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Lawyer for Dentists, Dental
Corporations and Group Dental Practices
Buying and selling a
dental
practice
Thank you for finding my suite of articles on
the basic corporate, business and contract law issues for
dental corporations and group dental practices in
California. The articles in this suite are:
This article gives a quick overview of
buying and selling a dental practice. I discuss the deal
from due diligence, through deal terms, to the definitive
deal documents.
Finding the Deal
The first step is to find a deal. Talk to
people in the industry. Find out if a dentist is looking to
sell and retire, or if an up-and-coming associate is looking
to buy. If you have a longer timeline, consider hiring an
associate and grooming him or her to take over (from the
buyer’s side, consider being that associate). If that
doesn’t work, hire a broker who specializes in dental
practices. Lastly, remember that only someone licensed in
CA as a dentist may buy and own the practice.
Due Diligence
Both the buyer and the seller should go
about the due diligence process in a business-like manner.
Most buyers of a dental practice have experience in the
profession and understand what to look for, so I won’t
belabor the issue. At a minimum, (1) check the seller’s
dental license for a history of complaints or litigation,
(2) review the practice’s financial statements and tax
returns for the past three years, (3) analyze whether the
seller’s relationship with referral sources and patients can
realistically be transferred to you (conversely, beware if
the relationship is so intensely personal that it can’t be
separated from the seller), (4) beware of prior employee /
contractor misclassification in the practice, and (5) check
for liens, unpaid back taxes (including sales taxes), unpaid
workers compensation, unpaid trust fund taxes, unpaid
vacation liability, unpaid bills, and current and potential
lawsuits.
Deal Terms
The first deal document is a letter of
intent, also called a term sheet. The parties use a letter
of intent to confirm basic deal terms. The letter of intent
should not be binding on the parties, except for such
matters as due diligence procedures and perhaps a lock-up or
exclusive period within which the seller may not field other
offers.
Purchase price is the primary deal term.
Be sure to take taxes into account, because it’s the
after-tax price that counts. Payment terms are almost as
important as the total purchase price. For dental
practices, usually you use some combination of cash,
promissory note, and earn-out (which is money that is paid
over time based on the practice’s post-closing
performance). Sellers love cash and buyers love earn-outs.
Also consider who collects the accounts receivable that were
booked before the closing date.
Another deal term is legal structure –
will it be a stock or asset sale?
As a rule of thumb, buyers want to buy assets and
sellers want to sell stock.
- Stock Sales.
Here the buyer
takes the entire dental corporation, leaving all
contracts, assets and liabilities in place for the
buyer. The buyer gets a carry-over basis, while the
seller pays taxes on the appreciation in their shares
(with no double-tax). This is why sellers love stock
sales.
- Asset Sales.
Here the buyer takes the assets of the practice
but not the liabilities (except those that the buyer
agrees to assume); also the buyer gets a stepped-up
basis in the assets.
This is why buyers love asset sales. The seller
keeps the un-assumed liabilities, and might incur the
dreaded double tax (if the seller uses a C corporation),
that is, the corporation pays taxes on the asset sale,
then the shareholders pay taxes again when the
corporation dividends the remaining purchase price to
them.
Fixing Prior Defective Work
All of us (yes, even lawyers) make
mistakes. When buying a dental practice, the deal terms
should include the fix-up of the seller’s prior defective
work (if this makes sense given the nature of the
practice). For patients who stay on, usually the buyer will
re-do, for free, defective work done by the seller. Hence
the buyer and seller need to allocate the responsibility and
costs for the re-do work + the time period for doing the
work, for example, for the first year after closing, the
buyer might do the fix-up work then charge the seller some
agreed-to fee for the work.
Also address the purchase of tail
insurance by the seller.
For more information on malpractice tail policies,
see my article -
Leaving
a dental practice / closing a dental practice.
Deal Documents
Once the parties agree to the basic deal
terms, they move on to the deal documents including the
purchase agreement. In the purchase agreement, the seller
makes representations about the practice. This allows the
buyer to recover back some of the purchase price if any of
the representations is materially misleading, for example,
the seller did not disclose certain liabilities.
Representations are not a substitute for due diligence, but
they do provide additional security to the buyer.
The last important piece is the
non-competition agreement. In most cases, the buyer should
receive a non-competition agreement from the seller.
Otherwise the buyer is at risk that, after collecting the
purchase price, the seller will set up a competing practice
across the street. For more information on non-competition
clauses, see
May
a dentist compete against his or her former practice?
This whirlwind tour is over.
Remember that buying or selling a dental practice is
a complex process.
Legal, tax, accounting, valuation and psychology issues are
all involved. Before
you do anything, get competent legal counsel to help you.
Call me to schedule a
legal consultation: 510-796-9144
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