Exactly whom does the broker represent?

June 1, 2010
If you are a selling dentist, it is natural to think that the broker represents you

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  1. Does the broker represent the selling dentist?
  2. Does the broker represent the buying dentist?
  3. Does the broker represent both the selling and the buying dentist?

If you are a selling dentist, it is natural to think that the broker represents you. A dental friend who used the broker’s services to sell his practice probably recommended the broker to you. You gave the broker considerable information about your practice so that he or she could appraise it. The broker screened prospects and showed your practice to qualified prospects.

Once a purchaser was identified, the broker helped him or her put together a loan package to send to several lenders. Once the financing was obtained, the broker recommended an experienced attorney to draft the purchase agreement. When the contract was signed and the sale closed, the broker assisted the parties with a proper transition.

If you are a buyer, it is plausible to think that the broker represents you. Your initial meeting with the broker may have been during your winter break before beginning your final semester in dental school. The broker outlined the options a senior dental student has upon graduation, and stressed that if you should decide to become an associate, you should become an associate for the correct reasons — to pick up speed and gain experience.

No one ever told you that most associateships do not lead to partnerships. After graduating, you worked as an associate and gained valuable experience. After two years, you contacted the broker again and told him or her that you were ready to purchase your own practice.

The broker showed you several practices and together you found the practice of your dreams. He or she helped you obtain financing and arranged for contracts to be drafted. If it were not for the broker, you would have wasted a great deal of valuable time and may not have found the practice of your dreams.

In these two illustrations, whom did the broker represent? The seller, the buyer, or both parties?

Is it even legal for a broker to represent both the selling and buying dentist in the same transaction? This is referred to as “dual agency.” The proper way to do dual agency is for the broker to disclose that he intends to represent both parties, and each party in turn should sign the disclosure forms giving their formal written approval.

The challenge for the broker in dual agency is to fulfill his or her obligations to both parties without compromising either party’s interest. Is this possible?

Agency best describes the special relationship between the broker and the person he or she represents. Common examples of agency include:

  • An attorney representing you in a legal matter.
  • A stockbroker buying and selling investments on your behalf.
  • A real estate broker assisting you in buying or selling your house.

In the overwhelming majority of the practices I sell, I’m the exclusive agent of the selling dentist. I enter into a listing agreement with the selling dentist that lays out the understandings between the parties.

If I represent the selling dentist, then who represents the buying dentist? I typically suggest that the purchasing dentist use the services of a capable CPA to assist him or her in evaluating the economics of the practice.

The CPA should confirm that the cash flow is sufficient to cover the practice’s overhead, debt service, and living expenses for the purchasing dentist and his or her family. Using the correct CPA helps to ensure the purchasing dentist does a first class job of due diligence.

The relationship between a dental practice broker and the parties involved in a dental practice sale is not a simple one. It is very common for a broker to represent selling dentists, and at the same time, show practices to potential purchasers. Once a purchaser selects a practice to buy, the broker frequently assists the buyer in obtaining financing.

It is perfectly acceptable for the broker to assist the buyer; however, the broker does have the responsibility to fully disclose to the buyer that he is not representing him or her; he is representing the selling dentist. If the buyer or seller is unsure as to who is representing their interest, they can get themselves in trouble. Never assume the parties know who is representing them. The broker has the obligation to all parties to DISCLOSE, DISCLOSE, and DISCLOSE some more.

Guy Jaffe, MBA, is a principal of ADS Midwest, a dental practice appraisal and brokerage firm located in St. Louis, Mo. ADS Midwest works with dentists in Missouri, Illinois, and Iowa. He is one of the founding members and past president of American Dental Sales. Reach him at (800) 221-6927 or [email protected].

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