MASTERS LAW GROUP

Purchasing a dental practice is a significant decision that involves various legal complexities. As a dentist, understanding these legal intricacies can help you make an informed decision and ensure a smooth transition. This comprehensive guide will cover everything you need to know when buying a dental practice from a legal standpoint.

1. Preliminary Considerations in Buying a Dental Practice

A. Self-Assessment and Financial Readiness

Before you start the process, it’s crucial to assess your professional goals and financial readiness. Ask yourself the following questions:

• Why do I want to buy a dental practice?
• Am I financially prepared for this investment?
• Do I have the necessary skills and experience to manage a practice? If I’m lacking, am I willing to learn these skills?

Understanding your motivations and ensuring you have the financial resources to support your purchase is the first step in this journey.

B. Market Research

Conducting thorough market research is essential. This includes understanding the local market, identifying potential opportunities, and analyzing the competition. Consider the following:

• What is the demand for dental services in the area?
• Who are the main competitors?
• What are the average revenues and expenses for practices in the region?

2. Legal Structure of the Purchase of a Dental Practice

A. Asset Purchase vs. Stock Purchase

One of the first legal decisions you’ll need to make is whether to proceed with an asset purchase or a stock purchase.

• Asset Purchase: In an asset purchase, you buy the individual assets of the practice, such as equipment, patient records, and goodwill. This option allows you to avoid assuming the seller’s liabilities but may require more complex transfer processes.
• Stock Purchase: In a stock purchase, you buy the ownership shares of the practice. This means you assume all assets and liabilities of the practice. This option can be simpler administratively but carries more risk due to the inherited liabilities. It also can carry some negative tax implications and tends to favor the seller.

Contact us for a free consultation to discuss whether an asset or stock purchase is right for your transaction.

3. Due Diligence when Buying a Dental Practice

Due diligence is a critical phase in the purchase process. It involves thoroughly examining the practice to ensure you have a complete understanding of what you are buying.

A. Financial Due Diligence

• Review Financial Statements: Examine the practice’s financial statements, including profit and loss statements, balance sheets, and tax returns for the past three to five years.
• Analyze Revenue Streams: Understand the sources of revenue and identify any trends or anomalies.
• Evaluate Expenses: Assess the practice’s expenses to ensure they are reasonable and consistent with industry standards.

B. Operational Due Diligence

• Patient Records: Ensure that the patient records are complete, accurate, and up-to-date. Ensure there are not outstanding patient credits that may transfer to you in the sale.
• Staff Contracts: Review the employment contracts of existing staff to understand their terms and conditions.
• Equipment and Inventory: Inspect the equipment and inventory to ensure they are in good condition and meet your needs.

C. Legal Due Diligence

• Licenses and Permits: Verify that the practice has all the necessary licenses and permits to operate legally.
• Lease Agreements: If the practice operates in leased premises, review the lease agreement to understand the terms and conditions.
• Contracts and Agreements: Examine all contracts and agreements, including supplier contracts, service agreements, and insurance policies.

4. Valuation of a Dental Practice

Determining the fair value of the dental practice is crucial. Several methods can be used for valuation, we will name just a few here. Keep in mind that the purchase price for the practice will ultimately come down to what a seller is willing to accept to part with the practice and what a buyer is willing to pay.

A. Income Approach

The income approach estimates the practice’s value based on its ability to generate future cash flows. This method often involves calculating the practice’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and applying an appropriate multiplier.

B. Market Approach

The market approach compares the practice to similar practices that have been sold recently. This method considers factors such as location, size, and profitability.

C. Asset-Based Approach

The asset-based approach values the practice based on the fair market value of its assets minus its liabilities. This method is often used for practices with significant tangible assets.

5. Financing the Purchase

Once you have determined the value of the practice, you need to secure financing. Several options are available:

A. Traditional Bank Loans

Many dentists opt for traditional bank loans to finance their purchase. Banks typically require financial statements and financial projections.

B. SBA Loans

Small Business Administration (SBA) loans are another popular option. These loans often offer favorable terms and lower down payments. Typically, it takes longer to close on an SBA loan than a traditional bank loan.

C. Seller Financing

In some cases, the selling dentist may be willing to finance part of the purchase price. This can be advantageous as it demonstrates the seller’s confidence in the practice’s future success.

6. Drafting the Purchase Agreement of the Dental Practice

The purchase agreement is the most critical document in the transaction. It outlines the terms and conditions of the sale. Key elements to include are:

A. Purchase Price and Payment Terms

Clearly state the purchase price and the payment terms, including any deposits or financing arrangements.

B. Representations and Warranties

Include representations and warranties from both the buyer and the seller to ensure that both parties have disclosed all relevant information.

C. Covenants

Covenants are promises made by the buyer or seller. For example, the seller may agree not to open a competing practice within a certain geographic area for a specified period, and not to solicit patients or employees away. Many lenders will require these type of covenants to be included in your purchase agreement.

D. Closing Conditions

Specify the conditions that must be met for the sale to close, such as obtaining financing or completing due diligence.

E. Indemnification Provisions

Include indemnification provisions to protect both parties from potential liabilities arising from the transaction.

7. Regulatory Compliance

A. HIPAA Compliance

Ensure that the practice complies with the Health Insurance Portability and Accountability Act (HIPAA) regulations regarding patient privacy and data security.

B. OSHA Compliance

Verify that the practice adheres to Occupational Safety and Health Administration (OSHA) regulations to ensure a safe working environment.

C. State Dental Board Regulations

Each state has specific regulations governing dental practices. Ensure that the practice complies with all state dental board regulations.

8. Transition Plan

A smooth transition is essential for maintaining patient trust and staff morale. Develop a comprehensive transition plan that includes:

A. Communication Strategy

Communicate the transition to patients and staff in a clear and reassuring manner.

B. Training and Support

Provide training and support to ensure a seamless transition for staff and patients.

C. Continuity of Care

Ensure that there is no disruption in patient care during the transition period. Be sure you have a plan for patients that the selling dentist has treated who may need rework performed by you in the event something fails. Often, the selling dentist may come back to treat the patient and pay for lab fees and other costs included with treating the patient, or the buying dentist may do the work and be compensated by the selling dentist.

9. Closing the Deal

The closing process involves finalizing all legal and financial arrangements. Key steps include:

A. Finalizing Financing

Ensure that all financing arrangements are in place and that the funds are available for the purchase.

B. Signing the Purchase Agreement

Both parties will sign the purchase agreement and its ancillary documents such as an assignment.

C. Transferring Assets

Transfer all assets, including equipment, patient records, and licenses, to the new owner.

D. Notifying Stakeholders

Notify all relevant stakeholders, including patients, staff, suppliers, and insurance companies, about the change in ownership.

10. Post-Closing Considerations

After the purchase of the dental practice is complete, there are several important post-closing considerations:

A. Integration

Integrate the new practice into your existing operations, ensuring a seamless transition for patients and staff.

B. Monitoring and Evaluation

Monitor the practice’s performance and evaluate the success of the acquisition. Make any necessary adjustments to ensure continued success.

C. Legal Compliance

Ensure ongoing compliance with all legal and regulatory requirements to avoid potential issues in the future.

Conclusion

Purchasing a dental practice is a complex process that involves numerous legal considerations. By thoroughly understanding the legal landscape and seeking professional guidance, you can navigate the process with confidence and set the stage for a successful transition. Remember, preparation and due diligence are key to ensuring a smooth and successful acquisition.

In summary, what you need to know when buying a dental practice includes understanding your motivations, conducting thorough due diligence, securing financing, drafting a comprehensive purchase agreement, ensuring regulatory compliance, developing a transition plan, and addressing post-closing considerations. By following these steps, you can make a well-informed decision and achieve long-term success in your new dental practice.

If you are ready to start the process of purchasing a dental practice, you can reach out to us here for a free consultation.