Successful Strategies in Purchasing or Selling Your Dental Practice: Part 2
By Law Offices of Barry H. Josselson, The Josselson Law Corporation *
The purchase or sale of your dental practice remains one of the most significant events in your dental career. The astute negotiating of and the precise drafting of your purchase and sale agreement will have significant economic, tax, and liability consequences to you for years to come.
The first part of this article briefly identified those necessary procedures (e.g., letters of intent, contingencies, and appropriate allocations of values among the dental assets purchased) to employ when purchasing or selling a dental practice. This second part addresses the critical terms and conditions to be drafted in your purchase and sale document.
1. Collection of seller's accounts receivable.
The buyer can purchase some, all or none of the selling dentist's accounts receivable. If accounts receivable are not purchased by the buyer, provisions need to be made in the document for the collection of the accounts receivable. It is in the buyer’s and the seller's best interest not to have the seller collect the accounts receivable. The seller's collection rate drops substantially if patients are reminded on a monthly basis to remit payment to an address, post office box or some remote location other than their present dental practice. Patients are inadvertently given the subtle message that the seller has left the practice. Any incentive not to pay to the departing seller the patient's outstanding balance is encouraged by such action. Instead, the buyer is motivated (i) to maintain all patient goodwill, (ii) to keep an overzealous seller from aggressively or improperly collecting his or her accounts receivable, and (iii) to have as many positive patient interactions as possible subsequent to the closing. Your document needs to clearly delineate the period of time that the seller's accounts receivable shall be collected, the normal collection fee (5%) for the buyer’s providing such collection services to the seller, and how patients' payments are to be allocated to new dentistry performed by the buyer when the patient has an outstanding balance still due the seller.
2. Re-do of defective dentistry.
Buyers of dental practices should expect to re-do at no charge to the patient any failed dentistry presented to the buyer after the closing. The real issue is if there exists significant work which has failed, who is obligated to re-do such work and at what charge? Well-drafted purchase agreements allocate such responsibilities between the seller and buyer. It is common to provide that the seller has the option (i) to return to the practice to re-do such work or (ii) to pay the buyer (50%-75% of the buyer's normal and customary fee) to re-do any failed work caused by the seller. Also, the period of time within which the seller retains such election and the procedures by which the buyer notifies the seller of such failed work need to be addressed in your agreement.
3. Warranties and representations.
The selling dentist's warranties and representations regarding the practice being sold to the buyer are the most important part of the purchase agreement. Warranties are statements made by the seller upon which the buyer reasonably relies in determining whether or not to purchase the dental practice. If such representations were not accurate, the buyer obviously would have negotiated a different purchase price or possibly elected not to proceed with the acquisition. Accordingly, such verbal statements made to the buyer or the practice broker must be memorialized in writing so that the parties may be assured of their accuracy. Common warranties made by the seller and upon which the buyer reasonably relies are matters such as (i) the practice assets having no liens or encumbrance on them, (ii) the seller never having had his or her license to practice dentistry be suspended or revoked, (iii) the seller's practice income and expenses being materially true and correct, and (iv) the seller not having engaged in any practice billing procedures which violate the terms of any third party insurance contract (e.g., the recurring practice of waiving patient co-payments or deductibles). The buyer rarely has the opportunity to be an associate in the dental practice being purchased or to be cognizant of the real goings-on in the practice. Accordingly, it is reasonable for the buyer to seek broad warranties from the seller assuring the buyer that the practice being acquired and for which the buyer is paying considerable money is not "damaged goods" in disguise.
4. Other significant business issues: dental incorporation, office lease analysis, and employee policy and procedure manual.
The purchase of a dental practice is merely the first step in an anticipated long and happy career in dentistry. However, the buyer’s personal joy and financial satisfaction can be enhanced with the buyer’s taking charge of the other areas in his/her professional career in much the same way that the buyer has been pro-active in negotiating or obtaining a fair and properly drafted purchase agreement.
(a) Dental corporations. Corporations continue to be viable entities by which dentists practice their profession. Unlike practicing as a sole proprietor or partnership, your professional dental corporation protects your personal assets from any practice or business liabilities (such as breach of contract matters or wrongful termination litigation) with the exception of dental malpractice claims. Also, as a high income taxpayer, the likelihood of being audited by the Internal Revenue Service is substantially less when you practice as a dental corporation as opposed to practicing as a sole proprietor.
(b) Office lease. Even if the buyer is assuming the seller's existing office lease, the buyer has to analyze it and understand its liabilities prior to agreeing to be bound by it. Do not make the mistake of believing that the seller's signing such office lease means that such document is fair or lacks dangerous or onerous terms and provisions. Most office leases do not permit the buyer of a dental practice to exercise the seller's option to renew the office lease. Also, most leases permit the landlord to recapture the premises if the seller merely asks for the landlord's consent to assign the lease to another party. Many landlords have also discreetly included in their leases the right to relocate any tenant at the landlord's discretion or not to release the dentist from his or her office lease if the building or dental practice premises have been destroyed by fire, earthquake or other catastrophe. Do not let the prior dentist's legal unsophistication impact your practice's profitability by not having your dental real estate attorney peruse any agreements (e.g., office leases, equipment leases, practice purchase loans) whose terms you shall be assuming.
(c) Employee policy manual/handbook. California is a litigious state, and staff, patients and other individuals are not reluctant to threaten litigation or actually file lawsuits. Employers must post certain notices within their workplace (e.g., their policy against sexual harassment). One way to reduce the likelihood of staff litigation and to increase office morale is to have your own office policy and procedure manual be drafted. By addressing formally in writing your office policy regarding critical issues (such as paid vacation, paid holidays, paid sick leave) or sensitive issues (such as termination of staff, sexual harassment, alternative work week schedules or pregnancy disability leave), you are making your office policies more efficient and less ambiguous. This then translates into reduced risk of litigation by current staff or terminated staff. It makes the purchase and sale of the dentist’s practice easier and more efficient.
5. Your purchase of a dental practice is a first step in your becoming immersed in the business and legal issues involved with being your own employer and owner of a dental practice!
Your sale of a dental practice is the final step of realizing the equity of your dental practice investment and should be accomplished without the anxiety or fear of subsequent litigation by a disgruntled, under-achieving buyer of your practice. Your rewards will be substantially greater if you seek and follow the advice of experienced dental legal counsel before signing or negotiating any agreements.
* Law Offices of Barry H. Josselson, The Josselson Law Corporation, 2019
Mr. Josselson’s law firm is the pre-eminent law firm in California devoted exclusively to the representation of dentists. Mr. Josselson advises more than 2000 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. 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.