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Things to Consider when Buying a Dental Practice

By September 6, 2012January 19th, 2022Buying a Practice

David Mayzel and I have helped a lot of dentists buy or sell a dental practice. And over time, we have learned a thing or two about the process. Now it’s time to share some of my knowledge to help educate dentists out there who are looking to buy or sell their practice. Plus, we’ve seen a lot of REALLY BAD agreements of purchase and sale out there that dentists have signed and which were NOT prepared by lawyers.

Who are the Parties?

Sometimes a purchaser looks to buy a practice in their personal (human) capacity. But this may not always make sense. From a liability perspective, it’s better for the purchaser to incorporate a dentistry professional corporation and have that corporation enter the agreement. Also, it’s better to have a corporation take out the loan because they can repay the loan with higher after-tax dollars than a human dentist can (because they are taxed less).

Asset vs Share Sale

Sellers want to sell shares. Why? Because they can use their lifetime capital gains exemption and pay little or no capital gains tax. Buyers, however, want to buy assets. They don’t want the risk of buying hidden liabilities of a dentistry professional corporation (which they could get by buying the shares); also, it’s more advantageous to buy the assets from a tax perspective. If it’s a share sale, the purchaser will need to do extensive diligence on the corporation (e.g. liabilities concerning debts, taxes, leases, employees, litigation, etc. and verifying ownership of the assets). If it’s an asset sale, the purchaser will need to do real diligence on the assets (e.g. ownership of the equipment, status of the employees and lease, etc.).

Purchase Price

Will there be a deposit paid up front when the Letter of Intent (a non-binding letter outlining the basic terms of an agreement) is signed? Will there be a holdback of a certain amount on the purchase price because of some risks inherent in the deal? Make sure to note that the purchase price will need to be adjusted after the closing. Generally, asset purchases are easier to deal with – but you must also comply with the Bulk Sales Act (unlike in a share sale).

Conditions

Is the purchase/sale conditional upon things like lawyer review, financing, due diligence (e.g. getting a technician in there to evaluate the equipment), or getting a lease assigned/entering into a new lease with the landlord? If so, what are the timelines? Pay attention here!

Restrictive Covenants

Will the purchaser require the vendor to agree not to compete or solicit patients, referring dentists or employees? If so, you should know that these provisions are generally void – unless they are reasonable in terms of time, geography, and activities that are being restricted.

Associate Agreement

Will the vendor be staying on as an associate? If so, read what’s already been written in this blog about associate agreements (e.g. termination, restrictive covenants, etc.).

Employees

What’s the status of the employees? How many, what are their roles, and what is their length of service? There’s a large misunderstanding out there about how to deal with employees during a purchase/sale, and I will discuss this at greater length in a future blog post.

Lease or Building

Are the premises currently being leased or are they owned by the dentist? If it’s a lease, you’ll need to see how it can be assigned. Landlords are notoriously difficult to deal with and cause extensive delays. It’s better to get started early. I’ve blogged extensively about what to look for in leases and how to negotiate a proper lease (e.g. taking into consideration things like rent, use, exclusivity, term and renewal options, assignment and subletting, termination, signage, etc.).

Training

Will there be any dentist, associate or principal, or staff remaining on to help transition the ownership change? Will they help introduce patients of the practice to the new dentist, and who will pay for things like an introductory letter?

These are just a few things to consider. I’ll probably need to write another blog about these and other things in more detail.

DMC