Practice Transitions: The Role of the Purchase Agreement in Selling and Buying A Dental Practice

Practice Transitions: The Role of the Purchase Agreement in Selling and Buying A Dental Practice

Posted on March 14, 2011
Sarah Cotterill is a member of Ice Miller's Health Group, practicing in the area of health care regulatory law. Cotterill represents various providers and suppliers of health services, including hospitals, physicians, medical device manufacturers, dentists and suppliers of diagnostic, laboratory and other services. She can be reached at: 317-236-5872 or sarah.cotterill@icemiller.com. 

At some time in your career, you may decide that you would like to own your own dental practice rather than working as an associate, or that it is time for you to sell the practice and move on to other opportunities. Any current owner of a dental practice knows that ownership can be a very rewarding experience, if done right. A dental practice is a complicated business and the purchase agreement that goes along with the sale or purchase of a practice is no different.

While purchase agreements do not make for sizzling summer reading, they do go a long way in providing legal protection when buying or selling a dental practice. Not surprisingly, the focus tends to be on purchase price, deal structure, and basic terms. But purchase agreements also address many less obvious, but equally important, legal issues.

The purchase of a dental practice necessarily involves risk, including practice liabilities that may not be apparent until after closing. Undisclosed lawsuits, judgments, debt, or other lingering obligations could sink a practice unless identified and addressed prior to closing. A seller may withhold knowledge of information potentially adverse to a practice or a buyer may fail to inquire about various issues. The purchase agreement forces a seller to disclose practice liabilities by means of representations and warranties concerning the practice, while a "survival" clause ensures that the seller stands by these representations even after closing. The purchase agreement also forces the buyer to represent to the seller that he/she is able to purchase the practice on the terms and conditions set forth in the agreement, including the ability to pay the purchase price.

Liabilities exist regardless of the amount of diligence a buyer does. Not all liabilities however are bad. Some "contract liabilities" may be worth taking over, such as an office lease or associate employment agreement. But, these should be reviewed and identified in the purchase agreement as being assumed by the buyer.

How a seller conducts the practice in the days leading up to closing and how the parties transition the practice following closing are also addressed in the purchase agreement. Transition aspects include notifying patients, collecting receivables, and specifying tasks to ensure the smooth transition of the practice. Certain conditions to closing must be described in the contract and satisfied prior to closing, such as, for the buyer, obtaining financing and leasing or purchasing office space, and for the seller, satisfying the liabilities identified in the contract.

Equally important, the purchase agreement should contain the seller's (and perhaps the buyer's) covenant not to compete after closing and not to solicit business from former patients or induce staff to leave. Restrictive covenants must be drafted with care to ensure enforceability.

Even the purchase amount involves more than meets the eye. For example, how the parties allocate the purchase price to various categories of assets (furniture, equipment, goodwill, non-competition, etc.) will affect the buyer and seller in different ways from a tax standpoint. This allocation is negotiated in the contract.

Finally, there are "boilerplate" clauses, such as assigning or amending contracts, excluding verbal agreements, or designating specific state laws for enforcement of agreement provisions.

A purchase agreement enables a buyer and seller to enter a transaction with eyes wide open. A properly drafted purchase agreement will go a long way toward providing sound legal protection and peace of mind to both buyer and seller.