A non-compete covenant is a contractual clause that limits your ability to practice medicine for a specific period of time and within a defined geographic area after you sell your practice or leave an employer.
Think of it this way: if you sold a famous local restaurant, the new owner would want to prevent you from opening a new one across the street a month later with the same popular recipes. The non-compete protects the new owner’s investment in the business’s goodwill, patient base, and referral sources, which they paid for during the acquisition.
Why This Matters to Healthcare Providers
When you sell your practice, the buyer will almost certainly require a non-compete to protect their investment. The terms of this agreement—its duration, geographic range, and scope of restricted activities—are major points of negotiation that directly affect your future career options.
The legal environment for these covenants is changing rapidly. The FTC has proposed a federal ban, and several states already prohibit them. However, in many states, they remain enforceable, especially when connected to the sale of a business. You should never assume a non-compete is invalid without seeking specific legal advice, as the consequences of a breach can be severe.
Example in Healthcare M&A
Scenario: Dr. Evans and her partners decide to sell their successful multi-location orthopedic practice to a private equity firm. The PE firm plans to use their practice as a “platform” for regional growth.
Application: As a condition of the multi-million dollar sale, the PE firm requires Dr. Evans and her partners to sign new employment agreements. Each agreement contains a non-compete covenant that prevents them from practicing orthopedics, investing in a competing practice, or soliciting former employees for three years within a 20-mile radius of any of their former clinic locations.
Outcome: The PE firm’s investment is secure because the physicians who built the practice’s reputation cannot immediately leave and become competitors. While Dr. Evans gains significant financial liquidity from the sale, she has also surrendered her ability to practice independently in her community for a substantial period.
Related Terms
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Frequently Asked Questions
What is a non-compete covenant in the context of healthcare practices?
A non-compete covenant is a contractual clause that restricts a healthcare provider’s ability to practice medicine for a specific time and within a defined geographic area after selling their practice or leaving an employer. It protects the buyer’s investment in the practice’s goodwill and patient base.
Why do buyers typically require non-compete covenants when purchasing a healthcare practice?
Buyers require non-compete covenants to protect their investment in the acquired practice by preventing the seller from immediately competing in the same area, which could undermine the buyer’s patient base, referral sources, and overall goodwill that they paid for.
How can non-compete covenants affect a healthcare provider’s future career options?
Non-compete covenants limit where and for how long a healthcare provider can practice after selling their practice, which can restrict their ability to work independently or in the same community for a certain period, often impacting career mobility and opportunities.
Can non-compete covenants be legally challenged or invalidated?
While the legal environment for non-compete covenants is evolving, with some states prohibiting them and the FTC proposing a federal ban, many remain enforceable, especially when tied to practice sales. Providers should seek legal advice rather than assuming non-competes are invalid.
What was the example scenario involving a non-compete covenant in healthcare M&A?
In the scenario, Dr. Evans and her partners sold their orthopedic practice to a private equity firm, which required them to sign non-compete agreements preventing them from practicing orthopedics or competing within a 20-mile radius for three years. This secured the firm’s investment but restricted the doctors’ independent practice in the community.