your associates, that they can be transferred over to them so that you don’t have your associate opening up right next door to them when they move in. Right, that decreases marketability, if they know the associates that open up, right. 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 very credible, that you’re in really good position, because the buying party wants that contract, they’re gonna want to take advantage of it, maybe you signed up for something in is a three-year deal or something and the rates have gone up since. So the buying party wants to be able to lock that in and being able to sign that agreement. It’s really valuable. So I think assignability is really the key element that keeps the contract, or rather the practice marketable.
Victoria Peterson 18:19
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, especially if you’re grandfathered into a sweetheart deal. And you’re, you know, got a landlord lock 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 18:46
So I definitely think just like I read Episode Two during enforcer marketing or third-party vendor contracts, assuming that their 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 us, nobody else would want to decrease your marketability, right. So, that should be taken into account, but then the third one that I’ve mentioned is you nailed it, the least the least to be able to assign that leads over to the buyer, I mean that can often make or break. 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 consent 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 the contract is good, it’s transferred and they have to be fair about it and that way, 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 leads and they basically are the gatekeeper to whether you sell your practice or not, that is definitely not something that you want and then I take the lead to a further level, and that’s deeply into the weeds here. You want to have a doctor look out for when you do your lease, if you still have to remain a guarantor on the lease, when the other party comes in 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, they have to remain a guarantor and then as an attorney, you look at their lease, doctor, Dr. Jones, or Johnson or so and you, by the way, already agreed towards usually not know that. So I think that’s obviously a really, a really key item but as far as it was assignable, I think for doctors, the main ones are the associate agreements and third-party vendor contracts. with companies such as marketing companies, those be the main ones, where we talked about contracts assignability, and
Victoria Peterson 21:30
you’re walking me down a road that we’ve been down many times. Remember, one of the practices that I bought, was in a condo, it’s 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 slipped 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 walked 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 it was a tough lesson to where you’re just given such goal to what to negotiate up front, right? So you started out with really looking at the offer the acceptance 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 the cause or not the cause? How do you get out i Those have been some of the things that I think had been the most costly to me. When I hadn’t when I failed to realize, you know, and look at him ahead of time. Is there anything else that you could think of like, the mistakes that you make getting into it? And then you go, “Man, I wish I had met you when you signed this, I wouldn’t want to sign it.” What do you?
David Cohen 23:45
what, what pops in my head immediately because if this happened last night, I have a client that’s selling to a DSO and this is a fairly significantly large deal and then they email me and say total after the fact that they, “Hey, by the way, you know, a week before this deal, I bought a new panel machine and I want to take that contract on now,” and I was like, “Why would you do that before you sell and not tell the buyer because if the buyer doesn’t want it, what do you do with it and you’re responsible to make the payment.” You want to talk about another type of contract that you might want to be assignable as possible, that would be you know, any type of maybe like a 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 team doesn’t just consist of the team also consists of consultants and accountants and other advisors that part of the team and IT 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, 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 and so talking to your team can help you save time, money and headaches. I always say that that’s one that definitely popped out off the top of my head.
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