Dental Practice Purchase Agreement: 17 Key Terms to Know

Understanding the Dental Practice Purchase Agreement

Table of Contents

Acquiring a dental practice is a monumental step in the career of any dentist. It signifies not only professional growth but also the opportunity to establish a lasting legacy in the community. Whether you are a seasoned practitioner looking to expand or a new graduate ready to embark on your entrepreneurial journey, purchasing a dental practice requires careful planning and consideration.

One of the most critical aspects of this process is the Dental Practice Purchase Agreement.

This legally binding document outlines the terms and conditions of the transaction, ensuring that both the buyer and seller have a clear understanding of their obligations and expectations.

By providing a detailed framework for the sale, the Dental Practice Purchase Agreement helps to safeguard the interests of all parties involved and facilitates a smooth transition of ownership.

What is a Dental Practice Purchase Agreement?

A Dental Practice Purchase Agreement is a legally binding document that formalizes the sale of a dental practice from one party (the seller) to another (the buyer). It details the conditions under which the sale will occur, providing a clear and enforceable outline of the transaction.

Purpose and Importance of the Dental Practice Purchase Agreement in the Transaction Process

The primary purpose of a Dental Practice Purchase Agreement is to ensure transparency and fairness in the sale process. By clearly defining the terms of the sale, this agreement helps to prevent misunderstandings and disputes between the buyer and the seller. It also provides legal protection for both parties, outlining their respective rights and responsibilities.

The importance of a Dental Practice Purchase Agreement cannot be overstated.

For buyers, it ensures that they are acquiring all the assets they need to continue operating the practice successfully.

For sellers, it guarantees that they receive fair compensation and that their liabilities are appropriately transferred. Overall, the agreement plays a crucial role in facilitating a seamless transition, allowing both parties to move forward with confidence.

Dental Office Purchase and Sale Agreement

17 Key Terms That Should Be Included In A Dental Practice Purchase Agreement:

Purchase Price

 Determining the purchase price of a dental practice is a multifaceted process that involves a thorough evaluation of various financial and operational factors.

Typically, a professional appraiser or dental practice broker will conduct a valuation, considering elements such as the practice’s revenue, profit margins, patient base, location, and the condition of its equipment and facilities.

The valuation process might also include a market analysis to compare similar dental practices recently sold in the area, ensuring that the price is competitive and fair.

Factors Influencing the Purchase Price Several factors influence the purchase price of a dental practice, including:

  1. Revenue and Profitability: Practices with higher revenue and consistent profitability generally command higher prices.
  2. Patient Base: A loyal and sizable patient base can significantly increase the value of a practice.
  3. Location: Practices in high-demand areas or those with limited competition may be valued higher.
  4. Condition of Equipment and Facilities: Well-maintained, up-to-date equipment and modern facilities can enhance the practice’s appeal and value.
  5. Staff and Operational Efficiency: Efficient operations and a well-trained, stable staff can add value to a practice.

Allocation of the Purchase Price 

 When purchasing a dental practice, buyers typically acquire the practice’s assets rather than the seller’s corporate stock, especially if the seller is established as an S or C Corporation. For tax purposes, the purchase price is allocated across various categories, each impacting the tax obligations for both the buyer and seller differently.

Common Categories for Allocation:

  1. Supplies: Includes dental and office supplies that will be used in daily operations.
  2. Furniture & Equipment: Covers all the physical assets like dental chairs, X-ray machines, and office furniture.
  3. Non-Compete Agreement: This allocation compensates the seller for agreeing not to compete with the practice for a specified period and within a certain geographic area.
  4. Personal Goodwill: Refers to the seller’s personal reputation, relationships, and skills that contribute to the practice’s success.
  5. Corporate Goodwill: Represents the practice’s established brand, patient base, and market position.

Allocation’s Impact on Taxes: The way the purchase price is allocated to these categories has significant tax implications. For sellers, a higher allocation to goodwill can result in capital gains tax, which is generally lower than ordinary income tax. For buyers, allocations to furniture, equipment, and supplies can be depreciated over time, providing tax benefits in the form of future deductions. Goodwill, on the other hand, is amortized over 15 years, spreading the tax benefits over a longer period.

General Allocation Guidelines As a general rule, approximately 75-90% of the purchase price is allocated to goodwill, unless all the equipment is brand new, which might shift the allocation balance.

It’s common for both parties to consult with their accountants to agree on an allocation that optimizes their respective tax situations. By doing so, both buyer and seller can ensure a fair and mutually beneficial transaction.

Payment Terms

The payment terms of a Dental Practice Purchase Agreement outline how and when the purchase price will be paid. These terms can significantly affect the feasibility and attractiveness of the deal for both the buyer and the seller. Common payment structures include:

  1. Lump Sum Payment: The entire purchase price is paid at the closing of the sale. This method provides immediate liquidity for the seller but requires the buyer to have significant funds or financing ready.
  2. Installments: The purchase price is paid over a period of time in agreed-upon installments. This structure can make the purchase more manageable for the buyer while providing the seller with a steady income stream.

Types of Financing Options Available for Buyers When Purchasing a Dental Office:  Securing financing is often a critical step in purchasing a dental practice. Various financing options are available to buyers, including:

  1. Traditional Bank Loans: Many buyers opt for loans from banks or financial institutions specializing in healthcare or dental practice acquisitions. These loans typically require a solid credit history, a detailed business plan, and sometimes collateral.
  2. SBA Loans: Small Business Administration (SBA) loans are popular among dental practice buyers due to their favorable terms and lower down payment requirements. SBA loans are partially guaranteed by the government, reducing the lender’s risk.
  3. Seller Financing: In some cases, the seller may agree to finance a portion of the purchase price, making it easier for the buyer to secure the necessary funds.

Creative Financial Structuring Options When traditional financing methods fall short or when parties cannot fully agree on the price, creative financial structuring can facilitate the deal. Some of these options include:

  1. Earn-Outs
    • Definition: An earnout is a portion of the purchase price that is “earned” by the seller over time or when specific milestones are achieved by the practice, such as future collections or patient retention.
    • Purpose: Earnouts are used to bridge gaps when the buyer and seller cannot agree on the purchase price upfront. They allow for a higher price if certain performance conditions are met, providing assurance to both parties.
  2. Seller Carrybacks (Promissory Notes)
    • Definition: A carryback occurs when the seller accepts a promissory note for a portion of the purchase price, essentially acting as a lender for that amount.
    • Usage: Carrybacks are common when the buyer cannot secure a loan for the full purchase price. For example, if the sales price is $1,100,000 but the bank approves only $1,000,000, the seller might carry back the remaining $100,000. Typically, these notes are structured for three years at an interest rate matching the bank’s rate, with the seller in a secondary lien position behind the bank.
  3. Consulting Income
    • Definition: Consulting income is paid to the seller for a period after the sale, during which the seller provides advisory services to the buyer.
    • Purpose: This arrangement is useful when the seller cannot work as an associate but can still offer valuable insights and introductions, helping to transition the goodwill of the practice to the new owner.
  4. Holdbacks
    • Definition: A holdback is a portion of the purchase price retained as a contingency to cover any claims made against the seller during their ownership.
    • Usage: The holdback amount is either not paid at closing and kept by the buyer or held in escrow. The release of the holdback is triggered by specific conditions and after an agreed-upon period, ensuring any potential liabilities are addressed.
  5. Escrow
    • Definition: Escrow involves a neutral third-party company that facilitates the sale, ensuring all funds are collected, debts are paid, and remaining amounts are disbursed appropriately.
    • Purpose: Using escrow services helps to manage the transaction smoothly, protecting both parties and ensuring all financial obligations are met before the sale is finalized. We highly recommend using an escrow company to ensure a seamless transition.

Assets Included and Excluded Assets 

When purchasing a dental practice, the dental practice purchase agreement typically includes a detailed list of assets that are part of the sale. These assets often comprise:

  1. Dental Equipment: Chairs, X-ray machines, sterilization equipment, dental instruments, and other clinical tools.
  2. Patient Records: All patient files, charts, and digital records, ensuring continuity of care.
  3. Furniture: Office desks, chairs, waiting room furniture, and other furnishings.
  4. Computers and IT Systems: Practice management software, computers, servers, and other IT infrastructure.
  5. Leasehold Improvements: Any modifications or improvements made to the leased space that are integral to the dental practice operations.

 

Importance of Specifying Included Assets Specifying the assets included in the dental practice purchase agreement is crucial for several reasons:

  1. Clarity and Transparency: Clearly defining the included assets ensures both parties have a mutual understanding of what is being transferred. This prevents misunderstandings and disputes.
  2. Accurate Valuation: Knowing exactly what assets are included helps in accurately valuing the practice, ensuring that the buyer is getting fair value for the purchase price.
  3. Bank Requirements: Lenders typically require a detailed inventory of the assets being purchased as part of the financing process. This inventory is often included as an exhibit in the dental practice purchase agreement, providing a comprehensive record of the assets involved.

List of Excluded Assets While most assets used in the daily operation of the dental practice are included in the sale, certain items may be excluded. These can include:

  1. Personal Items: Personal computers, pictures, diplomas, or any other personal belongings of the seller.
  2. Significant Exclusions: Occasionally, significant assets such as certain high-value equipment or specialized tools might be excluded.

 It is important for the seller to disclose any excluded items to ensure the buyer can properly value the practice. Full disclosure prevents any surprises after the sale and allows the buyer to make informed decisions. 

Insurance Credentialing

After the closing of a dental practice purchase, the buyer must get credentialed with insurance providers to ensure they can bill and receive payments for services rendered. This process can be time-consuming and may impact the practice’s cash flow during the transition period.

Delta Dental and Credentialing Changes. A significant aspect of this credentialing process involves Delta Dental, which has recently changed its reimbursement rates for new contracts. Delta Dental has discontinued its Premier reimbursement rates for new providers, meaning that a buyer will only be eligible for Delta PPO rates. These PPO rates are generally 25%-40% lower than the Premier rates, depending on the seller’s usual and customary rates (UCR). Therefore, if the seller is a Delta Premier provider, the buyer might experience a reduction in collections for Delta patients due to the difference between Premier and PPO fees. It’s crucial for both parties to disclose and understand this potential impact when negotiating the sale.

Factors for Credentialing post closing;

  • Application Timing: The buyer should not apply to register as a treating dentist or billing entity with any insurance plans until after the closing date.
  • Cooperation: After closing, both parties will work together to transfer the seller’s insurance plans to the buyer, if possible.
  • Interim Billing: The buyer can bill under the seller’s billing provider status for up to six months or until the transfer is complete, whichever comes first.
  • Bank Documents: After closing, the seller will sign documents to allow checks payable to the seller for the buyer’s work to be deposited into the buyer’s bank account.
  • Redirecting Payments: Any automated payments scheduled after the closing date will be redirected to the buyer’s account. Any payments mistakenly made to the seller will be promptly transferred to the buyer.
  • Tax Documentation: The buyer will provide the seller with a 1099 form at the end of the tax year showing the income received.
  • Insurance Plan Compliance: The buyer must follow all insurance plan requirements and actively pursue their own registrations and authorizations during this period.
  • Cancellation by Insurers: If any insurance company informs either party that this arrangement violates their provider contract, the arrangement may be canceled for that insurer.
  • State and Federal Programs: The buyer cannot use the seller’s billing provider status for any state or federal government insurance programs.
  • No Contingency on Registration: The buyer’s registration with insurance plans is not a contingency for the closing of the sale. Both parties recognize that credentialing issues could significantly impact the practice, and the buyer assumes responsibility for investigating these impacts before closing.

Practice Liabilities

 When purchasing a dental practice, it is essential to understand which liabilities will be transferred to the buyer as part of the transaction. These liabilities can include debts, leases, service contracts, and other obligations that the practice has incurred. The dental practice purchase agreement should clearly outline all assumed liabilities to ensure transparency and prevent future disputes.

Impact of Assumed Liabilities on the Transaction: Assuming liabilities can significantly impact the overall value and financial health of the dental practice being purchased. Buyers must carefully evaluate these liabilities to understand their potential impact on cash flow and operational expenses. Key considerations include:

  1. Debt Obligations: Any outstanding loans or debts that the practice owes. These must be factored into the buyer’s financial planning.
  2. Dental Office Leases: Existing leases for office space or equipment, which the buyer may need to continue honoring.
  3. Service Contracts: Ongoing service agreements that the practice has in place.

By fully understanding and assessing these liabilities, buyers can make informed decisions and negotiate terms that reflect the true value of the practice.

Service Contracts  One critical aspect of the liabilities in a dental practice purchase involves service contracts. These contracts cover various services necessary for the day-to-day operation of the practice. Common service contracts include:

  • Maintenance on Equipment: Regular servicing and repair of dental equipment to ensure functionality and compliance with industry standards.
  • Water Service: Provision and maintenance of water systems within the practice.
  • Cleaning Service: Professional cleaning services to maintain hygiene and cleanliness standards.
  • Laundry Service: Handling and cleaning of dental uniforms, towels, and other linen.
  • Information Technology (IT) Service: Management and support of the practice’s IT infrastructure, including software, hardware, and network systems.
  • Marketing Service: Promotional activities and advertising to attract and retain patients.
  • Music Service: Background music services for enhancing the patient experience.

 When buying a practice, the seller must disclose all existing service agreements and provide copies of these contracts. This disclosure is particularly crucial for services with contracts longer than 30 days. The buyer needs to review these contracts carefully to determine their suitability and cost-effectiveness. Key steps include:

  1. Disclosure by Seller: The seller provides a complete list of all service agreements and copies of the contracts.
  2. Review by Buyer: The buyer reviews each contract to assess its terms, costs, and relevance to the practice’s needs.
  3. Decision Making: Based on the review, the buyer decides which services to keep, modify, or discontinue. This decision will depend on factors like the necessity of the service, the quality of the provider, and the cost implications.

By thoroughly evaluating and deciding on service contracts, buyers can ensure that they maintain essential services while managing costs effectively. Understanding and managing the liabilities involved in a Dental Practice Purchase Agreement is crucial for a successful transition. Clear identification and assessment of assumed liabilities, including service contracts, help buyers avoid unexpected financial burdens and ensure smooth operation post-sale.

Closing Date

The closing date is the day on which the sale of the dental practice is finalized. It marks the official transfer of ownership from the seller to the buyer. On this date, all the agreed-upon terms and conditions of the purchase agreement are executed, and the buyer takes over the operations of the practice.

The significance of the closing date lies in its role as the culmination of the entire transaction process. It represents the point at which the buyer assumes control of the practice, and the seller receives the agreed-upon purchase price. It also serves as the reference point for the start of the buyer’s responsibility for the practice’s liabilities, operations, and revenue generation.

Representations and Warranties

Representations and warranties are statements of fact made by both the buyer and seller in the dental practice purchase agreement. They serve to provide assurances about specific conditions and aspects of the practice, ensuring that both parties have accurate information and a clear understanding of their obligations.

Examples of Representations and Warranties from Buyer

  1. Financial Capability: The buyer has the financial resources to complete the purchase.
  2. Legal Authority: The buyer has the legal right to enter into the agreement and perform the obligations.

Examples of Representations and Warranties from Seller

  1. Ownership: The seller has clear ownership of the practice and the right to sell it.
  2. Condition of Assets: The practice’s assets are in good working condition and free of liens or encumbrances.
  3. Compliance: The practice complies with all relevant laws and regulations.

 These assurances are crucial as they protect both parties by ensuring that the information they rely on is accurate. They help prevent disputes and provide a basis for legal recourse if any statements are found to be false or misleading.

Representations and warranties play a vital role in the integrity of a Dental Practice Purchase Agreement. They provide essential protections and build trust between the buyer and seller, ensuring a smooth and transparent transaction

Accounts Receivable:

Pros and Cons of Purchasing the Accounts Receivable of a dental Practice

When buying a dental practice, one critical decision is whether to purchase the accounts receivable (A/R), which are the outstanding payments owed to the practice for services rendered before the sale. Here are some pros and cons:

Pros:

  1. Immediate Cash Flow: Acquiring A/R provides the buyer with immediate cash flow, which can help manage initial expenses and operational costs.
  2. Clean Transition: It simplifies the transition process, avoiding the need for ongoing coordination between the buyer and seller post-sale.
  3. Administrative Ease: Reduces administrative burdens as the buyer handles all collections and integrates them into their accounting system.

Cons:

  1. Risk of Non-Collection: The buyer assumes the risk of not being able to collect some of the outstanding payments.
  2. Discounted Purchase: A/R is typically purchased at a discount, reflecting the uncertainty of collecting all amounts owed.

Alternative To Purchasing the Accounts Receivable: Collecting A/R for a Fee

If the buyer does not purchase the accounts receivable, they may agree to collect the A/R on behalf of the seller for a 5% administration fee. This arrangement involves the buyer collecting payments for work done by the seller before the sale and remitting those payments to the seller, minus the agreed fee. This approach requires meticulous record-keeping by the front desk staff to ensure all payments are accurately tracked and appropriately allocated.

Preferred Method: Purchasing A/R at Closing To avoid complications and ensure a clean financial transition, many parties prefer that the buyer purchases the accounts receivable at the same time they purchase the practice. This is typically done at a discount, using a sliding scale to account for the likelihood of collection:

  • 0-30 Days: Buyer pays 90% of the A/R value.
  • 31-60 Days: Buyer pays 80% of the A/R value.
  • 61-90 Days: Buyer pays 70% of the A/R value.
  • 91+ Days: Buyer pays 60% or less of the A/R value.

This calculation is usually performed one day prior to closing to determine the exact amount payable. This method simplifies the financial transition, providing clarity and immediate funds to the seller while giving the buyer control over collections.

Maintaining Accurate Records if A/R is Not Purchased

If the accounts receivable are not purchased, it is crucial for the practice to maintain accurate records of payments received. The front desk staff must diligently track all payments and ensure that funds for services rendered before the sale are appropriately deposited into the seller’s account. Both parties should agree on a method for managing these payments to avoid disputes and ensure smooth operations.

Deciding whether to purchase the accounts receivable is a significant aspect of buying a dental practice. Each option has its advantages and challenges, and the best choice depends on the specific circumstances and preferences of the buyer and seller.

Re-Treatment

Re-treatment refers to dental work that was performed by the seller but is found to be faulty or requires repair after the transfer of ownership. This situation can arise if a patient returns with issues related to procedures completed by the seller before the sale of the practice.

Handling Re-Treatments Post-Sale

Re-treatments can be a significant burden for the buyer, as they may affect patient satisfaction and the practice’s reputation. Therefore, it is crucial to establish clear guidelines on how re-treatments will be managed after the sale. Here are common approaches:

  1. Seller Performs Re-Treatment: If a patient requires re-treatment, the buyer typically allows the seller to perform the necessary work in the office. This arrangement ensures continuity of care and leverages the seller’s familiarity with the case.
  2. Seller Pays Buyer for Re-Treatment: If the seller is not available to perform the re-treatment, the agreement often stipulates that the seller will compensate the buyer for performing the work. A typical arrangement might be for the seller to pay the buyer 75% of the office’s normal fee for the re-treatment. This compensation reflects the effort and resources required for the buyer to correct the faulty work while providing a financial remedy for the seller.

Duration of Re-Treatment Agreement: The re-treatment clause is usually valid for a specified period, often 12 months, after the transfer of ownership. This time frame allows for a reasonable period during which any issues with previous work are likely to surface. Additionally, the terms of this agreement may already be outlined in the letter of intent, providing both parties with clarity and mutual understanding from the outset.

Establishing a clear plan for handling re-treatments is essential for ensuring a smooth transition of ownership and maintaining patient trust. By setting forth detailed terms in the dental practice purchase agreement, both buyer and seller can mitigate potential disputes and manage patient care effectively.

Work in Progress

Work in progress refers to dental treatments and procedures that were initiated by the seller prior to the closing date but remain incomplete at the time of the practice’s transfer of ownership. Addressing these unfinished treatments is essential to ensure continuity of care for patients and to define financial responsibilities clearly.

Handling Work in Progress Post-Sale Similar to re-treatment, work in progress needs a well-defined approach to avoid misunderstandings and ensure smooth operations. Here are the common methods to manage work in progress:

Seller Completes the Work

    • Uncompensated Work: If the seller remains working in the practice after the sale, they can complete the unfinished treatments without additional compensation. This approach ensures that patients receive consistent care from the same dentist who started their treatment.
    • Reimbursement for Supplies and Staff: In such cases, the seller typically reimburses the buyer for any supplies used and the time of the staff involved in completing the procedures.

Buyer Completes the Work

    • Compensation from Seller: If the seller is unable to continue working in the practice, the seller agrees to compensate the buyer for completing the unfinished work. This compensation might cover the buyer’s time, effort, and use of supplies.
    • Pre-Closing Completion: Ideally, the seller should strive to complete any ongoing procedures before the closing date to minimize the number of unfinished treatments that need to be managed post-sale.

 

Addressing work in progress effectively is crucial for ensuring patient satisfaction and seamless practice operations during the ownership transition. By clearly defining responsibilities and compensation arrangements in the dental practice purchase agreement, both parties can avoid potential conflicts and ensure a smooth continuation of patient care.

Patient Credits

Patient credits refer to amounts owed to patients, such as overpayments or prepayments for services not yet rendered. Addressing these credits is crucial for maintaining accurate financial records and ensuring fair transactions during the sale of a dental practice.

 Similar to managing accounts receivable, patient credits must be addressed clearly in the purchase agreement to prevent any disputes and ensure a smooth financial transition.

  1. If the Buyer is Purchasing the Accounts Receivable (A/R)
    • Reduction of Purchase Price: When the buyer purchases the A/R, any patient credits will reduce the total amount paid for the A/R. For example, if the total A/R is $100,000 and there are $5,000 in patient credits, the buyer would pay $95,000 for the A/R.
    • Credits Paid at 100%: Unlike other components of A/R that might be discounted, patient credits are typically accounted for at their full value (100%) without applying any sliding scale.
  2. If the A/R is Not Being Purchased
    • Settlement by Seller: The seller must settle all patient credits before the closing date, ensuring that any amounts due to patients are paid off and reduced to $0. This settlement avoids transferring this liability to the buyer.
    • Credit to Buyer in Escrow: Alternatively, the seller can allow for a credit to the buyer in escrow. This arrangement means that the buyer will manage the patient credits post-closing, but the seller provides the necessary funds in escrow to cover these amounts. This ensures that the buyer is not financially burdened by patient credits without compensation.

Effectively managing patient credits is essential for a seamless transition of ownership in a dental practice sale. By clearly defining how these credits will be handled in the purchase agreement, both parties can avoid financial discrepancies and ensure fair treatment of patients.

Covenants

Covenants in a contract are promises or agreements made by one party to act or refrain from acting in a certain way. They are legally binding and ensure that specific actions are taken or avoided to protect the interests of the involved parties. In the context of a dental practice purchase agreement, covenants are essential for safeguarding the buyer’s investment and maintaining the practice’s value and continuity post-sale.

The Covenant Not to Compete: A covenant not to compete is a common provision in dental practice purchase agreements. It ensures that the seller does not open a competing practice within a certain distance from the sold practice for a specified period. This prevents the seller from attracting away patients and negatively impacting the buyer’s new business.

  • Typical Terms: These covenants usually specify a distance and duration, such as 15 miles from the practice location for five years.
  • Negotiability: The exact terms are negotiable, but they must be reasonable and enforceable under local laws.
  • Importance: This covenant is crucial for protecting the buyer’s business interests. It should be addressed early in the negotiation process, ideally in the letter of intent, to ensure both parties have a clear understanding and agreement.

Covenant Not to Solicit Staff or Patients Similar to the non-compete covenant, this provision ensures that the seller will not solicit the practice’s staff or patients after the sale. This covenant protects the buyer’s investment by maintaining the stability and continuity of the practice.

  • Protecting the Practice: The buyer relies on existing staff and patients to ensure the smooth operation and continued success of the practice. Losing key staff or patients can significantly disrupt operations and diminish the practice’s value.
  • Terms: The seller agrees not to actively recruit or solicit any employees or patients of the practice being sold. Exceptions may include the seller’s family and close friends, which should be clearly noted in the agreement.

 

Covenants in a dental practice purchase agreement are vital for protecting the buyer’s interests and ensuring a smooth transition of ownership. By clearly defining these covenants, particularly the covenant not to compete and the covenant not to solicit staff or patients, both parties can prevent future conflicts and promote the practice’s success post-sale.

Employees

During the due diligence process, the seller must provide comprehensive details regarding the wages, benefits, and bonuses given to each staff member.

Termination and Rehiring at Closing At the closing of the sale, the handling of employees is a critical step. The standard practice involves the following:

  1. Termination by Seller: On the closing date, each staff member is terminated by the seller. This termination is necessary to facilitate the transition of employment from the seller to the buyer.
  2. Rehiring by Buyer: Immediately after termination, the buyer re-hires the staff members. This process ensures that the employees continue working in the practice with minimal disruption.

Seller’s Payment of Accrued Wages and Benefits: The seller is responsible for paying out all accrued wages and any unpaid benefits to the staff on the day of the sale. This includes:

  1. Accrued Wages: Payment for any hours worked up to the closing date.
  2. Unpaid Benefits: Payment for any earned but unused benefits, such as vacation or sick leave.

Continuation or Adjustment of Benefits by Buyer: After the sale, the buyer has the discretion to either continue the existing benefits and pay structure or adjust them according to their HR plan. Most buyers opt to maintain the current compensation and benefits structure at least in the short term to ensure a smooth transition and maintain staff morale. This approach helps:

  1. Facilitate Smooth Transition: Keeping the current pay structure and benefits initially helps in retaining staff and ensuring stability in the practice.
  2. Evaluate Future Adjustments: Once the buyer is more familiar with the practice operations, they can evaluate and make any necessary adjustments to the compensation and benefits packages.

 

Managing the transition of employees during the sale of a dental practice is a critical aspect that requires careful planning and clear communication. By ensuring a seamless transition of employment and maintaining stability in the workforce, both buyer and seller can facilitate a successful transfer of ownership.

Conditions Precedent (Contingencies)

A condition precedent is a specific requirement that must be met before a contract or a particular provision within the contract becomes effective. In the context of a dental practice purchase agreement, conditions precedent are essential steps or events that need to occur to ensure the smooth and successful completion of the transaction. If any condition precedent is not fulfilled, the closing may be delayed or the agreement may become void.

Common Conditions Precedent in a Dental Practice Purchase Agreement

  1. Lease Assignment or New Lease
    • Requirement: The buyer must secure a lease assignment or enter into a new lease for the practice premises or purchase the associated real estate.
    • Importance: Ensures that the buyer has a legally binding agreement to occupy the practice premises, which is crucial for the continuity of operations.
  2. Financing Obtained
    • Requirement: The buyer must obtain financing for the full purchase price.
    • Importance: Ensures that the buyer has the necessary funds to complete the purchase, which is fundamental to the transaction’s success.
  3. True Representations and Warranties
    • Requirement: All representations and warranties made by both the seller and buyer must be true as of the closing date.
    • Importance: Provides assurance that both parties have disclosed accurate information and complied with their commitments up to the closing date.
  4. No Legal Actions
    • Requirement: No legal action or proceeding should be threatened or instituted to restrain, enjoin, or prohibit the consummation of the agreement or the transaction.
    • Importance: Ensures there are no legal impediments to completing the sale, providing legal and operational security for both parties.
  5. Split Escrow Fees
    • Requirement: Escrow fees will be split equally between the buyer and seller.
    • Importance: Clarifies the cost-sharing arrangement for escrow services, facilitating the financial planning of both parties.
  6. Governmental Clearances
    • Requirement: The seller must obtain all necessary certificates and clearances from governmental agencies indicating the absence (or full payment) of any security interests, liabilities, or other claims against the assets.
    • Importance: Ensures that the assets being sold are free from encumbrances, providing the buyer with clear and marketable assets.
  7. Signing of Necessary Documents
    • Requirement: Both parties must sign all documents reasonably necessary to consummate the sale on the closing date.
    • Importance: Ensures all legal and procedural requirements are met to finalize the transaction, preventing any last-minute issues.

Conditions precedent are critical elements in a dental practice purchase agreement that ensure all necessary steps are completed before the transaction is finalized. By clearly outlining and fulfilling these conditions, both parties can proceed with confidence, knowing that the sale is legally sound and operationally feasible.

Post Closing Transition Services

Patient Notification Letter When a dental practice is sold, it is often beneficial to inform all patients about the change in ownership. This process typically involves sending a letter that:

  1. Introduces the New Owner: A key component of the letter is a picture of both the seller and the buyer together. This visual introduction helps reassure patients and fosters trust in the new owner.
  2. Recommendation from Seller: The seller has the opportunity to personally recommend the buyer as the new doctor, reinforcing continuity of care.
  3. Encourages Appointments: The letter can serve as a gentle prompt for patients to schedule their next appointments, ensuring a smooth transition in patient care.

Responsibility for the Letter

  • Seller: Traditionally, the seller is responsible for drafting the letter, leveraging their familiarity with the patient base to craft a reassuring and informative message.
  • Buyer: The buyer typically handles the costs associated with printing and postage, as this expense is part of the investment in retaining the practice’s patient base.

To fully transfer the practice’s goodwill to the buyer, the seller’s shareholder agrees to assist in the transition. This involves:

  1. Good Faith Efforts: The seller uses good faith efforts to facilitate the transfer, ensuring that patients and staff view the transition positively.
  2. Availability for Assistance: The seller agrees to be available by telephone and email to assist the buyer for up to eight (8) hours per month for three (3) months following the closing date. This assistance is provided at no additional compensation and is limited to a maximum of ten (10) hours per month. Each session is measured in minimum fifteen (15) minute increments.

The seller’s assistance can cover a range of areas, including:

  • Administrative Support: Helping the buyer navigate the practice’s administrative systems and procedures.
  • Technical and Mechanical Support: Assisting with technical or mechanical issues related to the practice’s equipment.
  • Billing Support: Providing guidance on billing practices and resolving any related issues.
  • Diagnosis and Treatment Interpretation: Explaining the seller’s diagnoses or treatments to ensure continuity of patient care.

 The time limits for the seller’s assistance can be amended at any time upon mutual agreement between the buyer and seller, allowing for flexibility based on the needs of the practice.

Transition services are a crucial aspect of a dental practice purchase agreement, ensuring a smooth and effective transfer of ownership. By clearly defining responsibilities for patient notifications and providing structured support from the seller, both parties can facilitate a seamless transition that maintains patient trust and preserves the practice’s goodwill

Use of Seller’s Name

In some cases, the buyer may wish to use the seller’s name as part of the transition process to maintain continuity and reassure patients. The dental practice purchase agreement may allow:

  1. Inclusion on Stationery and Office Door: The buyer is authorized to include the seller’s name on their stationery and office door.
  2. Telephone Usage: The business telephone may be answered using both the seller’s and buyer’s names.

This authorization is typically limited to a specific period, usually not exceeding one (1) year from the closing date, and must comply with any ethical guidelines set forth by professional statutes and administrative rules.

 The limited use of the seller’s name is not intended to create any form of partnership, joint venture, association, or other business relationship beyond the seller-buyer arrangement. It is merely a transitional tool to help patients adjust to the new ownership.

Financial Responsibility and Indemnification

  • Costs: The buyer is responsible for all costs associated with the continued use of the seller’s name.
  • Indemnification: The buyer agrees to indemnify and hold the seller harmless from any liabilities or damages that may arise from the buyer’s use of the seller’s name. This protection ensures that the seller is not financially or legally impacted by the buyer’s actions during this period.

Professional Liability Insurance

While the buyer continues to use the seller’s name, they must maintain professional liability insurance coverage with the following conditions:

  • Coverage Limit: A single limit of not less than $1,000,000.
  • Additional Insureds: The seller and the seller’s shareholder must be named as “additional insureds” on the policy.

This insurance requirement provides an additional layer of protection for the seller, ensuring that any potential claims or liabilities during the transition period are covered.

The temporary use of the seller’s name can be a helpful strategy for maintaining patient trust and continuity during the transition of ownership in a dental practice. By clearly outlining the terms and responsibilities associated with this usage, both parties can ensure a smooth and legally sound transition.

Steps to Take While the Dental Practice Purchase Agreement is Being Negotiated

Conduct Thorough Due Diligence

Importance of Conducting Thorough Due Diligence Due diligence is a critical step in the process of purchasing a dental practice. It involves a comprehensive investigation of all aspects of the practice to ensure that the buyer is fully informed about what they are acquiring. This step is essential for identifying potential risks and verifying the accuracy of the information provided by the seller.

Key Areas to Investigate During due diligence: The buyer should focus on several key areas:

  1. Financial: Review financial reports, including profit and loss statements, tax returns, and accounts receivable. Analyze the practice’s revenue streams, profitability, and financial stability.
  2. Legal: Examine any legal documents, such as existing contracts, leases, and any pending or past litigation. Ensure compliance with relevant regulations and identify any legal liabilities.
  3. Operational: Assess the day-to-day operations of the practice. This includes evaluating the condition of the equipment, reviewing patient records for completeness and accuracy, and understanding the practice’s workflow and efficiency.

Due Diligence Process: The due diligence process involves several steps:

  1. Investigation Period: The Letter of Intent (LOI) typically specifies a time period during which due diligence must be completed. This period allows the buyer to thoroughly investigate the practice.
  2. Marking the Due Diligence Expiration Date: It is crucial to keep track of the expiration date of the due diligence period. Once this period expires, the buyer’s deposit may become non-refundable, depending on the terms outlined in the LOI.
  3. Scope of Investigation: The due diligence process includes:
    • Equipment Inspection: Evaluate the condition, age, and functionality of all dental equipment.
    • Patient Records Review: Ensure patient records are complete, accurate, and properly maintained.
    • Financial Analysis: Scrutinize financial documents to confirm the practice’s financial health.
    • Practice Reports: Review operational reports to understand patient flow, appointment scheduling, and staff efficiency.
  4. Costs and Responsibilities: The buyer is responsible for conducting due diligence and covering all associated costs. This includes hiring professionals, such as accountants, lawyers, and practice consultants, to assist in the evaluation.
  5. Seller’s Role: The seller must accommodate reasonable requests for practice tours and investigations, providing access to necessary documents and information.

By conducting thorough due diligence, the buyer can make an informed decision about the purchase, ensuring they fully understand the value and potential risks of the dental practice. This step is vital for protecting the buyer’s investment and setting the stage for a successful transition.

Thorough due diligence is an essential step in purchasing a dental practice, helping to identify potential risks and verify the practice’s value.

Common Pitfalls to Avoid: Potential Risks and Pitfalls in Dental Practice Purchase Agreements

When purchasing a dental practice, it is important to be aware of potential risks and pitfalls that could impact the success of the transaction. Here are some common pitfalls to watch out for:

  1. Overlooking Due Diligence: Skipping or rushing through the due diligence process can lead to overlooking critical issues such as financial discrepancies, legal liabilities, or operational inefficiencies.
  2. Inadequate Valuation: Failing to obtain an accurate and fair valuation of the practice can result in overpaying or underestimating the investment required.
  3. Ignoring Staff Concerns: Not addressing the concerns of existing staff or failing to communicate effectively with them can lead to low morale and high turnover, disrupting the practice’s operations.
  4. Unclear Terms and Conditions: Ambiguities in the dental practice purchase agreement regarding terms and conditions, such as the handling of accounts receivable, liabilities, and transition services, can lead to disputes post-closing.
  5. Underestimating Transition Time: Assuming that the transition will be quick and seamless without planning for potential hiccups can create operational challenges.
  6. Neglecting Legal and Regulatory Compliance: Failing to ensure that the practice complies with all legal and regulatory requirements can result in fines, penalties, and operational interruptions.
  7. Insufficient Financing: Not securing adequate financing or underestimating the total cost of the acquisition and transition can strain the buyer’s financial resources.

How to Mitigate These Risks For A Smooth Practice Transition

Mitigating the risks associated with purchasing a dental practice requires careful planning, thorough investigation, and professional support. Here are some strategies to avoid common pitfalls:

  1. Conduct Thorough Due Diligence:
    • Detailed Investigation: Take the time to conduct a comprehensive review of all aspects of the practice, including financial records, legal documents, and operational procedures.
    • Professional Assistance: Engage professionals such as accountants, lawyers, and practice consultants to assist in the due diligence process.
  2. Obtain Accurate Valuation:
    • Professional Appraisal: Hire a professional appraiser who specializes in dental practices to provide an accurate and fair valuation.
    • Comparable Analysis: Compare the practice with similar practices recently sold in the area to ensure the price is competitive.
  3. Address Staff Concerns:
    • Open Communication: Communicate openly with the existing staff about the transition and address their concerns.
    • Retention Plans: Develop plans to retain key staff members and ensure continuity in patient care.
  4. Clarify Terms and Conditions:
    • Detailed Agreement: Ensure that the dental practice purchase agreement is detailed and clear, covering all critical terms and conditions.
    • Legal Review: Have the agreement reviewed by an experienced dental attorney to avoid ambiguities and ensure all aspects are covered.
  5. Plan for Transition Time:
    • Transition Plan: Develop a comprehensive transition plan that includes timelines, responsibilities, and contingencies.
    • Patient Communication: Communicate with patients about the transition to maintain their trust and confidence.
  6. Ensure Legal and Regulatory Compliance:
    • Compliance Review: Conduct a thorough review to ensure that the practice complies with all relevant laws and regulations.
    • Ongoing Monitoring: Implement systems to monitor compliance continuously post-acquisition.
  7. Secure Adequate Financing:
    • Financial Planning: Develop a detailed financial plan that includes all costs associated with the acquisition and transition.
    • Multiple Financing Options: Explore various financing options and secure adequate funding to cover all expenses.

Being aware of and mitigating common pitfalls in dental practice purchase agreements is essential for a successful acquisition. By conducting thorough due diligence, obtaining accurate valuations, and planning for a smooth transition, buyers can protect their investment and ensure the continued success of the practice.

Final Thoughts on the Dental Practice Purchase Agreement

A dental practice Purchase Agreement is a vital document that ensures the smooth transfer of ownership, protects the interests of both buyer and seller, and lays the foundation for the practice’s continued success. From specifying the purchase price and handling liabilities to managing employee transitions and outlining post-sale obligations, each component of the agreement plays a crucial role in safeguarding the investment and operational stability of the practice.

Recap of the Importance of a Dental Practice Purchase Agreement

  • Clarity and Transparency: It provides clear terms and conditions, preventing misunderstandings and disputes.
  • Legal Protection: It ensures that both parties are legally protected and that their rights and obligations are clearly defined.
  • Smooth Transition: It facilitates a smooth transition by addressing critical aspects such as employee management, patient communications, and transition services.
  • Financial Assurance: It helps in accurately valuing the practice and managing financial responsibilities, including accounts receivable and liabilities.

 

We Encourage you to  Seek Professional Advice and Conduct Thorough Research when Entering into a Dental Practice Purchase Agreement

Navigating the complexities of a dental practice purchase agreement requires thorough research and professional guidance. It is essential to:

  • Conduct Due Diligence: Investigate all aspects of the practice to ensure informed decision-making.
  • Engage Professionals: Work with experienced dental attorneys, accountants, and practice consultants to ensure all legal, financial, and operational aspects are properly addressed.

 

For expert guidance and comprehensive support in navigating dental practice acquisitions, contact Odgers Law Group

Our team specializes in dental law and is dedicated to ensuring your practice acquisition is smooth, legally sound, and successful. We provide tailored advice and support to help you make informed decisions and protect your investment.

Dental Practice Purchase Agreement
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