If you’re considering selling your dental practice, you’re likely focused on showcasing its value, including your dedicated team. But did you know that lacking proper and up-to-date employment agreements could put your sale—and a fair sale price—at risk?
As an employer, you know that your team members can be one of your best assets, and most people expect that potential buyers would see quality employees with good patient rapport as a value-add. However, even the most loyal and long-term employees can become potential liabilities from a buyer’s point of view. In this post, we’ll explore how employment agreements can impact the value of your practice, the sale price and your obligations after the sale.
How Proper Employee Agreements Protect Your Sale Price
When assessing a potential dental practice acquisition, buyers (and their advisors) closely examine the practice value and associated liabilities. And they will view any lack of formal, compliant employment agreements as potential costs. Employee issues can lead to unexpected financial obligations if contracts don’t align with current legal standards. In this case, buyers might demand a price reduction or ask you to absorb future employee costs, diminishing the overall sale value. For example, we’ve seen deals with the selling dentist on the hook for 100% of all termination costs done by the buyer after the closing for 6 months. Yikes!
So, that’s the bad news. But the good news is there are things you can do to mitigate these employee-related risks before you sell.
Common Pitfalls with Employment Agreements
First, the worst-case scenario would be to find yourself with no written/signed agreements with any of your employees. If that’s the case, call a dental lawyer immediately to discuss a strategy for issuing new employment agreements to your team. However, even with written contracts, you could still have some issues. Before listing your practice for sale, you should review all your current employment contracts and flag any problems. To highlight some of the most common and costly pitfalls you should look out for in your review, let’s look at an example scenario:
After five years, your receptionist decides to move out of town without notice, leaving you needing to hire someone new quickly. When you find someone, you want to get them started quickly, so you have them start working without a formal employment agreement, noting that you will get one to them in the next month or so. After a few weeks, you realize you still haven’t formalized their agreement. So, to save time, you take the employment agreement from your prior receptionist, adjust a few things to fit the new hire, present it to them, and ask them to sign it and return it to you by the end of the day.
So, what’s wrong with this scenario?
Problem 1: The Contract Wasn’t Entered Into Under Proper Conditions
To begin with, you can’t ask anyone to sign a new employment agreement immediately. You need to give your employee the opportunity to read it over, get independent legal advice (if they want it), and ask any questions they may have about the terms within it. Why? Because legally, employment relationships are generally viewed as power-imbalanced – with the employer having more power over the employee. This could lead to people feeling like they have to sign something they don’t understand – or don’t agree with – because of the pressure of having their job on the line. If the agreement is challenged, a court could say it is invalid because it was signed under duress or improper conditions.
In our scenario above, you may have asked for the contract returned by the end of the day simply to check it off your to-do list. But, if challenged in court, the new receptionist can say they felt pressure to sign it immediately and didn’t have time to read and understand all the terms thoroughly.
So, to show the process was transparent and fair, you need to ensure you give all employees adequate time to review new or updated agreements. Invite them to seek independent legal advice and keep records of the timeline given to them. This will help put potential buyer’s minds at ease about the legitimacy of the agreements.
Problem 2: No Fresh Consideration
The next problem with our example situation is the lack of consideration. When you present a new agreement to someone who has already started working, you are required to include what’s legally termed fresh consideration—typically an added benefit, such as a bonus or pay increase. Without this, any new terms may not be legally binding, which could lead to disputes down the line. A 2023 case explained consideration as:
“a benefit to one party or some trouble, prejudice, or inconvenience to the other party. Generally, a pre-existing contract can not be modified unless there is a further benefit to both parties. As a matter of law, employers do not have the right to alter a contract unilaterally by adding new terms or diminishing the existing rights under the contract. Something new and of benefit must flow to the employee in exchange for the new promise.”
The legal requirement that there be consideration is meant to protect the employee because of the power imbalance in the relationship. As such, Courts have held that an employer’s promise not to terminate an employee’s employment does not meet the requirement of consideration.
To improve our scenario above, make sure that you offer fresh consideration, such as a small bonus or added benefit, when updating or introducing agreements with current employees. This will help validate the new terms legally, providing both you and your future buyer with added security. For advice on what to offer as consideration, speak with an experienced dental employment lawyer.
Problem 3: Illegal Termination Provisions
In our imagined scenario, you used an old employment contract as a template. Even though it is just a few years old, legal standards for employment agreements have changed dramatically in recent years. So, even if the previous contract was properly prepared by an employment law lawyer at that time, the chances are that the agreement can no longer be relied upon.
One of the most significant changes in recent years has been in termination clauses. Starting with the Waksdale case in 2020, Ontario Courts determined that if your employment agreement contains a clause for termination for cause or termination without notice, then your agreement is subject to being challenged. Those clauses would say something like, “If the employee has done something wrong, then the employer can fire them immediately and not have to pay them or give them any notice.” The Court of Appeal in Waksdale said that if you have such a clause and it falls below the minimum standard set by the Employment Standards Act, 2000, then not only is that clause invalid, but ALL of your termination clauses within the agreement are invalid. That’s right – even the termination with notice clause.
In our example, a clause written over five years ago would likely have an outdated termination cause. If the buyer then tried to terminate the new receptionist after the sale and they challenged the buyer in court, the entire contract could be deemed illegal and unenforceable. The buyer would then be forced to pay that employee roughly one month of pay for every year of service up to 30+ months! This differs from the maximum 8 weeks a purchaser would have to pay under the Employment Standards Act, 2000, with a legal and enforceable agreement.
That’s a massive difference in notice of termination pay. So, the potential buyers will use this against you in negotiations and try to discount the purchase price or have you cover all, or at least a portion, of any employee termination costs after the sale for a period of time (e.g. 3 months or 6 months).
When presenting anyone with an employment contract, work with an experienced dental employment lawyer to ensure the contract aligns with all current legal standards. Relying on older agreements can trigger financial liabilities, putting you at risk if these employees are terminated, even after you sell.
Protect Your Practice’s Value with Proactive Contract Management
As you can see, having well-organized, compliant employee agreements can enhance the attractiveness of your practice and help ensure a smooth, fair sale process. Here are some steps to follow:
- Conduct a Thorough Employment Contract Review
- At least one to two years before a planned sale, review all employee agreements. Ensure each is up-to-date, compliant, and includes clear, enforceable terms. This is especially important if any agreements were verbal or the roles and responsibilities have significantly shifted since they were signed.
- Implement and Document Fairness and Transparency
- For any new or updated agreements, document each step, including any additional consideration provided and a written acknowledgment from employees regarding their understanding of the terms. This shows buyers that employment matters were handled properly and mitigates concerns over improper conditions.
- Ensure Clear, Direct Language in All Agreements
- Employment agreements should be clear and straightforward, specifying roles, responsibilities, and termination terms. Avoid vague language, which courts may interpret against you, potentially leading to larger payouts for terminated employees.
- Get Help from an Expert
- The best way to ensure your agreements are on par with the current employment laws is to have an experienced dental employment lawyer review them before presenting them to your employee. Contact a DMC lawyer for help reviewing your employment agreements today.
Not only will properly drafted, compliant employment contracts protect you in the remaining years as an employer, but they are also a cornerstone of a successful practice sale.
Bottom Line
Selling a dental practice involves numerous complex details, and employment agreements are a critical component. By ensuring that all your team members have valid, up-to-date employment agreements, you reduce employee liability risk, boost buyer confidence, and protect your practice’s value. Don’t let outdated or missing employment agreements undermine your sale—ensure your practice’s success by proactively managing these essential documents.
Ready to protect your practice and optimize its sale potential? DMC specializes in preparing dental practices for sale, including updating and presenting new employment agreements tailored for dental employees. Contact us today to learn how we can help you secure a smooth and successful sale.
