20 Questions Prospective Purchasers Should Ask

With DentalPlace.ca becoming more popular, we’ve found ourselves dealing with a lot of prospective purchasers.  And they have lots of questions.  We also represent purchasers on other deals (when we’re not representing the seller).  So I thought it would be worthwhile to outline the top 20 questions that prospective purchasers are asking about practices when they visit (which you might find helpful if you’re a potential buyer or seller of a dental practice):

1. Why does the dentist want to sell?  Are they retiring, ill, moving, going through a tough financial/family hardship?
2. What were the revenues for the past 3 years?  What is the trend here?
3. What is the adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) after all proper adjustments have been made (e.g. adding back the $80,000 ‘consulting expense’ paid to the dentist’s stay-at-home spouse)?  Again, what is the trend here?
4. Does the dentist record cash transactions, substantially attempt to / actually collect co-pay, and have normal write-offs?
5. How many patients attended the practice for some kind of dental treatment in the past 12 months?  18 months?  24 months?
6. How many active recall patients has the practice seen (either individual patients or appointments) in the past 12 months?  18 months?  24 months? 
7. What is the ethnic profile and age distribution of the patients?
8. Does the practice have paperless charts?
9. Does the practice use digital x-rays?
10. What is the situation with parking?  With signage?  This information is typically covered in a lease.
11. What kind of software (for both x-rays and practice management) does the practice use?
12. Does the lease have a demolition clause or relocation clause?  Generally speaking, a demolition clause gives the landlord the right to terminate the lease and kick you out after a set period of time if they are redeveloping the building, for example, to build a condo or build a new shopping centre.  A relocation clause gives the landlord the right to relocate you to another part of the same building (or even perhaps another building owned by the landlord).  Both are significant risks to prospective purchasers.
13. How old is the building?  This may give some insight into the history of the building and whether the landlord may try to do something like redevelop or update the building.
14. Do any of the staff work at any other practice?  Prospective purchasers would want to make sure that they don’t try to leave and solicit patients/staff to go to another practice.
15. Are the staff on contract and do those contracts have restrictive covenants and limitations of liability in case the employer wishes to terminate them?  Not having staff on contract can be a big risk to any prospective purchaser.  If it’s a share sale, the ownership of the employer changes, but that doesn’t change the legal relationship between the employer and the employee (which remains the same).  If it’s an asset sale, there are other legal factors at play.  You can read this blog here for more information.  Associates should also be on contract because, without one, they may be allowed to leave and set up shop across the street, compete,  advertise generally, and take staff who have given you notice.  You can read this article for more information.
16. What should I put as a purchase price in a Letter of Intent?   Price is obviously a very important factor to a selling dentist (as is ‘the right fit/person’).  Good practices in good locations have historically sold for well over appraised (e.g. 120%-140% is not unheard of).  You need to have a conversation with your family, banker, and accountant to determine what price you’re willing to put forward.  You will typically have one chance to select a price.  And bear in mind what you’re up against in terms of competition from other buyers.
17. What should I put as a closing date in a Letter of Intent?  Most transactions take at least 1-3 months to complete, so just bear that in mind.
18. Who finances these types of transactions?  ANSWER: all major banks (e.g. TD), but just be sure to deal with a ‘dental banker’.
19. How long will I have to do my due diligence?  ANSWER: about 2 weeks after your Letter of Intent is accepted.
20. What is a reasonable restrictive covenant?    This deals with how long a time and how large a geographic distance from the practice should the seller be prohibited from competing in / soliciting patients and staff.   The answer, as is usually the case with legal questions, is ‘it depends’.   It depends on things like: does the dentist actually work at the practice (or is it an associate-run practice)?  How far away do patients actually come from?  Does the dentist have another practice and where is that located?  And where geographically is the practice located (e.g. a 20 km restrictive covenant in downtown Toronto may not be as reasonable as it would be in Kenora, Ontario).

That’s it for now!  If you are a prospective purchaser looking for a law firm to represent you in purchasing a dental practice, feel free to contact us.