Are you aware of the financial, tax, and liability consequences?
Barry H. Josselson,
A professional law corporation
The purchase and sale of a dental practice are two of the most significant events in a dentist’s career. While finding the perfect practice to purchase or an appropriate buyer is important, correct and precise drafting and negotiating the dentist’s purchase and sale agreement have financial, tax, and liability consequences.
This two-part series identifies those necessary procedures to employ when purchasing or selling a dental practice and the terms and conditions to be drafted in your acquisition document.
Letter of intent
Most transactions effected by a dental-practice broker and private-party transactions (without such a broker) begin with a letter of intent signed by the parties. The letter of intent memorializes major terms to be 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, time within which the buyer’s accountant is to approve the practice’s financial information and the buyer’s lender is to provide financing, and the time within which the buyer secures a new office lease or assumes the seller’s existing lease. The letter of intent usually is non-binding, and any deposit provided by the buyer is refundable unless certain time periods have passed or events have already occurred.
Make sure your letter of intent provides that all information obtained by the parties and their respective advisors shall be kept confidential regardless of the outcome of any negotiations between the dentists. You don’t want collection and production reports discussed among your colleagues at the local component dental society meeting if you are the seller, or have your personal financial statement and balance sheet discussed among your peers if your lender or landlord decline to lend money or lease the premises to you.
Allocation of purchase price
Most dental-practice transactions result in the buyer’s purchasing assets of the dental practice (equipment, supplies, patients’ charts and records, seller’s telephone number) and not the stock of the seller’s professional dental corporation. When you purchase dental-practice assets, your accountant and attorney will allocate the purchase price among all of the dental practice’s assets you are acquiring, including, but not limited to, the goodwill and a covenant not to compete binding the seller. Your goal is to recover the maximum amount of your purchase price over a short time by 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 your seller’s covenant not to compete (for example, five years). Certain dental office furniture and equipment, however, can be depreciated over five or seven years.
Your acquisition agreement should indicate that certain events must occur for the transaction to be consummated and, in the absence of such occurrence, you shall be relieved of your obligation to purchase the dental practice and have no resulting liability. One of the most important contingencies is your assuming the seller’s existing lease with terms acceptable to you or entering into a new lease whose terms meet the prerequisites of your lender (for example, the lease term with any options to renew have to equal in length the term of your dental-practice purchase loan). Your (i) accountant’s approval of the practice’s books and records, (ii) obtaining a loan in the amount, interest rate, and term you desire, and (iii) attorney drafting or approving the purchase acquisition agreement all are contingencies that first must be met prior to transfer of title of the practice. Make sure such contingencies are expressed in your document so your good-faith deposit shall not be wrongfully withheld by any disgruntled seller or practice broker if you withdraw from the transaction because of one or more of these contingencies having not been satisfied.
Including a no-compete covenant in the purchase-and-sale document restricts the seller from practicing dentistry for a reasonable time and within a reasonable geographic radius from the practice. While restrictions placed on one’s ability to practice dentistry as an associate, employee, independent contractor, or otherwise generally are illegal and unenforceable under current California law, the law permits buyers to restrict competitive activities of a seller when the purchase of the selling dentist’s practice includes the goodwill of such dental practice.
Take extra caution when negotiating and drafting a detailed, comprehensive, no-compete covenant that restricts the seller’s activities subsequent to the practice purchase. Even if the selling dentist no longer owns another dental practice, make sure that any dental activities in which he or she might engage (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 addressed as acceptable or prohibited. Ascertain whether those activities are competitive with you and your recently acquired practice before you pay a full purchase price and patient attrition ensues because of a seller’s unforeseen, competitive endeavors.
If your seller stays part time as an associate in your newly acquired dental practice, make sure the no-compete covenant starts from his or her last day of employment with you and not from the date you acquire the dental practice (possibly two or three years earlier).
In such case, the protection of having a reasonably long covenant period is negated while your selling dentist is continuing to treat and bond with the former patients in your new dental practice.
The second part of this article will examine these topics:
• Allocating responsibility between seller and buyer to collect seller’s accounts receivables after the purchase is consummated; determining responsibility and liability between the parties for defective dentistry
• Appropriate warranties in your purchase agreement to protect the purchasing dentist or selling dentist
• Remaining significant business issues to address before the transaction is completed
The latter includes, for example, office lease negotiations or review, becoming a professional dental corporation, and employee policy and procedure manuals. ■
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].