Debugging The Myths of Practice Transitions/Selling Your Practice Part 4 - Transition Planning Requirements

In this final article of our series, I will summarize and outline what is needed and what to expect when buying or selling a dental practice. Having covered the timeline myths, advisory team importance, and valuation science in our previous articles, we now turn to the practical requirements and documentation needed for a successful transition.

TIME: Managing Timeline Expectations

The time it takes to sell a dental practice can be from three months to three years. A lot of the timing issues depend on the market demand in a particular area. It is interesting that those states that have opened up their borders to reciprocity generally have a much shorter turn-around time for those sellers than those that are restricted to state licensure issues.

VALUE: The Foundation of Every Transition

The first step in any transition is determining the value of the practice. I have discussed this extensively in Part 3 of this series.

FINDING A BUYER: From Identification to Negotiation

Assuming the value of the practice is acceptable, now you need to find a buyer. Very often, this step happens unexpectedly, and you need to backtrack to get the appraisal done. In any case, once a buyer has been identified, the negotiation process begins.

This process can be simple or complex, friendly or hostile; but at some point, you will either agree on the basic terms and conditions, or you will not. Because of the dynamics of a practice sale, all of the terms and conditions will not be agreed to in the beginning because there are too many issues to resolve.

INITIAL AGREEMENT: The Four Critical Elements

The four issues that should be agreed to in the beginning are:

Once these terms and conditions have been agreed to, we have a meeting of the minds on these issues. This does not mean that we have a deal; it just means that we have a solid foundation for a deal to work from.

At this point, the seller and buyer should execute a letter of intent (LOI) that outlines the agreed-upon terms and conditions, and the buyer should make an earnest money deposit. From the time of signing a letter of intent to closing usually takes from thirty to ninety days, although the timeline can be stretched if necessary.

DOCUMENTS: What's Required for Different Transaction Types

The documents required for a transition depend on the type of transaction. All mechanisms and advisors should be facilitated by an individual that specializes in the dental industry - the dental industry is very unique and has nuances that are specific to dentistry.

Outright Sale Documents

• Purchase and Sale Agreement (PSA) or Asset Purchase Agreement (APA)
• Restrictive covenant and/or non-solicitation agreement
• Lease assignment
• Bill of sale
• Closing statements

Corporate Buy-in Documents

• Stock purchase agreement
• Revision of corporation shareholder agreement
• Board of directors minutes
• Employment agreements for each dentist

Buy-in with Defined Buyout

Requires the same documents as the buy-in, but also provides for the obligation, options, or rights of first refusal for the buyout. These provisions may include formulas or actual numbers for the purchase price, time frames, payment terms, and so on.

KEY DOCUMENT DEFINITIONS AND FUNCTIONS

Confidentiality Agreement (NDA)

Often required by the seller before identifying a practice and providing proprietary information. This is a legal and enforceable agreement that can have serious financial implications if damage occurs to the practice because information is distributed inappropriately.

Letter of Intent (LOI)

Usually a nonbinding agreement that describes the basic terms and conditions of the transaction. Should include the agreed-upon purchase price, method of payment, restrictive covenant parameters, and closing date, accompanied by a refundable earnest money deposit.

Purchase and Sale Agreement (PSA)

The comprehensive document that identifies all terms and conditions of the sale, including asset allocations, payment terms, restrictive covenant parameters, closing date, and indemnification language. Should be drafted specifically for dental practice sales, not generic business transactions.

Additional Critical Documents

• Reverse Restrictive Covenant: Protects seller when financing buyer - restricts buyer from competing if they default
• Promissory Note: Legal obligation for borrowed money
• Security Agreement: Secures the promissory note with collateral and default penalties
• Closing Statements: Detail money disbursement for tax purposes
• Employment Agreements: Required for any entity structure
• Shareholder/Operating Agreements: Define ownership, operations, and dissolution provisions

ESSENTIAL ADVISORS: Building Your Transition Team

Attorney

Choose a deal maker for transactional work, not litigious work. They should have experience in dental practice transitions, including state dental act requirements and tax laws. Beware of attorneys who want to totally rewrite agreements or renegotiate deals - this kills transactions faster than anything else.

Accountant/CPA

Dental practice sales require different approaches and tax knowledge than typical accounting. A good accountant works creatively within legal bounds to reduce net income for tax purposes, but this can impact practice value. Most are cooperative, but occasionally one may demand structures that severely impact the transaction.

Brokers and Consultants

Like any professionals, there are very good and very bad brokers with many mediocre ones in between. Spend time seeking out ethical brokers who provide incredible value. "The most expensive broker is a cheap broker." You get what you pay for, and choosing the right advisor will more than pay for itself.

Lenders

Establishing the right lending relationship determines loan terms including interest rate, payback period, borrowing amount, and future capital availability. Remember:

• Don't borrow more than needed or extend loans longer than required
• Practice acquisition loans aren't collateralized like home loans
• Less than 0.05% of dental practices fail
• Business loan rates are higher than home mortgage rates
• Use 10-year amortization for cash flow purposes
• Avoid negative amortization with deferred payments

DISSOLUTION PROVISIONS: Planning for the Inevitable

Regardless of the model chosen for multi-doctor relationships, all relationships ultimately dissolve! Whether because of retirement, disability, death, or personal conflicts, all partnerships end.

It is critical that dissolution provisions covering any and all contingencies be defined in depth before the fact and not at the point of dissolution. These provisions should be re-evaluated and assessed every year so that necessary changes can be incorporated into the documents.

FINAL RECOMMENDATIONS

For Sellers:

If you think through your goals and objectives, understand retirement requirements, evaluate your practice honestly, define your exit strategy, and use advisors who understand dentistry and the transition process, you will experience a successful and profitable transition.

For Buyers:

Find the best and most experienced consultants and brokers and trust their knowledge and expertise. By surrounding yourself with the best advisors and listening to their advice and counsel, you will not make a mistake.

The above outlines are general broad strokes from beginning to end and are not designed as a complete blueprint on how to transact a transition. This is one of the biggest events in your life and can have severe consequences if not done well.