Barry H. Josselson,
The purchase or sale of a dental practice is one of the most significant events in a dentist’s career. Negotiating and drafting the purchase and sale agreement will have significant economic, tax, and liability consequences for years to come.
Part one of this article discussed what’s necessary (for example, letters of intent, contingencies, and appropriate allocations of values) for purchasing or selling a dental practice. Part two addresses the critical terms and conditions that need to be drafted in a purchase and sale document.
❶ Collection of seller’s accounts receivable
The buyer can purchase some, all, or none of the selling dentist’s 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 told to remit payment to an address or post office box that is not their current dentist’s. Patients believe the seller has left the practice. If they’re inclined not to pay their bill, this message inadvertently encourages them not to. The buyer becomes motivated to (1) maintain all patient goodwill, (2) keep an overzealous seller from aggressively or improperly collecting his or her accounts receivable, and (3) have as many positive patient interactions as possible following the closing.
The document should clearly indicate when the seller’s accounts receivable shall be collected, the normal collection fee (5 to 10 percent) for the buyer providing collection services to the seller, and how payments are to be allocated for dentistry performed by the buyer when a patient has an outstanding balance due to the seller.
❷ Redoing defective dentistry
Dental practice buyers should expect to redo any failed dentistry after the closing at no charge to the patient. If the redo work is significant, who is obligated to do it and at what charge? Well-drafted purchase agreements allocate such responsibilities between the seller and buyer. It is common for the seller to have the option of returning to the practice to do failed work or pay the buyer 50 to 75 percent of the buyer’s normal fee to redo failed work. Other issues that need to be addressed in the agreement are how long the seller can retain this election and how the buyer notifies the seller about failed work.
❸ Warranties and representations
The selling dentist’s warranties and representations regarding the practice may be the most important part of the purchase agreement. Warranties are statements made by the seller that help the buyer determine whether or not to purchase the dental practice. If such representations are not accurate, the buyer may negotiate a different purchase price or choose not to proceed with the acquisition. Such statements made to the buyer or the practice broker must be in writing to assure accuracy and integrity. Some common warranties made by the seller are (1) the practice assets having no liens or encumbrances on them, (2) the seller never having had his or her license to practice dentistry suspended or revoked, (3) the seller’s income and expenses being materially true and correct, and (4) the seller not having engaged in any practice billing procedures which may violate the terms of any third party insurance contract (for example, waiving patient co-payments). Buyers rarely have the opportunity to be associates in the practice 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 that the practice is not “damaged goods.”
❹ Other significant business issues: dental incorporation, office lease analysis, employee policy and procedure manual
The purchase of a dental practice is only the first step in an anticipated long and happy career. Financial satisfaction can be enhanced when you take charge of the other areas of your career with the same enthusiasm that you negotiated a fair 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, a professional dental corporation protects 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. Corporations enable dentists to pay for fringe benefit programs such as health insurance with pretax corporate dollars as opposed to personal, after-tax dollars. Finally, the likelihood of being audited by the Internal Revenue Service is substantially less when you practice as a dental corporation as opposed to a sole proprietor.
(b) Office lease - If you are assuming the seller’s lease, you need to analyze it and understand its liabilities before agreeing to be bound by it. Never assume that because the seller signed the lease it’s fair or lacks dangerous or onerous terms and provisions. Most office leases do not permit the buyer to exercise the seller’s option to renew the office lease. Most leases also permit the landlord to recapture the premises if you ask the landlord’s consent to assign the lease to another party. Many landlords also discreetly include the right to relocate any tenant or not to release the dentist from the lease if the premises are destroyed by fire, earthquake, or other catastrophe.
Do not let the previous dentist’s lack of legal sophistication impact your practice’s profitability. Have your dental real estate attorney peruse any agreements (office or equipment leases, practice purchase loans, capitation or PPO contracts) whose terms you shall be assuming.
(c) Employee policy handbook - California is a litigious state. Staff, patients, and other individuals often will not hesitate to threaten litigation or file lawsuits. Employers must post certain notices in their workplace (for example, the policy against sexual harassment). One way to reduce the likelihood of staff litigation and increase office morale is to draft an office policy and procedure manual. By formally addressing the office policy regarding critical issues such as paid vacation, holidays and sick leave, or sensitive issues such as staff termination, sexual harassment, alternative workweek schedules or pregnancy disability leave, you are making your office policies more efficient and less ambiguous. This translates into reduced risk of litigation by current or terminated staff. It makes the sale of the practice easier and more efficient.
❺ Your purchase of a dental practice is the first step in your immersion in the business and legal issues of 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 investment and should be accomplished without the fear of subsequent litigation by a disgruntled, underachieving buyer. The rewards are substantially greater if you seek and follow the advice of experienced dental legal counsel before signing or negotiating any agreements. ■
Barry H. Josselson, JD
Barry H. Josselson’s California law firm is devoted exclusively to the representation of dentists. He advises more than 2,000 dentists in 35 states. His offices are in Orange, San Diego, Walnut Creek, and Sacramento. Josselson in an instructor in the UCLA School of Dentistry Graduate Practice Residency program and guest lectures at UC San Francisco, USC, and Loma Linda Schools of Dentistry. Reach him at (800) 300-3525 or [email protected].