Instead of starting a new practice, dentists will often purchase an existing practice. For most dentists, purchasing a dental practice will be one of the most significant purchases you will make in your career, so you’ll want to ensure that you are making a fully-informed decision and going about it the right way.
The first step to buying a dental practice is to assemble the team you will need to make a successful purchase. An experienced attorney can either review or draft the necessary contracts for the sale. In addition, unless you have the resources to pay in cash, you will need to have a lender. You may also want a real estate broker involved to negotiate the lease or purchase of the building in which the practice is located. A financial advisor, practice consultant, CPA and/or broker can help determine what you should pay for the practice, and a CPA or financial consultant can conduct financial due diligence on the practice.
Once you have your team in place, the next step is the Letter of Intent (LOI). The LOI is an important document that acts as a roadmap for the practice sale. At a minimum, it should contain basic terms like the purchase price, the closing date, and whether the seller is staying on after the practice sale. If the seller insists on an earnest money deposit or down payment, that should be included in the LOI, but you’ll want to make sure you know how and when the earnest money will be refundable. Other terms that you might want to address in an LOI include:
- How will the purchase price be allocated? The allocation is largely for tax purposes, and is usually divided between the tangible assets (e.g. equipment, furniture, and supplies) and intangible assets like goodwill.
- What due diligence can you perform? An LOI should spell out the type of access you will have to perform due diligence—this should include financial records and access to the physical office to inspect any equipment you will be purchasing. You may also want to see if you can interview staff before the closing date. However, many sellers may be reluctant to do this, especially if there is no earnest money deposit.
- How will Accounts Receivable be treated? Depending on the practice, there could be tens of thousands of dollars in receivables that have been earned but not yet collected as of the closing date. In some instances, the seller will keep ownership and send out invoices. In other instances, the seller will keep the receivables, but the buyer will collect on the seller’s behalf (with the buyer getting a small collection fee). In still other cases, the seller will sell the receivables to the buyer. This is usually discounted off of the face value, with older receivables having a heavier discount. The decision on how to treat receivable is typically based on a number of factors, including collection history, the total amount of the receivables, and whether the buyer can obtain additional funding to purchase them.
- How will work in progress be treated? Work in progress are cases that have been started but that won’t be completed until after the closing. For example, the seller may have made an impression for a crown but won’t actually seat the crown until after closing. As a practical matter, you’ll want the seller to complete as much work as possible prior to closing, but it is not always possible. For remaining cases, the LOI can detail whether the seller will have access to the practice to finish up cases, or whether you will complete the treatment. The LOI will also need to address how to divide fees between the buyer and seller.
With respect to the final purchase agreement, there are different approaches and important legal differences that need to be considered. For example, the purchase could be an asset purchase or a stock purchase. In an asset purchase, you are buying all the assets of an entity, without necessarily assuming any of the liabilities. The seller’s entity (usually a PLLC of PC) will continue in existence, but it will be a shell entity, with no assets after closing.
In a stock purchase (for a PC) or a membership purchase (for a PLLC) what you are actually buying is the individual doctor’s interest in the company. Meaning the entity will continue in existence, and will continue to own all of its assets, but just with you as the owner. Unfortunately, this also means it will continue to have all of its liabilities as well, for which you will now be responsible. Although you can contract around some of these issues with careful drafting of indemnification provisions in the contract, you may ultimately end up responsible for an undisclosed liability.
This is just one example of an important distinction that can have significant legal ramifications. Accordingly, it is best to work with an attorney when purchasing a dental practice, to ensure that you are not overlooking any important legal pitfalls, and the deal lines up with your expectations.