When you are looking to buy or sell a dental practice, it is important to protect your legal interests by paying special attention to the various contracts that the dental attorneys will be preparing for you. The letter of intent and the purchase agreement are vital to any successful transaction as it ensures what the parties agreed to is included in the agreement. However, you must be very careful because if it’s not in the purchase agreement then it’s not part of the transaction even if it is in the letter of intent or you’ve been discussing it verbally with the other party.
With the above in mind and the information below, you will be well on your way to developing a successful purchase agreement.
1. Letter of Intent – While generally non-binding, a letter of intent is key to many business transactions, not the least of which involves your dental practice. Such a letter is an agreement between both the seller and buyer of a practice, which specifically spells out the terms of your agreement. Examples of the types of items laid out in a letter of intent include: the date and purchase price of the sale, discussion of any transfers of accounts as a result of the transaction, deadlines for approval of financing and delivery of that financing, and deadlines for securing or transferring any lease related to the sale. In addition to these items, a letter of intent should state that all information related to the potential sale should be strictly confidential as a means of protecting all parties should the sale fail to be executed.
2. Allocation of Purchase Price – When allocating the purchase price of a transaction involving your dental practice, the assets involved are generally tangible items such as patient records and dental equipment and supplies. Your CPA and legal counsel should consider these items, along with a goodwill and non-compete covenant, when allocating the purchase price of assets. In turn, you should use expenses, depreciation, and amortization in order to get the most bang for your buck when seeking to recover the amount spent for your purchase price. One example of this includes depreciation of your practice’s supplies or furniture over a 5 or 7 year period.
3. Contingencies – A contingency involves language that specifies that the purchase agreement relies on the result of certain actions being taken. Should those actions fall through, you would then, therefore, not be held liable for executing the sale or purchase of the practice. One frequent example of a contingency is determining the terms of the dental lease agreement and when and how those terms may be assumed by another party. Other examples include your CPA’s review of your records and accounts prior to a sale of your practice, the ability to obtain financing for the sale, and review of the purchase agreement by your legal counsel. To protect yourself from liability, these contingencies must be clearly enumerated in your purchase agreement.
4. Non-Compete Covenant – One of the most important parts of your purchase agreement, as a buyer, is a non-compete and goodwill covenant. This, in essence, prevents the seller of the dental practice from practicing within a certain geographical location for a specific amount of time. Under California law, this is allowable so long as the covenant includes the goodwill of the practice. In order to protect yourself from competition as the new purchaser of a dental practice, it is absolutely critical for you to include such a clause in your purchase agreement.
5. Collection of Seller’s Accounts Receivable – When buying or selling your dental practice, you should consider whether or not the seller will attempt to collect their accounts receivable. In actuality, it is in the best interest of both parties not to have the seller attempt to collect. If a patient suddenly discovers that he will have to pay another entity rather than his regular dental office, the likelihood that he will not pay is higher than if the buyer of the practice seeks to promote a good relationship with the patient through the transition process. In order to protect yourself from this potential consequence, you should be very clear about when and if the seller can collect his accounts receivable, what the collection fee will be, and how to reconcile any patients that remain with the practice who have an outstanding balance.
6. Correcting Defective Dentistry – After the closing of sale of a dental practice, the buyer should be prepared to re-do any defective dentistry that is thus presented. Your purchase agreement should contain who will correct the defective dentistry at no charge to the patient. More specifically, your purchase agreement should determine where the corrective procedure will be done, whose cost it will be at, and whether or not the buyer of the practice will do the work for the seller for a fee. The purchase agreement should also clarify the exact length of time that the seller may be bound to execute any re-dos.
7. Warranties and Representations – Warranties and representations are those things upon which a buyer relies on when determining whether or not he is purchasing a reputable dental practice. As such, it is important to have this information executed in writing. Examples of warranties that a seller might make are whether or not he has ever had any issues with his license, whether there are any liens against the practice or property, whether the income of the practice and expenses are true and correct, and whether there have ever been any violations regarding third-party billing or insurance. Because warranties and representations can influence how much a buyer would pay, it is prudent to include all such related concerns within the purchase agreement.
8. Other Issues – There are several other issues that should be considered when developing a purchase agreement. For instance, you should decide whether or not you would like to incorporate your business. Incorporating protects you, as a dental practice owner, from personal liability in your business, except for the commission of malpractice. In addition to this, an incorporated practice allows for the collection of disability and health insurance before taxes, as well as for peace of mind regarding the frequency of IRS audits.
Aside from incorporating, you should consider any risks you may be open to regarding the office space you may lease. In purchasing a dental practice, you might assume the lease of the seller to assist with a smooth transition. However, you should have legal counsel review the lease that you will be assuming, in case the seller did not scrutinize his own contract carefully. For instance, if you go forth and assume the lease as is, it is possible that the landlord might have included unfair language regarding acts of God, seizure of the property, or a right to relocate a tenant.
To further reduce any risk of liability, you should consider drafting your own employee manual. As there are many specific policies that must conform with local, state, and/or federal law, it would provide peace of mind for you to draft a manual which you are certain contains all legal requirements. For instance, you will need to include harassment and equal opportunity clauses, along with information regarding pay, vacation time, holidays, and more. Additionally, the presentation of a new employee manual may help diffuse any issues regarding any retained or new employees as they will have a new set of standards with which to familiarize themselves. We recommend HR for Health to ensure you are 100% compliant with all the complex HR laws that apply to your dental practice.
When considering the sale or purchase of a dental practice, the asset purchase agreement is the key to protecting yourself and/or your potential new assets. By preparing carefully in advance, as well as consulting with your CPA and legal counsel, you can rest assured that you have made the best decisions possible relating to your newest venture.