Definition
A buyout clause is a provision in your employment contract that gives you the option to pay a predetermined amount of money to cancel a restrictive covenant. Most often, this is used to get out of a non-compete agreement, allowing you to practice freely within a restricted geographic area after leaving a position.
Think of it as a pre-negotiated “lease-break fee” for your job. You know the exact cost to exit the restriction upfront, which removes the risk and uncertainty of a future legal challenge.
Why This Matters to Healthcare Providers
After you sell your practice, your new employment agreement with the buyer will almost certainly contain a non-compete. A buyout clause is your contractual escape hatch. It preserves your professional mobility and gives you a clear, albeit costly, path to open a new practice or join a competitor locally if the new arrangement does not work out.
Example in Healthcare M&A
Scenario: A successful four-physician ophthalmology practice agrees to be acquired by a private equity-backed Management Services Organization (MSO). As part of the deal, the physicians must sign new employment agreements that include a three-year, 15-mile non-compete clause. One of the senior physicians, Dr. Evans, is concerned about adapting to the MSO’s management style.
Application: During contract negotiations, Dr. Evans’ attorney successfully adds a buyout clause. The clause states that Dr. Evans can terminate the non-compete covenant at any time by paying the MSO a one-time fee equal to her prior year’s total compensation.
Outcome: Two years after the acquisition, frustrated with new administrative burdens and productivity metrics, Dr. Evans resigns. She exercises the buyout clause, pays the predetermined fee, and is immediately free to open her own boutique practice just five miles away. Without the clause, she would have had to move or temporarily retire.
Related Terms
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About the SovDoc M&A Glossary
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Frequently Asked Questions
What is a buyout clause in an employment contract?
A buyout clause is a provision in your employment contract that allows you to pay a predetermined amount of money to cancel a restrictive covenant, most commonly a non-compete agreement. This enables you to practice freely within a restricted geographic area after leaving a position.
Why is a buyout clause important for healthcare providers?
After selling a practice, healthcare providers often face non-compete clauses in new employment agreements. A buyout clause serves as a contractual escape hatch, preserving professional mobility by giving a clear, though costly, path to open a new practice or join a competitor locally if the new arrangement is unsatisfactory.
Can you provide an example of how a buyout clause works in healthcare mergers and acquisitions?
In a merger, a four-physician ophthalmology practice is acquired by a Management Services Organization (MSO) with a three-year, 15-mile non-compete clause. One physician, Dr. Evans, negotiates a buyout clause allowing termination of the non-compete by paying a fee equal to her prior year’s compensation. Two years post-acquisition, she exercises this option to open her own practice nearby.
What is the usual fee structure for exercising a buyout clause?
The fee to exercise a buyout clause is usually a one-time predetermined amount agreed upon in the contract, often equivalent to a prior year’s total compensation or another fixed sum negotiated upfront.
How does a buyout clause reduce legal risks associated with non-compete agreements?
A buyout clause sets a clear, predetermined cost to exit the non-compete agreement. This transparency reduces the uncertainty and risk of future legal challenges by providing an agreed-upon remedy to cancel the restrictive covenant.