This is part two of a two-part series examining the most important points a dentist should understand to accomplish a successful transition.
Part one of this two-part article on seller’s transaction issues outlined some of the pre-practice sale considerations doctors should consider prior to engaging in the sales process.
Not many moments in a dentist’s long and successful career are more invaluable than selling their dental practice. However, this transition can also be quite stressful. Thankfully, after years of hard work and risk-taking, this milestone will potentially allow you to enjoy the fruits of your labor. Thus, it’s incredibly vital to make sure this pivotal point in your career is executed as seamlessly as possible.
In this article, we’ll examine seller obligations typically associated with the sales documents and how to mitigate your liability post-sale.
1. Understanding Your Asset Sales Agreement
Most dental practice sales are structured as an asset sale, where the buyer purchases most or all of the tangible and intangible assets, but not the seller’s stock. Asset sale agreements are also called asset purchase agreements, practice sales agreements, or (inaccurately) buy-sell agreements. They include, among other provisions, a description of the assets being sold, the purchase price, an outline of the liabilities being assumed by the buyer, and all of the obligations the parties owe to each other pre and post-closing.
You’ll be hard-pressed to find a well-drafted asset sales agreement provided by a broker or downloaded from the internet. If it’s crafted well, the agreement will accomplish two objectives:
- Protect you (the seller) against unnecessary exposure to future liability.
- Provide a clear understanding of the parties’ obligations which will mitigate the potential for future disputes.
Every asset sales agreement will include a section in which the seller represents to the buyer certain facts about the state of the dental practice. These representations will include, among other points, statements related to:
- The condition of the assets
- Status of any dispute or claims
- The seller’s compliance with local, state, and federal laws
- The accuracy of the financial records and patient charts that the buyer reviewed
- Other material facts related to the practice
A buyer’s objective is to make these representations as extensive and broad as possible, to suss out all of the potential liabilities associated with the practice. Seller’s counsel, however, should aim to make these representations as narrow and limited as reasonably possible so as to limit their client’s exposure to liability.
It is essential that these representations be factual. Otherwise, the buyer may have grounds to assert a claim for breach of misrepresentation and fraud against the seller. This is another important reason for sellers not to rely on “standard” agreements prepared on their behalf by their practice broker. An experienced dental attorney will know how to draft and negotiate these statements to minimize the seller’s liability after the closing.
3. Uncompleted Dentistry (Dental Work in Progress)
Patients with work in progress as of the closing represent a liability that must be addressed in the asset sales agreement. The following questions may come up:
- Who completes the treatment?
- Where is the treatment completed?
- Who earns the proceeds from the treatment?
Generally, sellers want to finish the work they planned prior to the closing in order to earn the entire fee and make sure the work is completed as they see fit. Having the seller complete the treatment is also good for continuity of care. If something goes wrong, and the buyer had completed the treatment, the buyer and seller may end up in litigation, blaming each other for the failed work.
The asset sales agreement should provide language outlining the mechanisms for completing the work in progress. Generally, the seller should complete the treatment within a reasonable amount of time at the practice and should reimburse the buyer for use of any assistants and supplies.
4. Lease Assignment
Unless a buyer is moving your practice into one of their locations, a buyer cannot purchase and operate your dental practice without taking over your lease. As such, it is critical that you understand what rights and obligations you have to the landlord when requesting that the lease be assigned to your potential buyer.
We have seen many sellers that are ready to sell their practice but have never reviewed their lease assignment obligations. Some sellers don’t even have a copy of their lease! It is crucial to review your lease with a dental attorney before you find a buyer, in order to understand how to comprehensively navigate the lease assignment provisions in that document.
5. Retreatment Issues
Not all dental treatment goes according to plan. Sometimes a patient will return to the practice with complaints about the prior treatment.
What does each party need to do in a dental practice sale when the patient files a complaint about treatment provided by the seller even though the buyer is now the owner of the practice? These types of situations can be tricky for both parties.
For sellers, make sure that you are able to solve the problem with any potential exposure to liability. You don’t want the buyer to complete the retreatment and send you a bill without first consulting with you about the complaint. As such, the asset sales agreement should address retreatment issues, how the seller is notified about the complaint, and the steps the parties must take to adequately address the issue so as to prevent patient disputes or disputes between the seller and buyer.
6. Restrictive Covenants
In California, unlike other states, it’s impossible to restrict someone’s ability to compete with your business. One exception is made when a buyer purchases a seller’s business and the goodwill associated with that business. In such circumstances, a buyer may restrict the seller’s ability to compete in a similar business within a defined geographic area.
It’s critical that you review your post-Closing plans with your practice broker and attorney when selling your dental practice. Your buyer will attempt to maximize the geographic area and number of years you are prohibited from owning a dental practice. As the restricted party, determine what exceptions you will need during the negotiation of the restrictive covenants.
Many sellers either don’t hire an attorney during the transition process, relying on the practice broker’s “standard” agreement. This neglects the restrictions you’re signing into with the agreement. In other cases, you may refuse to believe that the restrictions are enforceable because you were unaware of the exceptions to your state’s prohibitions against such restrictive covenants.
The transfer of a dental practice can be fraught with potential liabilities for a selling dentist. It is critical that you understand their exposure and mitigate as much risk as possible in order to sell your practice with peace of mind.