December 2004

Chiropractic contracts need attention to detail

by Dr. David G. Foster

Throughout your chiropractic career, you will be confronted with the need to have a contract. The most common chiropractic contracts are the chiropractor and the chiropractic associate, the sale of chiropractic practice and the shareholders agreement between two partnering chiropractors.

DC and the associate

Many chiropractors hire associates with the best of intentions. The associate begins the relationship with equally good intentions. In theory, the practice will grow and the associate will cultivate a patient following and goodwill within that practice. This relationship may prosper for an extended period of time, without incident.

The associate's perspective of this relationship usually changes first ‑‑ human nature alters it. This change frequently occurs when associates gain enough knowledge and experience to feel confident and independent of their employer. A true sign of this is when associates tally their services for the week and compare this number with income. The associates may feel exploited upon recognition of the imbalance within the evaluation.

At this point, the risk is with the employing chiropractors. Without a pre‑employment contract, employing chiropractors are in a very trying situation. They have provided exactly what was stated from the beginning of the relationship. They have given the associates opportunity, instruction, and invaluable experience.

And now, the associates have the ability to legally open a practice next door and take a percentage of the existing practice with them, without compensating the employing DCs a dime. The employing chiropractors are in a very poor negotiating position at this time.

A pre‑employment agreement with an established non‑compete clause prevents this situation.

Additionally, the contract should address compensation, termination, conduct, insurance, liability, and responsibility.

As the employer originating the agreement, it is considered good business protocol to protect oneself before the relationship develops. In my offices, the new associate signs the agreement on the first day of employment.

Contract of sale for a practice

Selling a chiropractic practice is different than selling anything else you own. It holds physical and emotional value. During this process, discussing your practice in terms of assets, patient files, and accounts receivables depersonalizes the practice you have created and nurtured.

Before the process begins, it's important realize that potential buyers do not share your emotions. They are buying your practice, not your memories or attachments. The difficult job for the seller is to keep the emotional and the business aspects separate.

When chiropractors sell their practices, they are traditionally responsible for originating a contract of sale. Most DCs contact an attorney and accountant and ask them to start the process. But, does your attorney or your accountant know about your chiropractic practice? What kind of experience do they have in selling a professional practice such as yours? Who will teach them the mechanics of your practice? How much time and money will you spend in teaching them this needed information?

It has been my experience that lawyers know the law, accountants know accounting, but neither knows chiropractic. Transferring ownership in a chiropractic practice is significantly different than other businesses. To ask accountants to appraise the dollar value of a practice is like asking them to tune up a car.

There is no one equation to value your practice. Each one is unique, with its own personality. An experienced person who has exposure to many "for sale" practices can give you the most accurate, objective, and useful perspective of value and marketability.

Do not recruit your lawyer or accountant to do the job of a professional practice broker. Your loss will be greater than the cost of the broker.

You should be careful and critical when hiring an attorney to develop a contract. Invest your energy wisely and interview a few lawyers until you feel you can work with one effectively. You will spend approximately $150 per hour or more for advice. Explain your needs and absolutely request an approximation of time and cost. Do not expect the professional to do it all for you. An attorney's job is to execute your wishes legally, not tailor a deal to their liking.

All contracts must contain the basic financial transaction, covenant not to compete, accounts receivable transfer, prepaid expenses, lease, creditors, employees, and transition agreement. The contract should be simply stated and easy to read.

Each topic should be presented independently of one another for additional ease. Most important, you should understand each issue completely. When you spend time with your lawyer, he or she should be educating you on the legality of the sale. You should not have to educate the lawyer on the mechanics of your practice.

My experience has shown me that when two chiropractors negotiate, they should do it face‑to‑face without the presence of any professionals. The professionals should work in the background educating the seller and buyer about each topic when needed.

The reality is the chiropractors must work together and discuss all issues toward resolution. When this negotiation process is used, a compromise and a conclusion are accomplished with less effort, stress, and professional cost.

In contrast, when you walk into a negotiation with a lawyer on one side and an accountant on the other, you are looking for a long, drawn‑out, costly meeting that could be counter productive.

Never allow the attorneys to negotiate the contract unless you are present. Once your counsel starts to speak directly with the buyer's counsel, all good intentions are gone between the seller and the future buyer. The likelihood of the deal closing will decrease significantly. They may argue for hours on a minor issue which you will end up paying for. By being present, you can keep the big things big and the small things small, while coaxing the process towards completion.

The contract is basic; emotions and legal naivety could create friction. The ideal scenario is when an experienced mediator reads through a "boilerplate" chiropractic contract of sale with the seller and buyer. The mediator explains each issue within the contract allowing both parties to vocalize their concerns and negotiate their point. Both parties understand and recognize the other's concerns and are willing to compromise.

Using an outline boilerplate contract ensures all major issues are explained and understood, with just the unique additions being incorporated. At this stage, the document can be delivered to your professional for review.

An accountant can give you a strategy to limit the tax liability on the proceeds of the sale. Your attorney will make sure all of your intentions are legal and facilitate the transaction to closing. Following this process allows the buyer and seller to work together to accomplish the goal of transition, minimizing effort, stress, and expense.

Shareholders agreement for partnering DCs

The shareholders' agreement is the most important and unique contract of all documents. This document illustrates in detail the relationship and responsibilities between the partners, a sort of prenuptial marriage agreement. If the relationship is successful, the parties will never read it again. If not, it will act as a rule book to guide the relationship to its original agreement or dissolve the relationship entirely.

The shareholders agreement starts with a statement of facts that describes the entity, its location, percentage owned and by whom. The body of the document explains compensation and a general overview of the responsibilities of each shareholder. Some of the unique aspects of the shareholders agreement are shareholder selling options, shareholder life and disability insurance and even procedure in the event of death. The last third of the document defines restrictive covenant, termination, indemnification and a myriad of standard legalese.

This agreement should act as a guide book to navigate the partnership through sunny and stormy days. Additions and subtractions to it are common as partners make plans for the present and the future. It always has a way of changing.

(David G. Foster DC, co‑owns and operates six chiropractic practices and employs eight chiropractic associates. In his 14 years as a chiropractor, he has completed all aspects of originating, building and selling of chiropractic practices.

He is the former owner of United States Practice Brokerage, a chiropractic practice brokerage firm which completed many successful buy/sell transactions. His undergraduate education includes a BS degree from Boston University with a major in finance prior to attending Life Chiropractic College.

Presently, he consults in the areas of the practice buy/sell process, practice evaluation, associate contracts, and shareholder agreements. Contact Dr. Foster at 800‑908‑3040 or Chirodave@aol.com.)