dental articles from 2 Dental.com

By Ted Schumann, CPA, CFPAssociate Buy-ins are a hot topic of conversation. But frequently dentists find themselves making several attempts before successfully finding an associate that meets their needs and that they are willing to consider as a future partner. Over the years, I have noted the most common reasons why Associateships fail:

Battle of the Generations
The average age difference between the senior dentist and the associate is between 18 and 22 years. This difference means the two doctors come from two totally different perspectives. They were trained differently and, in short, have a different worldview. These differences can be too great to overcome.

Lack of an ownership mentality
One complaint we hear about associates is they don’t look at problems in the practice like an owner. This should be no surprise as very few dentists spend time teaching associates about the responsibilities of being an owner. Most associates would really like their employers to mentor them on management issues.Many owners worry that if they teach their associate about running the practice, they risk losing the associate. The way to groom an associate for eventual ownership is to take the time to teach them.

Not enough patients
In our experience, a practice should have a minimum of 2000 active patients and be growing by 15% per year before it considers bringing in a second doctor. An active patient is one that has received a service from the practice in the past 14 months and has not died or moved away. Frequently, we see a practitioner that tends to be slightly busier than comfortable and they add an associate. Once the associate is on board, the dentist’s schedule eases off. If there aren’t enough patients, eventually both doctors have difficulty filling their schedules. If this lasts for any extended period, the owner will begin to make less and problems begin.

Inability of senior dentist to share sandbox
The majority of dentists practice alone because that’s the way they prefer it. This is not a character flaw, but rather a fact of life. While most dentists think they would enjoy the professional companionship of having another doctor in the practice, many don’t enjoy the experience once the new doctor has been hired. It is not easy to share patients, decisions about operations, and personal space.

Failure of the associate to build the practice
As I mentioned, associates are often brought in before there are enough patients to support both doctors. Prior to the associateship, the senior dentist may not have needed to focus on developing new patients. Once an associate is hired, the need for new patients increases and the senior dentist expects the associate to take action to help build the practice. Unfortunately, few young dentists understand the process of brining in new patients.

Staff Conflicts
Often, the problem between the doctors is centered on the staff. Sometimes, especially when the associate brings new ideas to the practice, employees do not like the change or extra work of having a second doctor in the practice.

Failure to discuss expectations
For many dentists, they expect their associate to be a mind reader. Prior to bringing in an associate, consider what your expectations are. Once you have developed your expectations, it is essential you share them with your prospective associate. I recommend the employer dentist develop a first year curriculum to judge the performance of the associate in a variety of areas.

No clear goal as to Buy-In
Today’s associates are not willing to wait for years without the chance of becoming an owner. On average, we see a strong desire to purchase within three years of graduating from dental school. If you are convinced that this is not the right partner for you, or if you have no desire to have a partner ever, it is essential that you disclose this to your associate early on. I think it is reasonable to have the associate work for you for 12 to 18 months before making your decision, but at some point, you owe them a decision.

Unexpected Events
Despite our best planning, things happen that change the course for the employer or the
associate. These things can range from family illness or the health of either of the parties, a change in marital status, or any number of life changing events.

Communication
The most important thing you can do to improve the chances for a successful associateship is to establish a system of communication. I recommend the employer and associate meet weekly for an informal lunch and once per month in an official meeting to discuss the associate’s progress and the state of the practice.

The best business dealings are when you deal with someone whose word and handshake are all you need … and then you put it in writing! Written contracts between owners and associates are critical. Too often, dentists tell associates to come and work for them to see how things work out. Later, if things mesh, they get together and work out a contract. Too many times, however, later never comes and contracts don’t materialize. This lack of a contract is the source of several critical problems.

First, both parties tend to create their own set of understandings and expectations … and these understandings rarely coincide. As time goes on, friction mounts when these contradictory goals collide, and they then tend to occur more frequently. This results in a very unpleasant practice for everyone involved - i.e., dentists, staff, and patients.

One critical element of a contract is a “covenant-not-to-compete/nonsolicitation agreement.” For example, let’s say an associate has worked in a practice for five years without such an agreement. During these five years of “seeing how things work out,” the associate has, in effect, freely acquired the goodwill of the patients he or she has treated.

Now, suppose the owner wants to sell his “$900,000” practice. The owner’s production is $500,000 and the associate’s production is $400,000. When the owner has a practice valuation, the value is placed at his or her production level of $500,000. Despite the owner’s strongest assertions otherwise, the buyer, the buyer’s accountant and attorney, and the lender will not support paying the seller for goodwill that actually belongs to the associate. In fact, the associate can leave with his or her patients and establish a new practice or associateship nearby. The bottom line is that buyers will not pay a seller for goodwill that the associate owns and the buyer does not expect to receive.

At this point, the seller will want to negotiate a covenant-not-to-compete and a nonsolicitation agreement with the associate. That owner will quickly discover that unless enhancements are offered - i.e., money - the associate will not be willing to make such concessions. The owner can terminate the associate, but the associate still can take the patients he or she has treated.

The owner has no leverage after the fact. In our example, the loss of $400,000 of goodwill translates into a loss of $250,000 in the sale price. This is the price the owner paid for not having a written agreement.

Many problems can arise between owners and associates, and when they have not been anticipated and resolved by a written agreement, their resolution will be much more difficult. One party will invariably have a stronger bargaining position, and one will be more vulnerable after time has passed and individual investments in time, energy, and money have been made.

Another important issue is the status of the associate, whether that associate is an employee or independent contractor. Frequently, owners will designate the associate as a contractor to avoid paying employer withholding taxes. The caution here is to ensure that the associate actually meets the criteria for a contractor. Does the associate provide his or her own dental equipment, instruments, supplies, auxiliary staff, and does the associate set his or her own schedule and work without any supervision? In such a case, the associate might possibly, but not necessarily, pass the contractor tests.

If these conditions are not met, the Internal Revenue Service may judge the contractor to be an employee. In this case, the owner may expect to pay the IRS for all past withholding and payroll taxes, with possible additional penalties and interest. If an associate has been working for a year or more, this can become very expensive.

If the associate is incorporated, an owner may more safely consider contracting with the associate’s corporation, and the associate’s corporation will pay his or her salary and withholding taxes. If the associate is not incorporated, it is safer to regard that individual as an employee and withhold taxes and pay the payroll taxes due. These taxes amount to about 3 percent of the associate’s gross production, so reducing the associate’s commission by 3 percent would have the same financial effect as if the associate were a contractor who paid his or her own taxes. This avoids the huge financial risk the owner would face if the IRS disallowed a contractor status.

When is the best time to plant an acorn? Now! The same applies to a contract with your associate. The benefits are enormous and the cost is negligible. Talk to your consultant or attorney today!

Earl M. Douglas, DDS, MBA, is the founding president of American Dental Sales. He is president of Professional Practice Consultants Ltd. Dr. Douglas services the southeast area of the United States, and has affiliates nationwide. He can be reached at (770) 664-1982 or write to him at 11285 Elkins Road, A-2, Roswell, GA 30076. Visit his Web site at www.ppcsouth.com.

Dental Economics March, 2006
Author(s) :   Earl Douglas

Associate buy-ins are a hot topic of conversation. But, frequently, dentists find themselves making several attempts before successfully finding an associate who meets their needs and who they are willing to consider as a future partner. Through the years, I have noted the most common reasons why associateships fail:

Battle of the generations- The average age difference between the senior dentist and the associate is between 18 and 22 years. This difference means the two doctors come from two totally different perspectives. They were trained differently and, in short, have a different world view. These differences can be too great to overcome.

Lack of an ownership mentality - One complaint we hear about associates is they don’t look at problems in the practice as the owner does. This should be no surprise as very few dentists spend time teaching associates about the responsibilities of being an owner. Most associates would really like their employers to mentor them on management issues. However, owners worry that if they teach their associates how to run the practice, they risk losing them. The way to groom associates for eventual ownership is to take the time to teach them.

Not enough patients- In our experience, a practice should have a minimum of 2,000 active patients and be growing by 15 percent per year before it considers bringing in a second doctor. An active patient is one who has received a service from the practice in the past 14 months and has not died or moved away. Frequently, we see practitioners that are slightly busier than they want to be and they add an associate. Once the associate is on board, the schedule may ease off. If there aren’t enough patients, eventually both doctors have difficulty filling their schedules. If this lasts for an extended period, the owner begins to make less and problems arise.

Inability of the senior dentist to share the sandbox- Most dentists practice alone because that’s the way they prefer it. This is not a character flaw, but rather a fact of life. While most dentists think they would enjoy the professional companionship of having another doctor in the practice, many don’t enjoy the experience once the new doctor is hired. It is not easy to share patients, decisions about operations, and personal space.

Failure of the associate to build the practice- As I mentioned, associates often are brought in before there are enough patients to support both doctors. Prior to the associateship, the senior dentist may not have needed to focus on developing new patients. Once an associate is hired, the need for new patients increases and the senior dentist expects the associate to take action to help build the practice. Unfortunately, few young dentists understand the process of bringing in new patients.

Staff conflicts- Often, the problems between the doctors are centered around the staff. Sometimes, especially when the associate brings new ideas to the practice, employees do not like the change or extra work of having a second doctor in the practice.

Failure to discuss expectations - Many dentists expect their associates to be mind readers. Prior to bringing in an associate, think about your expectations. Once you have developed them, share them with your prospective associate. I recommend the employer-dentist develop a first year curriculum to judge the performance of the associate in a variety of areas.

No clear goal as to buy-in- Today’s associates are not willing to wait for years without the chance of becoming an owner. On average, we see a strong desire among young graduates to purchase a practice within three years of graduation from dental school. If you are convinced that this is not the right partner for you - or if you have no desire to have a partner ever - it is essential that you disclose this to your associate early on. It is reasonable to have the associate work for you for 12 to 18 months before making your decision, but at some point, you owe this person a decision.

Unexpected events - Despite our best planning, things happen that change the course for the employer or the associate. These things can range from family illness or the health or marital status of either of the parties, or any number of life-changing events.

Communication- The most important thing you can do to improve the chances for a successful associateship is to establish a system of communication. I recommend the employer and associate meet weekly for an informal lunch and once per month in an official meeting to discuss the associate’s progress and the state of the practice.

Theodore C. Schumann, CPA, CFP®, is president of The DBS Companies and past president of American Dental Sales. The DBS Companies service the financial needs of the dental community, in addition to representing American Dental Sales in Michigan. Contact Schumann by phone at (800) 327-2377, or via e-mail at tedtbti@dentalbusinesssuccess.com.

Dental Economics May, 2006
Author(s) : Ted Schumann

by: drobnylaw.com

Consider: Drs. A and B have been practicing dentistry together for 15 years. Last year, each netted $255,537 out of the practice. Last week, Dr. A was killed in an auto accident. How much does Dr. B owe heirs of Dr. A’s shares of the practice?

Practice value defined

Mrs. A believes that she didn’t receive fair value for her share of the practice, especially after paying $45,000 in attorney’s fees. Her net is $303,333.

Life insurance and buy/sell agreements

How could this scenario have been avoided? Had Drs. A and B sat down with their attorney and prepared a Buy/Sell Agreement, none of this would have happened. Drs. A and B. could have agreed on what would have been a fair value to pay each other’s family in the event of death. To minimize the adverse impact on the surviving partner, each could have each purchased insurance on the other. The cost of insurance would have been extremely reasonable and affordable. Let us assume that they agreed on a value of $1 million. They could have contacted their insurance agent and obtained life insurance policies on each other. Dr. A owns the policy on Dr. B and Dr. B owns the policy on Dr. A. This is called cross-ownership agreement.

Then, when Dr. A died, Dr. B would have received $1 million from the insurance carrier. Pursuant to the written Buy/Sell Agreement (which had also been signed by each doctor’s wife), Mrs. A would have accepted a check for $1 million as payment in full for any and all of her interest and the estate’s interest in the practice, thereby eliminating the need to hire appraisers, CPAs, attorneys, and take over two years to litigate the matter.

Dr. B would not have incurred the litigation expenses and would not have to come up with $500,000 cash all at once. The life insurance company would have assumed the risk for Dr. B.

Disability Insurance and Buy / Sell Agreements

In addition, a Buy/Sell Agreement wherein properly written, would also address several other issues that can come up in a dental practice: disability, disagreement and divorce.

• DisabilityWhat if either dentist became disabled and was unable to continue to work? How long would he/she be entitled to continue to take his/her draw out of the business, without contributing to the profit and cash flow of the practice? A Buy/Sell Agreement would provide how long that a dentist would be entitled to take a draw, thereafter agreeing in advance to be bought at a predetermined price, payable over a period of years. Again, your insurance agent can assist you in securing disability insurance to cover the risk.
• DisagreementWhat if Drs. A and B are no longer compatible and no longer capable of working together? A Buy/Sell Agreement, when properly drafted, would address the procedures and protocols to follow in dissolving the practice in an orderly manner, as well as how to divide the charts and contact the patient in a businesslike and professional manner, and to decide who takes which equipment and who assumes which debts.
• Dissolution of MarriageIf either Dr. A or B dissolves his marriage, a properly drafted Buy/Sell Agreement would ensure that their (soon-to-be) ex-spouse does not interfere in the operation of the practice. Drs. A and B would agree ( and their spouses would sign the agreement at the time of its execution) that even if Dr. A or Dr. B has to give their (soon-to-be) ex-spouse all of their interest in the house, the savings, the pension, or whatever, the ex-spouse would have no right to participate in the operation of the practice.

Review and Update Buy / Sell Agreements Annually

Very few business owners (and even fewer professionals) have prepared and executed a proper Buy/Sell Agreement. Of greater concern is the fact that of the few who have executed buy/sell agreements, even fewer keep the document current. Had Drs. A and B executed a Buy/Sell Agreement in the above example 15 years ago, what value do you think they would put on the practice? Significantly less than what it’s worth now. Once a Buy/Sell Agreement has been executed, it needs to be reviewed annually and the values need to be updated. What might have been a fair value to the heirs of a deceased partner 20 years ago certainly wouldn’t be fair today. If the document is not updated, Mrs. A would be barred from objecting to whatever value is set forth in the original document executed 15 years prior to Dr. A’s death.

In addition, if you do not have a Buy/Sell Agreement, see your attorney and commit to having one done this year. If you already have a Buy/Sell Agreement, make sure it is current, up-to-date, and addresses not only buyouts upon death but upon disability, disagreements and divorce. If the agreement is not funded with insurance, contact your life insurance agent immediately. If it is funded with insurance, perhaps it is time to review your insurance as well. The insurance industry has changed considerably over the last few years, rates are more competitive than ever, new products are on the market that were not available even a few years ago, and you may be able to get more insurance for a lower price.

About The Author

DROBNY LAW OFFICES, INC., concentrates its practice exclusively in the areas of Estate Planning, Estate Administration, Business and Taxation. DROBNY LAW OFFICES, INC. was formed in 1989 by Mark S. Drobny, who had been practicing in these same areas of the law since 1980. DROBNY LAW OFFICES, INC.’s main office is in Sacramento, California and has satellite offices in San Ramon and Stockton. With four Attorneys, three Paralegals and a support staff of eight, DROBNY LAW OFFICES, INC. can assist clients in handling the most basic to the most complicated matters in a timely, accurate and cost-efficient manner.

Office Locations:

DROBNY LAW OFFICES, INC.
4180 Truxel Road, Suite 100
Sacramento, CA 95834

Tel. 916-419-2100
FAX 916-419-1222
Email: dlo@drobnylaw.com

by: Peter Cusimano

(applicable to province of Ontario only)

Headnote: business law, corporate law, purchase and sale of business

by Peter Cusimano, B.Sc., LL.B.

At some time in your career you may decide that you would like to own your own dental practice rather than work as an associate. Owning your own practice can be accomplished by starting your own practice or purchasing an existing practice. This article will focus on frequently asked questions by dentists with respect to purchasing an existing practice. Many of the points discussed will also apply to starting a practice from scratch.

Owning your own dental practice can be a very rewarding experience if you do it right. A dental practice is a complicated business and the purchase of a practice involves many complicated legal issues that require careful analysis and advice from a lawyer. We strongly encourage you to speak to a lawyer as early as possible. Often the biggest and most expensive mistake that purchasers make is that they believe that they only need to speak to a lawyer after they have a signed and offer to purchase. The key to purchasing an existing practice is to ensure that it is properly done from the very beginning and this involves consulting with us as your lawyer to obtain professional legal advice from the very beginning prior to signing an offer to purchase.

Why Do I need to speak to a Lawyer ?

Obtaining professional legal advice will greatly assist you to effectively address the many complicated legal issues involved in the purchase of a dental practice. These issues arise from many sources including: (i) the selling dentist; (ii) an agent or broker; (iii) bank or finance company; (iv) accountant; (v) landlord; (vi) existing associates if any and staff. As such it is important to involve us as your lawyer in the process as early as possible.

What Does a Lawyer do in the Purchase of a Dental Practice ?

In general, as your professional legal advisors, we will act in your best interests and provide professional legal advice and legal service to you including:

• meet with you for an initial consultation to obtain from you the particular facts of your particular situation;
• discuss with you various legal issues that will need to be addressed that relate to dental practices;
• introduce you, if required, to qualified professionals who have experience with purchases of dental practices including: (i) agents/brokers to assist you to find a potential practice to purchase; (ii) representatives of banks or finance companies; (iii) accountants;
• consult with your accountant with respect to your tax situation and the tax situation of the practice including purchase price and other tax related issues such as price allocation and estate planning.
• analyze, explain, and advise you with respect to any existing associate or partnership agreement between you and the current practice where you are currently practising.
• analyze, explain, and advise you with respect to any legal representations made by the selling dentist or the agent if an information package is provided to you by the agent;
• prepare a comprehensive and effective legal strategy for the purchase of the practice that is tailored to your particular situation;
• conduct preliminary legal searches in government records against the sellers to determine if there are any serious problems that require immediate attention such as court judgments against the sellers;
• prepare a detailed introductory letter to the seller (or his/her lawyer) requesting extensive preliminary information from the seller such as information concerning (i) the ownership of the equipment; (ii) liens; (iii) lease; (iv) employment contracts; (v) creditors; (vi) other relevant information;
• prepare a letter of intent to the seller which can be a binding offer to purchase or a non-binding letter depending on your particular situation;
• prepare a comprehensive Agreement of Purchase and Sale in accordance with your instructions setting out the exact terms and conditions of the purchase;
• negotiate the terms and conditions of the purchase with the lawyer for the seller;
• analyze, explain, and advise you with respect to the terms and conditions of financing documents including the loan agreement, grid promissory note, personal guarantees.
• analyze, explain, and advise you with respect to the existing lease of the premises;
• negotiate with the landlord with respect to an assignment of the existing lease or the creation of a new lease;
• address various legal issues including but not limited to those relating to creditors, lien holders, business taxes, patient lists, assignment of telephone number.
• incorporate a holding company for you if necessary or advisable after consultation with your accountant;
• prepare the many legal documents (approximately 30 documents) necessary to complete the transaction including but not limited to: closing agenda, statutory declarations, warranties, assignments, agreements, bill of sale;
• prepare and file a business name registration if required; advise you with respect to the use of business names; consult with the Royal College of Dental Surgeons with respect to approval of the proposed name;
• prepare an associate agreement dealing with various issues including: general employment terms and representations, confidentiality, non-competition, and non-solicitation;
• meet with the lawyer for the seller on the scheduled closing date to exchange legal documents and complete the purchase;
• provide a written report to you and a reporting book after the transaction is completed summarizing the transaction;
• provide any other legal advice necessary to complete the transaction;

In addition to usual issues common to the purchase and sale of any business, there are particular legal issues relating to a dental practice including but not limited to: (i) the handling of patient lists, records, x-rays, and charts, (ii) handling of associates who will not remain with the practice; (iii) completion of unfinished dental work; (iv) appointments that are scheduled by staff before the completion date of the transaction for an appointment on a date after the completion date; (v) procedure for handling of patients requesting the previous dentist.

Who Else Should I Speak To ?

Through our experience we have established contacts with an extensive network of suppliers and professional advisors that can assist you with your purchase. If required we will refer you to these suppliers and/or professional advisors that can be of assistance to you. Together we will actively involve you and consult if required with the following suppliers and/or professional advisors:

• suppliers of dental equipment and dental supplies
• representatives of banks or finance companies catering to dentists
• architects and designers
• makers of neon dental signs
• insurance brokers
• financial planners
• printers for business cards, letterhead, newsletters, brochures
• accountants
• business evaluators
• Internet marketing consultants

What are the Costs Involved in Purchasing and Operating a Dental Practice ?

In budgeting for the purchase and operation of your practice you should ensure that you take into account many expenses including but not limited to:

• purchase price
• applicable taxes including GST and PST
• professional fees for lawyers, accountants, business evaluator, marketing consultant
• security deposit for rent, telephone
• announcement cards
• bank or finance company processing fee
• cost for new sign
• letterhead, brochures, business cards
• office and disability insurance
• leasing cost of telephone, fax machine, photocopier, specialized equipment
• purchase of additional equipment, furniture
• new dental equipment
• new computer
• new dental office management software
• salary for dental assistant, receptionist, hygienist
• continuing education courses
• dental supplies, instruments, sundries.

In consultation with your accountant, you should examine your cash flow projections taking into account the billing cycle and time delay in processing claims from insurance companies. From the cash flow projections, you should be able to determine how large of a line of credit you will require.

How Much Should I Pay for a Dental Practice ?

Often a dentist selling a practice will indicate an asking price that is greater than the current market value of the practice. It is strongly recommended that before determining a purchase price a valuation be conducted by an independent third party qualified to do business evaluations. The expense to obtain an evaluation will often be well worth it especially if the valuation is far less than the price you had anticipated on offering prior to obtaining the evaluation.

The value of a dental practice is based on numerous factors. A bank or finance company will want to know the value of the practice when determining how much financing to provide to you to finance the purchase.

Should I use an Agent or Broker Company ?

Many companies deal with the purchase and sale of dental practices and offer a variety of useful services. These companies often employ real estate agents, business evaluators, and other consultants. The use of these companies can be very useful in finding a practice for sale. Typically these companies are also able to provide you with a detailed information package about the practice you are considering purchasing. This information package will provide us with valuable information and may alert us to potential legal issues that need to be addressed or that require further investigation.

In addition, although representatives of these companies will meet with you and assist you, the representatives typically act on behalf of and in the best interests of the seller and not you. Therefore, you must be very careful as to the information you disclose to these companies.

It is not recommended that purchasers utilize these companies to negotiate or prepare the terms of a letter or intent, offer to purchase, or purchase and sale agreement without seeking advice from a lawyer to consider the critical legal issues. Unless the professionals of these companies are lawyers they may not be qualified to deal with legal issues that need to be addressed in the foregoing legal documents. It is likely that these companies do not conduct any legal searches and may utilize a fill-in-the-blank “standard” agreement which fails to address legal issues critical to your particular practice and which favours the seller. Although this approach will likely result in easy acceptance by the seller, it will also likely result in legal complications for you that will be very expensive and time consuming to resolve.

Can I Bring to My New Practice the Patients I Previously Treated ?

Often when you purchase a practice the handling of patients is often a complicated and difficult issue that requires your careful attention. A dentist purchasing a practice usually wants to bring along those patients that he/she previously treated, often to the objection of the owners of the practice where the dentist was previously located. Similarly, the selling dentist may try to take with him/her as many patients as possible, to the objection of the purchasing dentist. As such, unless this issue is carefully handled, it will result in great frustration and stress for you and possible expensive court action against you if you are not careful.

Several issues have to be carefully examined by a lawyer including the precise wording of any written agreement with the owners of your current practice. If your written agreement contains clauses dealing with non-competition and non-solicitation you may be prevented from competing with your former employer and/or prevented from soliciting any patients previously treated by you. In addition, the Royal College of Dental Surgeons and Ontario Dental Association have developed guidelines with respect to the handling of patients when dentists leave their existing practice to either work elsewhere or to start their own practice.

Based on the foregoing, it is important to discuss this issue with a lawyer as soon as possible.

How Long Does it Take to Complete the Purchase of a Dental Practice ?

Many dentists considering to purchase a practice are currently practising at an existing clinic. As such the purchasing dentist would like to complete a purchase as soon as possible to avoid as much down time between their current practice and new practice. Although both the purchasing dentist and the selling dentist are usually anxious to complete the transaction, it is important that sufficient time be allocated to properly do the work necessary to successfully complete the transaction. In order to do a proper and complete job the minimum amount of time required to complete the legal work for a straightforward transaction is approximately eight to twelve weeks. Complicated transactions may require more time. The entire process from the time you consider to purchase a practice to the time you are practising in your purchased practice may require up to six months or longer.

Often the most time consuming aspect of the completing the legal work is dealing with and negotiating with various third parties such as landlords, lien holders, and financiers. Often these parties have different agendas than the buyer or the seller and they are often known to use various negotiating tactics to take advantage of the anxious purchaser or seller. Purchasers and sellers usually fail to anticipate the use of these negotiating tactics which often leads to increased costs, time delays, and great frustration for both the purchaser and seller.

Based on the foregoing it is imperative to speak and meet with us as soon as possible so that negotiations can be commenced as soon as possible with third parties including landlords, lien holders, and financiers. It has been our experience that purchasers who avoid contacting a lawyer until just before the anticipated completion date will ask the lawyer to rush the completion of the purchase of a practice. In such a case, the purchaser often finds third parties such as landlords, lien holders, and financiers using their negotiating position to take advantage of the situation.

What Can I Expect From the Seller ?

Sellers are generally not as concerned as a purchaser with respect to the well-being of a practice after the completion of a transaction. As a result, a seller sometimes puts pressure on a purchaser to complete a transaction as soon as possible and to ignore any potential problems that have been raised by us as lawyer for the purchaser. Therefore, as a purchaser it is important to be aware of undue influence from the seller and to carefully consider the advice from your professional advisors. It is important to remember that the legal obligation of the lawyer for the seller is to consider only the best interests of the seller. Similarly, the legal obligation of the lawyer for the purchaser is to consider only the best interests of the purchaser. This effect of this obligation is that a lawyer for one party does not consider the interests of the other side unless it is beneficial to his/her own client.

What Non-Legal Issues Should I Consider ?

In addition to legal issues, you must address other matters including: (i) financing; (ii) marketing; (iii) staff and/or associates. In addition, the acquisition of additional equipment may be desired. We should be consulted when dealing with these other matters because in each case legal issues will arise. Listed at the end of this article are valuable references on the internet to assist the dentist with (i) financing; (ii) location; (iii) marketing; (iv) staff and/or associates; and (v) practice management.

About The Author

Peter Cusimano is experienced in the purchase of dental practices and would be pleased to meet with you and represent you as your professional legal advisor.

Peter Cusimano practices business law in Toronto, Ontario.

by: Jacqueline M. Carolan and William R. Wanger

Today`s changing and uncertain health care environment is causing an increasing number of practitioners to make the transition from owner to employee. Dentists are no exception to this trend. In addition to familiar considerations, such as retirement, disability and relocation, some of the new factors driving dental practice sales include reduced fee for service reimbursements, risks associated with capitation contracts, competition from larger providers and increased administrative burdens.

Evaluate Your Practice
If you are considering the sale of your dental practice, you should assemble a team of trusted advisors (your counsel, your CPA and perhaps a colleague with experience) to assist you in analyzing practical issues and business risks. Prior to entering into discussions with a prospective purchaser, you should identify the attributes that make your practice valuable. Is it your revenue, reputation, staff, the size or quality of your patient base, specialty or location that makes your practice attractive to a purchaser? Placing a dollar value on your equipment, office supplies, lease and other tangible assets is not a terribly difficult exercise. But valuing “intangible” assets is not an exact science, and the amount a purchaser will pay for intangible assets may well constitute a significant portion of the purchase price. Equipment and office supplies can be purchased anywhere. It is the opportunity to earn money from your practice that will interest a purchaser.

Payment Considerations
When negotiating the sale of your practice, the most important consideration is when and how you will be paid. If the purchase price is to be paid in a lump sum at the closing, there is little risk from the standpoint of the seller, although tax considerations must be examined. On the other hand, if all or a portion of the purchase price will be deferred, you must take the necessary steps to protect yourself. At closing, the purchaser must give you a note for the balance of the purchase price, and agree to a fair interest rate and installment payments. Issues to be negotiated include whether the note will be guaranteed by a principal of the purchaser (and his or her spouse), whether the note is secured by some or all of the assets being sold, whether the note is subordinated to the purchaser`s purchase money debt, other bank debt or other business obligations, and your remedies should the purchaser default on the payment of one or more installments.

Accounts Receivable
The accounts receivable of a dental practice is an asset that often has significant value at the time of sale. If receivables are included in the sale of the practice, you should be paid — at the closing on the sale — an amount equal to the present value of what will ultimately be collected, less reasonable collection costs.

The purchaser may be concerned as to whether your collectible accounts receivable estimate is accurate. A purchaser may demand a reduction in the sale price in order to protect against the risk of non-collection. The reduction in sale price proposed by the purchaser may be so significant that you decide not to sell your accounts receivable to the purchaser.

Parties often negotiate procedures whereby the seller will attempt to collect the practice`s pre-sale receivables after the sale is consummated. There are problems with this approach as well, however. Patients who no longer see you may lose their incentive to pay you, and the purchaser may not want you to “hound” his new patients for payment. In addition, unless the sale agreement provides for it, you may no longer have access to the practice`s computer system and billing personnel who had previously handled this function for you. If you do not sell your receivables to the purchaser, the sales agreement should provide for your continued use of the practice`s computer system and office staff.

Other Assets
Your practice`s tangible assets, such as examining room tables, equipment, furniture or real estate will also typically be included in the sale, and can be valued relatively easily by reference to market prices or replacement cost.

Do not forget to specifically exclude from your sale agreement items that you wish to retain. Items that are typically excluded from a sale of a practice include cash in banks, pension and profit sharing plan benefits, insurance rebates, automobiles and personal items used by the seller in his or her personal office (such as a desk, chair, computer, artwork, and “memorabilia” of the practice).

Covenants Not to Compete
Your competition with the purchaser after the sale could render the intangible assets he or she purchased worthless. Therefore, a purchaser will typically ask the seller to sign a “covenant not to compete,” also called a “restrictive covenant.” No purchaser wants to risk the prospect of your taking back patients or diverting patients to other practices. In addition to prohibiting you from soliciting your former patients, a typical restrictive covenant might also bar you from soliciting former staff members.

The laws of most states require restrictive covenants to be reasonable in terms of duration (one to three years is acceptable in most jurisdictions) and geographic area (the area from which your practice derives substantially all of its patients), in order to be enforceable. Some courts consider restrictive covenants to be restraints on trade and will not enforce them. If a court finds that a restrictive covenant is overly broad, the court may re-write it or even toss it out entirely.

Do not minimize the importance of negotiating the terms of the restrictive covenant. Imagine yourself trying to open a new office in a few years: Where would you want your new office to be located? Depending on the nature of your practice, the size of your marketing area, and the extent of your specialization, you may want to retain the option of opening an office in another town or state, or engaging in a practice or business that is not directly competitive with the practice you sold. You may also want to bring some of your former staff members with you and employ them in your new business. Since many restrictive covenants prohibit the seller from soliciting or employing former employees for a certain length of time, the breadth of the restrictive covenant must be carefully reviewed. For example, if your spouse is employed in the practice as a bookkeeper, you should not be prohibited from hiring your spouse after the sale of your practice.

If the best covenant you can negotiate would still be severely restrictive or would impose intolerable consequences, you might seek to negotiate a provision allowing you to buy your release from the covenant for a reasonable, pre-determined amount of money. Another option would be to include a clause in the sale agreement providing for an opportunity to buy back your practice at an appropriate price under certain delineated circumstances.

Employment Considerations
For whom, when and where will you practice after the sale? If you will work for the purchaser after the sale, your employment agreement is crucial. Are annual pay increases and other incentive compensation benefits (pension plan participation, etc.) built into the contract? Is there an appropriate formula for bonuses? Depending on your age, you may want to secure a long-term commitment from the purchaser. It makes no sense to sell a profitable practice, only to find yourself looking for a new position in a year or so. The purchaser should only have the right to terminate your employment prematurely in the event of a serious violation of the employment agreement.

Other important aspects of your new employment status include the location at which your services are to be rendered; vacation; continuing education and other time off issues; on-call issues; continuing licensure; entertainment; travel and other expense reimbursement issues; administrative duties; and the provision of cell phones, beepers and other perquisites. If you have become accustomed to running your own practice, consider the degree of control you want to relinquish over staffing decisions, equipment purchases and other operational issues.

Be on guard, for even in a situation where you are paid a fair price, obtain fair employment terms and structure the transaction in compliance with all applicable laws, it is possible that you — a former entrepreneur — simply may not be happy as an employee.

Lease Issues
If your office space is leased, that arrangement must be considered as part of the sale transaction. If the purchaser wants your practice to remain in the same location, can you assign your lease? A landlord who is not in some way affiliated with the purchaser may try to increase the rent or otherwise change lease terms, thereby creating an impediment to the sale.

Similar issues arise if you own the building in which your practice is located. If you do not currently have a lease with your practice, you will need one if the purchaser intends to continue to occupy the space after the sale. The purchaser should commit to pay a fair rent for an acceptable minimum lease term. In addition, the lease should allocate between landlord and tenant the duty to pay utilities, responsibility for repairs, maintenance expenditure for the building, the duty to pay insurance, and the duty to pay real estate taxes.

When considering what assets your practice has to sell, remember that a leasing company or equipment manufacturer may actually own some of what you see in your office. Your equipment leases and other agreements should be reviewed to determine your options. The amount it takes to buy out leases will obviously reduce the proceeds of the sale.

Practice Debt
You may still owe money to a lender who financed the purchase price of an item, and to whom you granted a lien on some or all of your assets. Such debts generally must be paid off at the closing, and these debts will reduce the net proceeds of the sale. If the purchaser is to assume some or all of the practice`s debt, then creditors must be contacted and, where necessary, their consent obtained. If you guaranteed the practice`s lease for its office space, its credit card debt, or any other debts of the practice, these guarantees need to be released upon the sale of the asset and/or assumption of the debt to which the guaranty is related. You will have to ascertain whether there are real estate, income, employment, sales and other taxes applicable to the practice which need to be paid in connection with the sale (such as where bulk sales clearance may be required).

Other Practice Obligations
There are certain less intuitive but equally important issues, which must be addressed in connection with the sale of your practice.

The purchaser may ask for an assignment of any contracts your practice has signed. This is a potentially broad area, which could include agreements to perform services, such as anesthesia-related services, software maintenance agreements, telephone and other equipment leases, and billing services agreements. The terms of these contracts need to be examined to determine whether they are assignable, and whether there any conditions which would be imposed in connection with an assignment. The issue of who pays the costs associated with an assignment must be addressed.

Also, be mindful of your obligation to disclose any hidden or contingent liabilities, such as lawsuits in which the practice is named as a defendant.

Tax Considerations
The allocation of the purchase price has important tax implications for both the seller and purchaser of a practice. If your practice is incorporated and is taxed as a “C ” Corporation, there are really two levels of tax to be considered in a sale. If your corporation sells its assets, any gain on the sale will be taxed at the corporate level. When the net proceeds of the sale are then distributed to you, tax is again imposed. In contrast, if your practice is incorporated, but set up as an “S” Corporation (a limited liability company) the sale proceeds and other amounts paid directly to you (such as for your covenant not to compete) may not be subject to this double taxation. Although these amounts, as well as compensation received from the new employer under an employment or consulting contract, are taxed at ordinary income rates (and employment taxes will be imposed on employment and consulting payments), it may still be that more of these dollars will reach your pocket than if these amounts had been first added to the amount paid for goodwill, taxed at the corporate level and then taxed again upon their distribution to you.

Regardless of whether the practice is conducted through a corporation or not, the purchaser will most likely want to allocate the maximum amount possible (consistent with the tax laws) to the assets which depreciate most quickly, such as equipment. If your practice is run as a sole proprietorship or as a partnership, for example, over-allocating to assets which you have depreciated could lead to your obligation to pay taxes on the excess of the amount allocated over the value of those assets on your books. This depreciation recapture results in tax liability to you calculated at ordinary income rates, which are usually higher than the capital gains rates otherwise applicable.

Conclusion
Selling your dental practice forces you to consider numerous legal, tax, estate planning and employment issues. Evaluate the strengths and weaknesses of your negotiating position and clearly discern your needs and goals. The sale of your practice may well be the single largest transaction you ever undertake. Therefore, it is crucial that you understand the tools and techniques available to you, and the legitimate needs and expectations of the purchaser, before you structure the transaction.

About The Author

Jacqueline M. Carolan
jcarolan@foxrothschild.com is a partner in the firm’s Professional Liability and Health Care Law Groups, and chairs the firm’s Pro Bono Committee. She concentrates her practice in the malpractice defense of health care professionals and providers. Jackie represents both hospitals and health care providers, from major entities to smaller agencies, in all aspects of health care litigation.

William R. Wanger
wwanger@foxrothschild.com represents a diverse group of family, professional, franchise and other types of privately-held businesses. His practice consists of counseling his clients on a broad range of topics, especially regarding mergers and other sales and purchases of businesses, succession planning, franchise matters, real estate purchases, sales and financing and other types of sophisticated transactions, agreements and matters. Bill is a member of the firm’s Corporate and Tax Departments and the Technology & Venture Finance Group.

by: Mac Winston

You want to buy your own dental practice? Great! Proceed with caution and follow these seven steps to success.

Having spent the last eight years making over $100,000,000 in loans to dentists for 100 percent or more of the purchase price of existing dental practices, I’ve observed seven key steps that will ensure a smooth transition to ownership.

While acquiring or starting a practice of your own is a powerful dream, and one that easily can become a reality, a few words of caution are in order. First, you should beware of the allure of the sense of autonomy inherent in this dream. As any dentist who has borrowed money to become an owner of a practice will report, there is no such thing as absolute independence. Second, the dream of ownership quickly can turn into the nightmares of bankruptcy, overdrawn bank accounts, disrupted family life, and mental depression when you decide to purchase or start a practice before you are ready. Therefore, working as an associate for two or three years following graduation can be very valuable in terms of sharpening skills and gaining firsthand knowledge of the challenges, benefits, and drawbacks to ownership.

There is less risk in buying an existing practice than in starting one from scratch. So, while there are many situations where a start-up makes good sense, you should thoroughly understand the challenges involved in each process before making a choice between purchasing vs. starting a practice. Now, assuming that you have decided to pursue ownership through the acquisition of an existing practice, let’s go through the seven steps to success in buying your dental practice.

1 — Check Your Credit

Obtain a copy of your personal credit report. You may request a report, free of charge, each year from one of the three major credit-reporting services: Equifax (800-759-5979), Trans Union (800-851- 2674), and Experian (800-682-7654). You need to check the report carefully for derogatory credit notices that may impede your ability to borrow the money needed to purchase a practice. Most credit reports feature a credit rating called a “credit score” that ranks the credit profile of an individual borrower relative to the vast population of individual borrowers in the United States. Your credit score can be negatively or positively influenced by such factors as:

• Late payments

• Delinquent accounts placed with a collection agency

• The number of credit inquiries (i.e., the number of times a credit report on an individual has been ordered by prospective credit grantors during a given period)

• The total balance of credit-card and revolving credit available (it is wise to keep this below $35,000)

• The total balance of revolving-debt usage (this should be kept below $25,000)

• The existence of bankruptcy during the last 10 years

• The dollar amount and number of new debts incurred during the last 18 months

• Any civil judgments outstanding

• Disputed city, state, and/or federal taxes, etc., that have not been paid

If there are derogatory notices on your credit report, you should try to remove them by contacting the creditors in question or asking the credit-reporting service to attach a written explanation, giving your side of the story, to the report. You also might wish to ask the applicable credit-card companies to terminate unused accounts. These efforts can enhance your individual credit score and your chances of obtaining practice financing. To make sure that your actions to improve your score have been effective, go back to the credit-reporting agency and order a new report.

2 — Select Your Market

Most dentists gravitate toward the heavily populated urban areas and closely linked suburban markets (e.g., the metropolitan areas of Chicago, Dallas, Atlanta, Denver, Phoenix, Los Angeles, and St. Louis). They do this to be close to high school or college friends, family, major entertainment and shopping centers, the dental school they attended, major airports, and the like. Rural markets are chosen less frequently because they are “out there”…where there might be few of the most desirable characteristics of metropolitan areas.

Many rural practices do, however, offer a significant investment opportunity not available in most urban and suburban practices. The cash flow of a dental practice generally improves (i.e., more money is made doing the same work), and the market value (sales price) generally declines as the practice moves away from an urban center. Cash flow improves because of reductions in rent and staff expense. Market value declines because there are fewer buyers for rural practices.

This gap between a dental practice’s economic value (i.e., the practice’s value as a generator of cash flow into the future) and its market value represents the investment opportunity that often is not available in the urban and suburban practice. Dentists in rural markets often realize a larger disposable income, a larger personal savings rate, and an earlier retirement than their counterparts in urban and suburban practices.

3 — Get Help from a Practice Broker

Since most dental practices are sold with broker assistance, serious buyers will want to get in touch with a broker active in the markets where they want to practice. Brokers typically work in limited geographical areas where they have a unique familiarity and understanding of the local dental market.

They charge a commission or a fee, which is paid by the seller, for the sale of the practice. With the advent of the Internet, a dentist can shop broker listings of practices all over the nation. There also are listings of practices for sale in the major dental Literature and local dental-association publications.

4 — Get Professionals on Your Team

Once the desired market has been identified and the ideal practice located, it is time to enter into an intent-to-purchase agreement. Before you sign that agreement, however, you should develop a relationship with an attorney and an accountant. These professionals need to review the agreement and assist you with due diligence on the practice.

5 — Obtain Insurance as Loan Collateral

You need to find a life- and disability-insurance agent experienced in working with dentists acquiring dental practices. Life and disability insurance is necessary at this point because most financiers will require this type of coverage as collateral for their loans. You will be able to deliver approved coverage as collateral to the lender more quickly if you submit an application for coverage and complete the insurance company’s medical exam in advance of your application for financing.

The most frequently used life-insurance product for loan collateral is term life. The most frequently used disability products for this purpose are income disability, reducing-term disability, and disability overhead. The number of disability-insurance providers has declined significantly over the last five years, so coverage is more difficulty to find. Be sure, however, to select an agent experienced in structuring and procuring disability coverage for the purpose of collateralizing a business loan.

6 — Arrange for Financing

Brokers, accountants, and attorneys usually can make recommendations on suitable lenders to consider. Most lenders specializing in practice-acquisition financing will fund 100 percent of the practice- purchase price, plus all related working capital and transaction-cost needs. Lender policies can vary widely in the length of the approval process, the interest rate and terms of the loan, and whether there are penalties for early repayments.

After you decide on a lender, obtain a loan application. Complete it in its entirety and return it along with:

• A copy of each of your personal tax returns for the last three years

• A personal resume

• Copies of the last three years’ tax returns and most recent interim-operating statement for the practice in question

• Any information the broker may have produced in the process of valuing the practice

• An explanation of derogatory notations in your credit report

• A statement of your annual living-expense needs (if this is not included on the loan application form)

• A short narrative regarding your transition plans for the practice during the six to 12 months following the acquisition closing Once the lender makes you a financing offer, review it very, very carefully – including the fine print.

You will want to look for two things in particular:

The Annual Percentage Rate (APR) – The APR is a measure of the total costs of the financing offer. Such costs include the interest rate paid over the life of the loan, any fees paid, and any interest to be paid on interest as a result of having no payments or graduated payments during the first few months of the loan.

Penalties for Early Repayment – Many lenders will charge a penalty if the loan is repaid during the first few years of the loan or at any time prior to the scheduled maturity of the loan. It is not unusual for penalties of $30,000 to $40,000 to be levied on loans of as small as $150,000.

Another thing to check carefully is the amount of life and/or disability insurance required as collateral. (On life insurance, the requirement usually is an amount equal to the loan total. The disability requirement typically is no less than 80 percent of the loan payment.) Relay these amounts to your insurance agent as soon as possible, so that approval for coverage can be completed.

The lending offer should include an amortization schedule depicting the monthly payments of principal and interest over the life of the loan. Review it and make sure that your monthly loan payment will leave you with sufficient funds to live on, given the historical cash flow of the practice. A practice purchased within the typical market range of 60 to 980 percent of its historical gross receipts will support the repayment of acquisition debt in seven years while paying you a reasonable wage relative to the dentistry you perform.

7 — Negotiate the Purchase Agreement

So, you have accepted a financing offer. Now it’s time to team up with your accountant and attorney to negotiate the purchase agreement with the seller of the practice. You should arrange for your insurance agent to have contents, liability, and malpractice coverage in force for the practice following the closing of the sale. (Most dentists have malpractice insurance, but those who do not certainly will be required by the lender to purchase it.)

Once the purchase agreement is final, it’s on to the closing and, after that, celebrating the acquisition of your own practice

About The Author

The preceding article appeared in the May 1999 issue of Dental Graduate. The author, K.M. “Mac” Winston, is executive vice president and chief credit officer for Professional Practice Capital, a Texas- based lender that serves the professional marketplace nationwide. Mac has over 20 years of banking experience and has specialized in lending to dentists and medical professionals since 1992. He may be reached at 800-456-2779 or mac@ppcloan.com