New Strategies in Successfully Purchasing or Selling Your Dental Practice: Part 1
By Law Offices of Barry H. Josselson, The Josselson Law Corporation *
The purchase and sale of your dental practice is truly one of the most challenging events in your dental career. While the process of finding that "perfect" practice to purchase or the process of finding the “appropriate” buyer for your practice is of critical importance, the negotiation of the transaction’s terms and the prudent drafting of your purchase and sale agreement have significant financial, tax, and liability consequences to you for years to come.
This two-part article briefly summarizes those necessary steps to follow when purchasing or selling your dental practice and the essential and critical (albeit often over-looked) terms and conditions to be drafted in your purchase and sale document.
1. Letters of intent. Most transactions (involving a dental practice broker) and private party transactions (without such a broker) commence with a letter of intent signed by the parties. Its purpose is to memorialize the major terms agreed upon between the parties such as the purchase price, date of transfer of the practice, inclusion or exclusion of accounts receivable in the transfer, and time periods within which (i) the buyer's accountant is to approve the practice's financial information, (ii) the buyer's lender is to provide financing, and (iii) the buyer is to secure a new office lease or assume the seller's existing lease. The letter of intent is usually binding; therefore, any deposit provided by the buyer should be refundable unless specific time periods have passed or certain events have already occurred.
Make sure that your letter of intent provides that all of the information obtained by the parties and their advisors shall be kept confidential irrespective of the outcome of any negotiations between the dentists. You certainly do not want collection and production reports being discussed among your colleagues at local component dental society meetings if you are the seller. If you are the buyer, you obviously do not want to have your personal financial statement and balance sheet discussed among your peers if your lender or landlord decline to finance the practice purchase or lease the premises to you.
2. Allocation of purchase price. The majority of dental practice transactions result in the buyer’s purchasing the assets of the dental practice (e.g., equipment, supplies, patients' charts and records, seller's telephone number, etc.) and not the stock of the seller's dental corporation. When you purchase the dental practice assets, your accountant will allocate the purchase price among all of the dental practice’s assets you are acquiring (including the seller’s goodwill and a covenant not to compete binding the seller). As the buyer, your goal is to recover the maximum amount of your purchase price over a short period of time by way of expensing, depreciating, or amortizing the assets. For example, the amount of the purchase price that you allocate to the seller's goodwill and covenant not to compete can be depreciated only over 15 years irrespective of the actual term of the seller's covenant not to compete (e.g., 5 years). Certain dental office furniture and equipment, however, can be depreciated over 5 or 7 years. As the seller, your goal is to allocate as much of the purchase price to the assets resulting in favorable capital gain tax treatment to you as opposed to less favorable ordinary income tax treatment (resulting in substantially greater tax liability to you).
3. Contingencies. Your purchase and sale agreement should indicate that certain events must occur for the transaction to be consummated. In the absence of such events occurring, you shall be relieved of your obligation to purchase or sell the dental practice and have no resulting liability to the other party. One of the more important contingencies is to have the buyer assume the seller's existing lease with terms acceptable to the buyer or to enter into a new lease whose terms meet the prerequisites of the buyer’s lender (e.g., the lease term with any options to renew has to equal or exceed in length the term of the dental practice purchase loan). The buyer’s (i) accountant approving the practice's books and records, (ii) obtaining a loan in the amount, interest rate, and term desired, and (iii) attorney drafting or approving the purchase and sale agreement are all contingencies which must first be met prior to the practice transfer occurring. Make sure such contingencies are expressly spelled out in your document so that the buyer’s good faith deposit shall not be wrongfully released or withheld (by any disgruntled party or practice broker) if you choose to withdraw from the transaction due to one or more of these contingencies having not been satisfied.
4. Covenants not to compete. A covenant not to compete restricting the seller from practicing dentistry for a reasonable period of time and within a reasonable geographic radius from the practice is an essential provision in your document. While restrictions placed on one's right to practice dentistry as an associate, employee, independent contractor, or otherwise are unenforceable under current California law, the law permits buyers to restrict the competitive activities of a seller when the purchase of the dentist's practice includes the seller’s goodwill. Accordingly, take extra caution when negotiating and drafting a very detailed and comprehensive covenant not to compete restricting the selling dentist's activities subsequent to the practice purchase. Even if the selling dentist no longer owns another dental practice, the buyer shall want to be assured that any dental roles that the seller may assume (such as a part-time associate dentist, partner, shareholder, director, officer, consultant, employee, independent contractor, or agent of any other dentist or dental practice) have been clearly addressed as either acceptable or prohibited. The time to ascertain whether such roles are competitive with those of the buyer and of the recently-acquired practice is not after the parties have paid or received the full purchase price and patient attrition, if any, results from the seller's unforeseen competitive endeavors.
If the seller stays on in a part-time capacity as an associate in the buyer’s newly-acquired dental practice, it is usual and customary to have the covenant not to compete start from the seller’s last day of employment with the buyer and not from the date that the buyer acquires the dental practice (possibly 2 or 3 years earlier). Otherwise, the protection of having a reasonably long covenant period is negated if the selling dentist continues to treat and bond with former patients in the buyer’s new dental practice. The second part of this article will examine (i) determining responsibility and liability between the parties for defective dentistry; (ii) appropriate warranties in your purchase and sale agreement to protect the selling dentist or the purchasing dentist; and (iii) allocating responsibility between seller and buyer to collect seller’s accounts receivables after the purchase is consummated; and (iv) remaining significant business issues to address before the transaction is completed (e.g., office lease negotiations or review, becoming or maintaining a professional dental corporation, and employee policy and procedure manuals).
* Law Offices of Barry H. Josselson, The Josselson Law Corporation, 2019
Barry H. Josselson’s law firm is the pre-eminent law firm in California devoted exclusively to the representation of dentists. Mr. Josselson advises more than 3,200 dentists regarding their dental legal and business matters. His law offices are located in the cities of Orange, San Diego, Walnut Creek, and Sacramento, California. Mr. Josselson currently serves as an instructor in the UCLA School of Dentistry Graduate Practice Residency program. He currently also guest lectures at the UC San Francisco, USC, and Loma Linda Schools of Dentistry and the UNLV School of Dental Medicine. Mr. Josselson can be reached at 800-300-3525 or via e-mail at firstname.lastname@example.org. You may also access his website at www.josselson.com or www.dentallawfirm.com.