Sensible approaches to dental practice acquisitions
Dental practice acquisitions and sales require the right strategy with sensible guidelines to result in a successful transition.
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Dental practice acquisitions and sales require the right strategy with sensible guidelines to result in a successful transition. It is important to find the ideal practice to purchase, and to know that the practice has a sufficient cash flow to provide a good living and to service debt. It is vital to ensure that the terms and conditions of the negotiations are well documented in the acquisition contract and related documents.
Once the basic terms and conditions are agreed upon, the next step is to craft a letter of intent. The rationale here is to put in writing the terms and conditions that the two parties have negotiated. Generally included are the purchase price, date of transfer of the practice, how accounts receivable will be handled, how much time the buyer and agents will have to perform their due diligence on the practice’s financial records, and the time necessary for the buyer to negotiate an assumption or enter into a new office lease. If a loan is needed to purchase the practice, then time periods that will allow the lender to provide financing should be included.
Typically, the letter of intent is nonbinding, and the deposit of any earnest money by the buyer is made refundable unless certain time periods have passed or certain events have occurred.
Most dental practice transactions result in the buyer purchasing the assets of the dental practice rather than stock in the seller’s professional corporation. Usually these assets are equipment, furniture, supplies, patient charts and records, and a restrictive covenant binding the seller.
The goal for a buyer is to recover the maximum amount of the purchase price over a short period of time by way of expensing, depreciating, or amortizing the assets. For instance, the amount of the purchase price a buyer will want to allocate to the seller’s equipment, supplies, furniture, goodwill, and restrictive covenant is important since the buyer may be able to depreciate these purchases over time.
On the other hand, the seller will most likely have a tax liability on the sale of the practice’s assets. As a result, the buyer and seller must negotiate sensibly and rely on their accountants and attorneys to arrive at a fair and reasonable outcome.
The asset purchase agreement will indicate that certain events must occur for the transaction to be concluded. For example, the buyer may assume the seller’s lease or enter into a new lease with terms that are acceptable to the buyer; the buyer’s accountant must make sure that the practice’s books and records are in order; financing must be obtained with acceptable terms to the buyer; responsibility between the parties for defective dentistry should be spelled out; provisions should be made for a restrictive covenant; and both parties should approve the purchase agreement and related documents.
A restrictive covenant, or covenant not to compete, will limit the seller from practicing dentistry for a period of time within a geographic area around the practice. Although enforcing this will depend on state law where the transaction takes place, a buyer will likely be permitted to restrict the competitive activities of a seller when the purchase of the selling dentist’s practice includes the dental practice’s goodwill.
In some cases, the seller may be retained as a part-time associate and may work in the office for the new owner. Ensure that the restrictive covenant begins from the last day of employment and not from the acquisition date. This will ensure the seller is restricted after he or she leaves the practice, not when the transfer of ownership takes place.
Use sensible guidelines such as these to begin negotiations for a fair and reasonable practice transition.
Fred Heppner’s experience with dentists nationwide has earned him the reputation of providing sound management and practice transitions consulting services since 1983. He is a member of ADS covering Arizona. Contact him at FredH@ADSTransitions.com or (888) 419-5590, ext. 480.