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Looking to buy a practice? Get educated and protected!

By October 9, 2015January 21st, 2022Buying a Practice

I thought I would spend some time talking about some of the recent weird things happening in the dental industry when it comes to buying/selling a dental practice. Bottom line: you need to understand these things if you’re looking to buy a practice so that you don’t end up getting taken advantage of and losing money!

Letters of Intent

A letter of intent is typically a 5 page document that spells out the key terms upon which a buyer/seller agree to buy/sell a dental practice. Interestingly enough, some real estate salespeople have decided to draft these important legal documents themselves under the guise that they are ‘saving the purchaser’ the legal fees involved.

So what do you get in exchange for not hiring a ‘legal gun’ to help you negotiate a proper letter of intent? Well, yes, you could save 997 + HST. But you also miss out on having the education and protection that comes along with it. So if you’re doing an asset sale, for example, will you think about whether HST is included or excluded on the sale? Or perhaps that will come up later – like at the end of the deal when you have to pay HST on the value of the leasehold improvements! Ouch!

Also, keep this in mind: real estate salespeople are not neutral. They get paid typically 10% commissions from the seller. They are not there to represent or protect your interests. And if you don’t deal with purchase and sale agreements on a daily basis (as we do), you’re bound to miss something critical or even get an unfair deal. We see incomplete, deficient, and one-sided letters of intent all the time prepared by real estate salespeople. Don’t sign important legal documents blindly!

Now, there’s also another issue with Letters of Intent: some real estate salespeople don’t want them at all. They say: we will (for “FREE”) prepare a formal agreement of purchase and sale which you can take back to your lawyers to finalize. We will save you lots of money. This approach is loaded with problems.

FIRST: why would anyone want to spend thousands of dollars on having their lawyer review a purchase and sale agreement (typically 40+ pages, excluding schedules, etc.) when the KEY TERMS of the deal have not been agreed upon (for example, in a Letter of Intent)!!! If it’s a competitive bid scenario, and you have less chances of actually getting the deal, it makes matters that much worse. SECOND: some real estate salespeople do a disservice to SELLERS by recommending offers that come in the form of simple letters of intent to be rejected automatically. This reduces the number of bids and scares prospective purchasers away. THIRD: the so-called formal agreement of purchase and sale we’ve seen are so deficient (remember that they are not being drafted by lawyers who spent 7+ years in university, articled, and are called to the bar in Ontario; they are prepared by real estate salespeople) that they sometimes have to be undone or drastically revised once lawyers actually get involved. FINALLY: keep in mind what is motivating the real estate salespeople throughout – namely, their 10% commissions. They need the deal to close as quickly as possible in order to recoup their initial investment on marketing. But this may create unnecessary pressures and problems of its own. Real estate salespeople may end up recommending non-dental professionals (accountants and lawyers) who push the paper to get the deal done but who may not spend the requisite time and energy to fully educate the dentist and protect them throughout. The fact that real estate salespeople both appraise and sell practice is an inherently flawed approach and rife with conflict (as I have discussed elsewhere).

Equipment Inspections

When you purchase a house, you typically do a building inspection as a condition to purchasing. You would think that it makes sense to do the exact same thing when buying a dental practice, right? The problem is that some real estate salespeople are pushing back on equipment inspections; they are telling prospective purchasers that they have to do an equipment inspection BEFORE submitting their Letter of Intent. That’s weird. Trust me: I’ve never seen that before. And it puts purchasers at a disadvantage (who has time or money to spend on equipment inspections BEFORE submitting a letter of intent) particularly when there’s a time crunch?

It’s important for purchaser dentists to know the state of the equipment that they are purchasing. Does anything need to be repaired or replaced? Does everything work as intended?

More importantly, in all the past dealings I’ve done, the result of having an equipment inspection is that the seller is asked to fix or repair things (or reduce the purchase price accordingly) so that when the purchaser takes over, he or she does not feel like they’ve been taken advantage of. Typically we’re talking a few thousand dollars (e.g. $20k) that are required to be spent by the seller or purchaser to repair or replace equipment; in the grand scheme of things, this may not be a lot of money – particularly when a practice is selling for over $1-million. But fixing the equipment / bringing it up to par before a sale makes a world of difference in the eyes of a purchaser. Moral of the story: purchasers should NOT be restricted in doing equipment inspections after submitting a Letter of Intent (as a condition to completing the sale) and should be free to use whomever they want to complete that inspection.

THE GOOD NEWS…BUT…

Despite the oddities that purchasers are facing by real estate salespeople when submitting letters of intent or doing equipment inspections, they have a legal and ethical obligation to the selling dentist to present ALL offers AND they must follow the instructions of the dentists who engage them (and pay them 10% commissions, mind you).   What this means is that they HAVE to show your offer to the seller. The only situation where a selling dentist will NEVER see a letter of intent is if the real estate salesperson convinces them to NOT accept a letter of intent. But this is like taking a shotgun, pointing it at your own feet, and pulling the trigger. Why would a selling dentist ever want to limit the number of offers they receive? Well, they are paying 10% commissions and perhaps they think they should go along with the advice from their real estate salesperson that comes with paying that amount of money to them. In my humble opinion: sucks to be them.

DMC