Steps for Buying a Dental Practice

Often, dentists reach out to ask: “What is the process of buying a dental practice?” In other words, how does a dentist go from being an associate to an owner? Well, after writing the same email over and over, I thought it would be worthwhile to actually write a blog post about it to better educate the dentists out there who are surfing the Internet. So here we go.

Step 1: Letter of Intent

Assuming that you have found a practice you would like to purchase, the next step is to draft, negotiate and finalize a Letter of Intent. This is a generally non-binding letter that outlines some of the key terms upon which the purchaser will buy and the seller will sell the dental practice. Some of the key terms that will need to be addressed include:

• Who is buying/selling (i.e. the parties)?
• What is being bought (assets of a dental practice or shares of a dentistry professional corporation)?
• What is the purchase price?
• Will there be a deposit, and if so, how much and in what circumstances will it be returned?
• Will the vendor or a dentist shareholder of a dentistry professional corporation be staying on afterwards to associate at the practice (and if so, what are some of the key terms of that relationship)?
• What will happen with the employees before and/or after the closing?
• Is the building also being sold?
• Is there an existing lease, and if so, will a new lease be entered into, or will the existing lease be assigned?
• What conditions will the seller and the purchaser require in order to complete the transaction?
• How long will the exclusivity period go for?
• Other issues may be addressed as well (e.g. excluded assets, treatment of accounts receivable, etc.)

Importantly, the Letter of Intent is generally non-binding. The only parts that may be binding are the confidentiality, exclusivity, and deposit provisions. Once the Letter of Intent is finalized, the next step will be for the parties to have their team of professionals (e.g. dental lawyers, dental accountants, etc.) begin to do their diligence on the dental practice while drafting the formal, binding and separate agreement of purchase and sale.

Step 2: Due Diligence

The next step after the Letter of Intent is signed usually involves the purchaser conducting due diligence on the practice. This is typically done before or at the same time as the agreement of purchase and sale is being entered into. Due diligence basically involves things like:

• Chart audit
• Equipment inspection
• Financial review
• Lease review if there is a lease

At the same time as the due diligence is being done, the purchaser can also start arranging for financing.

The purpose of doing due diligence is to ensure that the purchaser is buying what it thinks it should be buying. Many times, there may be issues or discrepancies with things like the status of equipment, the financial statements of the vendor, or terms in a lease that need to be dealt with (e.g. demolition clauses) prior to the parties getting any further. There will typically be timelines on doing all of these things (though not to deal with the lease, since Landlords are notoriously difficult to deal with and end up only cooperating at the last minute).

Step 3: Agreement of Purchase and Sale

The next step – which can be done simultaneously with the due diligence – involves having the two lawyers draft, negotiate and finalize the agreement(s) of purchase and sale and all documents in order to “close” the transaction. “Closing” the transaction means completing the purchase and sale transaction on the closing day; this is when all the paperwork is exchanged, and funds are exchanged too. This may take a few days or weeks for the purchaser’s lawyer to initially draft and a few days or weeks for the vendor’s lawyer to review. All of the key terms from the Letter of Intent are basically inserted into a more comprehensive and formal document for everyone to agree upon. This is a binding document, the breach of which by a party could be very serious (i.e. lead to lawsuits). The document is typically structured as follows:

1. Introductory clause: identifies the type of agreement (i.e. asset purchase or share purchase agreement), the date, and the parties entering into the agreement.
2. Background section: provides context to the agreement.
3. Article I: Definitions define key terms that are used in the agreement.
4. Article II: the purchase of asset or shares sections deals with the purchase price, what is being purchased, the allocation and calculation of the purchase price, and adjustments required after the Closing Date.
5. Article III: standard provisions dealing with what happens on the closing date (exchange of documents and funds).
6. Article IV: treatment, if any, of existing employees before and after the closing.
7. Article V: treatment, if any, of accounts receivable before and after the closing.
8. Article VI: this is the indemnification section. Here, the vendor makes a number of standard and typical promises to pay the purchaser if the vendor ends up doing something wrong (e.g. lie about a promise the vendor made in the agreement itself). The purchaser will do the same.
9. Article VII: this is the representations and warranties of the vendor section. Here, the vendor will make a number of standard and typical statements about itself, what is being bought, etc. These statements are considered to be true, and the purchaser will be relying upon them to enter into the agreement.
10. Article VIII: this is the representation and warranties of the purchaser section. Here, the purchaser will similarly make a number of standard and typical statements about itself.   These statements are considered to be true and the vendor’s company is relying upon them to enter into the agreement.
11. Article IX: this is the covenants of the vendor section (i.e. promises that the vendor agrees to do/refrain from doing from the time of signing the agreement of purchase and sale up until the closing). Basically, the vendor will agree to maintain everything ‘as is’ from the time everyone signs this agreement to when the deal closes.
12. Article X: these are the conditions (e.g. chart audit, financing, etc.) that must be satisfied for the purchaser to proceed to close the deal.
13. Article XI: these are the conditions (e.g. chart audit, financing, etc.) that must be satisfied for the vendor to proceed to close the deal.
14. Article XII: these are general terms.
15. Schedules: here, additional supporting documentation will be attached to the actual agreement (e.g. articles of incorporation, asset list, list of accounts receivable, employee information and employee contracts, the lease, etc.).

Importantly, no two agreements of purchase and sale are the same. They are highly customized documents that get negotiated back and forth by the parties when it comes to things like including / excluding terms, precise drafting language, etc.

Step 4: Associate Agreement

Sometimes, the purchaser may require the vendor (if the vendor is a human being) or a shareholder of the dentistry professional corporation to stay on and continue associating after the closing. If that’s the case, then the associate agreement will be drafted, negotiated, and finalized at the same time as the agreements of purchase and sale. This agreement will deal with key terms such as:

• Who are the parties?
• What is the term (i.e. months, years, etc.) of the associateship?
• What is the remuneration (e.g. 40% of Net Monthly Collections)?
• How can the agreement be terminated?
• Are there any restrictive covenants (e.g. non-solicitation, non-compete, etc.)?

Again, no two associate agreements are the same. They are highly customized documents and are heavily negotiated back and forth by the parties’ lawyers.

Step 5: Employees

Another issue that needs to be addressed prior to the closing is the employees and what happens to them. Will they be given notice of termination or termination pay by the vendor prior to the closing? Will they be offered new employment agreements after the closing, and what are the details of those terms?

Step 6: Real Estate or Lease

If the building where the dental practice is being located is being bought/sold, then this will need to be dealt with almost as a separate purchase and sale transaction. If the real estate is owned by a corporation and the shares of the corporation are being bought/sold, then there will be a second agreement of purchase and sale transaction (this time, for the shares of that real estate holding corporation). If the real estate is being sold directly as an asset to the purchaser, then a real estate lawyer should be involved to deal with it. They will typically have their own form of agreement of purchase and sale and closing steps/documents which need to be followed.

If the dental practice is leasing space, then the purchaser will need to decide (and see if it’s even possible) whether they want a simple assignment or transfer of the existing lease OR if they want a new lease altogether. If they want an assignment, then the existing lease needs to be consulted to determine whether the Landlord’s consent is required (typically, it is). The Landlord may refuse to give consent or delay in giving consent if they are not satisfied with things like the purchaser’s creditworthiness, financial net worth, or background checks. The Landlord may also try to ask for money – either to cover their administrative and legal costs in getting the consent or because they are greedy and want a piece of the overall purchase price (watch out for this and be sure to read the lease carefully to see what they’re entitled to!). If the purchaser wants to have a new lease, then they will need to work with the Landlord (which can be very difficult, time-consuming and FRUSTRATING) to address issues such as:

• Who are the parties?
• What is the premises?
• What is the term of the lease?
• What are the renewal terms?
• Is the lease a gross lease (includes everything) or a net lease (which separates the basic and additional rent)?
• What is the basic rent?
• How can the lease be assigned/transferred?
• Is there a demolition clause?
• Is there any rent-free period?
• How are issues such as parking, signage, garbage, etc., dealt with?

I don’t have to tell you that having a dental lawyer involved in negotiating the lease is very important. Some dentists end up getting screwed on the lease and don’t realize it until they try to sell their practice. They end up having to sell for much less because they have a crummy lease.

Step 7: Close the Transaction

When all of the above steps have been addressed (and there may be more, depending on the nature of the deal and the specific terms therein), the next step will be for the parties to select a day to “close” or complete the transaction. This involves the parties either meeting to exchange documents and funds or mailing each other the documents and funds. From that day onwards, the purchaser will own the dental practice.

Step 8: Post Closing

After the closing, there are typically a number of steps that need to be taken to help “finalize” and “clean up” the transaction. This may involve dealing with employees (e.g. having meetings), getting training from the vendor or someone else (if that was part of the deal), working with the vendor in a principal-associate capacity, transferring certain things over (e.g. fax, phone, internet, websites, etc.), and notifying parties of the transaction (e.g. RCDSO, Ministry of Health and Long Term Care, etc.). If the purchaser is a corporation and it is amalgamating with another dentistry professional corporation, then even more documentation will be required to be filed with the RCDSO and the Ministry of Government Services.

Conclusion

So there you have it in a nutshell. There are a lot of little things I didn’t bother to include in this process, but at least you get a basic idea of what is involved in buying a dental practice.