Are you considering buying a dental practice but unsure where to begin?
Whether you’re a recent graduate, an associate, or expanding your current practice, buying a dental practice can feel overwhelming, regardless of your experience. Multiple factors must align for a successful acquisition, so having an experienced dental attorney is crucial.
Despite the challenges, buying an existing practice offers immediate access to an established patient base, potentially translating into instant cash flow.
Here Are Some Key Questions to Consider:
- How do you value the practice?
- How profitable is it?
- What condition is the equipment in?
- What is the location like, and can you lease or purchase the space?
- Can you secure lending for the purchase?
- How many active patients are there?
- Are you ready for ownership?
- Is the location ideal?
- What laws should you know, especially in California?
Consult your dental professional team to answer these questions. Once you’re satisfied with the answers, you can proceed with the purchase. Remember to keep the purchase confidential until the closing.
In the rest of this guide, you’ll learn about each step in buying a dental practice.
Understanding the Dental Practice Acquisition Process
Purchasing a dental practice involves more than acquiring a business; it’s about owning an established entity with its assets, liabilities, and operations. When you buy a practice, you’re acquiring:
- Office space, equipment, and inventory
- Goodwill, including the patient base, reputation, and staff.
This process requires a thorough review of the following:
- Financial health
- Legal standing
- Operational framework
Starting a practice from scratch involves building everything—location, staff, equipment, and patient marketing. In contrast, buying an existing practice offers:
- Established operations and patient flow
- Immediate revenue streams
Odgers Law Group is invaluable in this area. We can guide you through dental transactions, help you avoid pitfalls, and secure a beneficial purchase.
Types of Dental Practice Acquisitions To Consider When Buying a Dental Practice
Here are the key types of dental practice acquisitions to consider:
Solo Practice Acquisition:
Overview: Buy a practice where a single dentist operates.
Benefits: Full control, intimate patient relationships, and ownership of all practice aspects.
Partnership Buy-In:
Overview: Buy a portion of an existing practice, becoming a co-owner.
Benefits: Lower upfront costs, shared responsibilities, and a gradual transition to full owner.
Associate with Option to Buy:
Overview: Start as an associate with an agreement to buy the practice in the future.
Benefits: Learn the business gradually, build rapport with patients and staff, and transition smoothly into ownership.
Why Buy an Existing Practice? Benefits of Buying a Dental Practice
Buying an existing dental practice offers strategic benefits that streamline market entry and boost long-term profitability, including:
- Immediate Patient Base: Start with a steady stream of income from day one, reducing financial risk.
- Established Cash Flow: Ongoing revenue can help offset acquisition costs quickly.
- Experienced Staff: Retain existing staff, ensuring continuity in patient care and minimizing the learning curve.
- Reputable Practice: Benefit from an established reputation, which attracts new patients and retains loyalty among current ones.
- Tested Infrastructure: Utilize existing, refined systems and office layouts, saving time and effort in setup.
Key Considerations Before Buying A Dental Practice
Purchasing a dental practice is a significant decision that requires careful planning and expert guidance.
To ensure a smooth acquisition, keep these key steps in mind:
- Assemble a Specialized Team: Include a Dental Attorney, CPA, Transition Consultant, and Practice Lender.
- Conduct Due Diligence: Review the practice with your team to spot legal, financial, or operational issues.
- Review Legal and Financials: Ensure all agreements and lease terms are clear with your attorney.
- Secure Financing and Insurance: Obtain funding and required insurance before closing.
- Plan for Transition: Prepare transition letters, update licenses, and manage staff changes.
The 10 Steps of a Smooth Dental Practise Purchase
Step 1: Organize a Team of Specialized Dental Advisers before Buying a Dental Practice
Buying a practice may be your most important financial and professional decision, requiring an in-depth evaluation of a wide range of issues.
Due to the multitude of factors that you must consider, this can be a daunting process. So, after finding a practice to buy, the first step is to gather the following team of specialized advisers:
- Dental Attorney
- Dental CPA
- Transition Consultant (the buying dentist’s adviser)
- Professional Practice Lender
See our professional resources for dentists
These professionals will initially help you review the practice prospectus and point out any possible red flags.
As the transaction develops, these professionals will also help keep you and the seller on track and take care of the practical, legal, and financial due diligence.
Role of a Dental Attorney For Buying a Dental Practice:
Even the most experienced general business attorney may be unfamiliar with the dental industry’s legal standards and conventions.
An inexperienced attorney can slow down the acquisition process and/or expose you to unnecessary liability after the purchase has been made.
Your attorney should be familiar with California laws and dental industry standards related to the following:
- Non-compete provisions
- Re-treatment clauses
- Securely transferring patient records, as well as
- The purchase and collection of accounts receivable (AR)
Dental CPA for Buying A Dental Practice:
Your dental CPA should be intimately familiar with accounting for dentists. He or she will then be able to spot any discrepancies in the seller’s books when conducting the financial due diligence.
Dental Transition Consultant for Buying a Dental Practice:
To ensure a seamless transition when buying a dental practice, an experienced dental transition consultant is crucial. They anticipate and resolve potential issues, negotiate terms that satisfy both parties, and provide expert guidance on essential aspects such as:
- Employee Management
- Patient Retention
- Regulatory Compliance
- Dental Software
- Effective Communication
This expertise minimizes risks, saves time, and helps maintain the practice’s success post-purchase.
Professional Practice Lender For Buying a Dental Practice:
A dental-specific lender will better understand your needs than a conventional bank. While many dentists start with traditional banks, specialized lenders are more flexible, often requiring less collateral and accommodating high student loans. They also collaborate with your advisers to ensure timely practice acquisition.
Step 2: Submit a Dental Office Letter of Intent (LOI)
After you and your advisers are comfortable with the dental practice advisors, the next step is to submit a signed letter of intent.
A letter of intent, which is typically non-binding, is a way of communicating to the seller that you are serious about buying their practice.
You and the seller should address the following terms in your LOI:
- What assets are to be included in the sale
- What assets will be excluded from the sale
- The practice purchase price
- The closing date
Any terms that are not agreed upon in the letter of intent will be negotiated by the parties before signing the final practice purchase agreement.
Step 3: Consider Your Dental Practice Loan and It’s Terms
The next step is to get pre-qualified for a practice purchase loan. Your dental attorney or CPA should be able to put you in touch with several local banks who specialize or have experience lending to dental or other medical professionals.
Securing the right loan is crucial when purchasing a dental practice, as it impacts your financial stability and success. Key considerations include:
- Loan Type: Compare fixed-rate, variable-rate, and SBA loans to find the best fit.
- Interest Rates and Terms: Compare rates and decide on loan duration; shorter terms mean higher payments but less interest, and longer terms lower payments but more interest.
Here is a short list of some of the most common documents that banks requests in the underwriting process when buying a dental practice:
- A signed Dental Practice Purchase and Sale Agreement
- A signed lease agreement or assignment (with a term equal to length of loan)
- Corporate documents, including articles of incorporation and tax ID number
- Life and disability insurance policies
Step 4: Consider Insurance Policies for Dental Practice Acquisition
The landlord, seller, and lender may require you to secure various insurance policies to protect your practice and meet obligations.
When buying a dental practice, the insurance policies typically include, but may not be limited to:
- Malpractice insurance
- Life insurance
- Disability insurance
- General business liability insurance
- Personal property insurance
Step 5: Set Up A Dental Corporation Before Dental Practice Acquisition
In California, you are allowed to set up your practices as either a sole proprietorship, a dental partnership (with another dentist), or a professional corporation.
By setting up your practice as a dental professional corporation, you can limit your personal liability and take advantage of beneficial tax treatment.
Step 6: Review Dental Practice Purchase Agreement
The Dental Practice Purchase Agreement is the contract that defines all of the terms of the purchase. It will typically be provided by the seller’s attorney and reviewed by your own dental attorney to make sure that the terms are fair.
You and your dental attorney will then go over the agreement together to make sure that you understand all of the details.
Some of the details that are addressed in the purchase agreement are:
- The seller and buyer’s respective representations and warranties
- The assets that are included (or excluded) in the sale
- Who will control the patient records
- The scope of the non-compete covenant (time and geographic distance)
- The collection of the seller’s accounts receivable and patient credits
- Procedure for handling any re-dos of defective dentistry
- Allocation of the purchase price for tax purposes
- Ongoing contractual obligations or liabilities
- The firing and hiring of staff
- The transition letter notifying patients that the practice has been sold
Your dental attorney and CPA should work closely together to verify that the purchase price allocations are acceptable and that all financial due diligence has been completed.
Step 7: Securing the Office Space
Concurrent with reviewing and negotiating the practice purchase agreement, you and your advisers should review the seller’s dental office lease or negotiate to purchase any real estate associated with the practice.
It is not uncommon for a commercial lease to require the landlord’s written consent prior to any assignment.
With that said, the seller should notify the landlord of his or her intent to sell the practice as early as possible and verify that the landlord will consent to your assumption of the lease.
If the lease is at the end of its term (or if the seller is the landlord), you and your advisers will need to negotiate a new lease. The term of this lease must be equal in length to that of your purchase loan.
If the real estate is included in the sale, then you and your advisers will need to negotiate the terms of the real estate purchase agreement.
Step 8: Sign Documents and Take Ownership of Practice
After you and the seller have agreed on all of the terms of the purchase, you will meet and sign all of the agreements.
Once signed, these agreements will be submitted to the bank so that the bank can finalize the underwriting for your practice loan and transfer the funds to the seller.
Once the seller has received the purchase funds, and all other conditions under the practice purchase agreement are met, you will be allowed to take possession of the practice.
Step 9: Send out a Transition Letter to Patients
As soon as the purchase has been finalized a transition letter should be mailed out to all active patients and referral sources.
The transition letter should inform the practice’s active patients and referral sources that the practice has been sold and present you as the new owner.
It should also inform them of changes (if any) they should expect in the service they will receive on their next and subsequent appointments.
Most importantly, however, your transition letter should accomplish the following 3 things:
- Promote your dental experience and background
- Express the confidence the previous owner has in you as the new owner
- Encourage continued patronage
Step 10: Additional Due Diligence to Consider When Buying a Dental Practice
After buying a dental practice, focus on these key due diligence tasks to ensure a smooth transition:
- Staff Management: The seller terminates staff; you decide whom to rehire, aligning the team with your vision. The seller must also settle all accrued benefits.
- Pro-Rata Adjustments: Establish clear divisions for mid-cycle billing and shared liabilities (rent, utilities, etc.) to avoid disputes.
- Update Licenses: Quickly transfer all licenses and registrations to your name to prevent legal issues or practice interruptions.
Contact An Experienced California Dental Attorney
If you are buying a dental practice for the first time, you will suddenly be exposed to a variety of business and legal issues that go along with owning a practice and being your own employer.
The benefits that you enjoy afterward will be substantially greater if you seek the advice of an experienced dental attorney when negotiating the deal and before signing the purchase agreement.
At Odgers Law Group we have developed a tailored approach to meeting the needs of dentists and physicians with our specialized knowledge of their practices.
If you are interested in purchasing a practice, reach out to our team of experienced dental attorneys at 858-869-1114 for a free consultation, or visit us online to schedule an appointment.
