Dental Practice Sales
Dental Practice Transitions
Why do I need a practice transition attorney for my practice transition?
When should I hire a practice transition attorney for my practice transition?
Is joint legal representation advisable?
Are dual representation brokers recommended?
When should I form a corporation/PLLC for my practice transition?
What should I name my dental corporation/PLLC? Can I use a fictitious name?
Can a Management Service Organization (MSO) own part of a dental office?
May I pay commissions or referral fees to dental marketers?
Disclaimer: No attorney client privilege is created by posting this information. Law changes frequently and varies by jurisdiction. This information is general in nature, may not apply to different or additional circumstances, and does not substitute for legal advice from a state licensed attorney. Please retain a qualified state-licensed attorney for thorough and reliable treatment of the subject.
Although dentists and brokers are intelligent and well trained in their fields, they do not have the legal background necessary to safely complete the transaction. It isn't so much the contract terms themselves that are a problem, but the deeper implications of those terms, and the terms left out of the contract (whether intentionally or otherwise). Even a simple adjective, or a single comma added or omitted in the wrong place, can completely change the legal meaning of a sentence.
Furthermore, there is no such thing as a standard form contract; every document in existence is drafted with a particular perspective in mind. Finally, just as medical advances change treatment plans, new legal developments and changes in the professional environment require new contract strategies. Please see my article on these and related issues in the June 2008 California Dental Association Journal.
You need an attorney to ensure the contracts submitted and signed protect you properly, but at the same time allowing the sale to close on time and not incurring expenses until you are relatively certain the sale can be completed. Unfortunately, waiting to hire an attorney when the sale is certain will frequently prevent the sale from closing on time.
I generally recommend that you hire me to complete/review the Letter of Intent before it is submitted to the other side, and definitely before it is signed. That Letter generally will contain specific deadlines for buyers to obtain loan approval and complete due diligence review of the practice, among others. It also generally contains the main deal points, such as price, method of payment, non-compete time and distance, transition terms, and seller-as-landlord lease terms. The Letter you receive from the broker or other party may propose requirements that your own experience level doesn't recognize as extraordinarily unreasonable. Once the Letter is signed, it becomes difficult to change those terms in the full contract, so attorney representation at this early stage can be extremely important.
If the Letter of Intent already has been signed, I tend to recommend that buyers wait to hire an attorney until the buyer has obtained loan approval and has completed its due diligence review. For sellers, their early legal work mostly can be reused for a new buyer so I can be hired immediately. Significant contract drafting issues and landlord negotiations also need completion, and these can take an enormous amount of time. Waiting to hire me until after due diligence is complete can significantly delay the closing, resulting in lost loan approvals, missed vacations, forced moves from your former residence, or circumstance changes that prompt the other party to refuse to proceed with the sale. In my experience, it is rare for a sale to not have at least one week worth of unexpected delays - and for sales that actually closed I have seen delays of six months on more than one occasion.
The main source of delay tends to be the landlord. There may be existing lease terms that the seller needs amended before the landlord even KNOWS about the proposed sale. The seller also may want to propose a lease assignment with specific seller protections (infrequently granted). Keep in mind that the landlord has no obligation to rush the sale to completion, and absentee landlords or committee members can cause even a friendly assignment scenario to drag on for over a month. The other party's attorney, non-dental industry lenders/ escrow companies, and even the client himself (by not responding to attorney/lender requests in complete and timely fashion) can cause significant delays.
Joint legal representation is never advisable if any of the parties are uncomfortable with joint representation. If the parties are comfortable with the idea, joint legal representation is allowed under many states' laws if the clients first have received proper disclosure and acceptance of the potential risks of joint representation. The question then becomes: is joint representation advisable in your particular situation?
Practice sales have significant opportunities for conflicting issues: non-competition, retreatment, representations, and tax allocations being first among many. In fact, many conflicts may not appear until negotiations have progressed; conflicts can even first appear after the sale has closed! I believe joint legal representation works well when (1) the seller is retiring without leaving the community, or the sale is to the seller's child or a long term associate, and (2) both sides express a genuine desire that the contracts be drafted in a fair and nonpartisan manner.
In these cases, a significant level of trust and understanding has developed during the relationship and the threat of deception or renewed competition is almost non-existent. An experienced practice transition attorney then will be able to propose reasonably balanced and pragmatic contract terms. Even in this situation, the two sides should discuss tax allocation of the purchase price with their respective CPAs before coming to a final decision on that issue.
Partnerships and corporations tend to have fewer conflict issues, since (1) operations and procedures apply equally to the parties, and (2) the success of the long-term working relationship that it not only appear fair, but in fact be fair. Nevertheless, conflicts exist when one party will carry a minority interest for any length of time or is very near retirement. Some clients even hire separate counsel in addition to joint counsel.
I do not recommend joint counsel for stand-alone independent contractor agreements. There are too many conflicting issues, and too much room for future disagreement, to consider joint counsel a viable option.
I do not recommend dual representation brokers, whether for sellers or buyers. Although dual representation brokerage is allowed under many states' laws, commission-based payments (payment is due only if the sale closes) creates a conflict of interest for the broker, a conflict that does not exist with dual legal representation (payment is due whether or not the sale closes). For details, see my Note on Dual Representation Brokers.
There are reasons to form a corporation/PLLC either before and after buying (into) a dental practice. Reasons to do so beforehand include preventing personal liability from the practice while you are unincorporated and on contracts signed in your personal name, and avoiding cost and delay of completing the name change on letterhead, signage, bank accounts and insurance panels. Reasons to incorporate after the transition could include the lack of significant or immediate limited liability or tax benefits from incorporating at the time of purchase, or to obtain your acquisition loan personally in order to treat the loan as "basis" in a future S corporation. The right answer may even be to incorporate before the purchase, but purchase the practice in your individual name and immediately assign the practice to your new corporation/PLLC. Your individual circumstances should be discussed with your CPA before making this final decision.
Rules are extremely specific and vary state to state. Some states require you to use only your licensed name and some indication of corporate status in the corporation name, some don't allow fictitious corporate names but permit the corporation to separately apply for a fictitious name, and some permit fictitious corporate names with or without separate registration. Your local Dental.Law.Pro™ attorney will confirm your state's requirements when incorporating or forming your PLLC.
IMPORTANT: Before spending money on a proposed fictitious business name, confirm that the name is protectable and available: please see my Note on Safely Choosing a Tradename for your Business. In general, the first to actually use a name in the relevant locale has rights in that locale. Federal trademark is a major exception: once the filing is made, no new use of the name in the same business classification may be made anywhere in the United States.
The law here is very state specific, though the tendency is to allow non-dentist ownership of dental practices with specific limitations. Some states ban MSOs completely, some allow variations such as requiring limited participation and only by other dental/medical licensed personnel, some allow their existence but ban enforcement of their contracts, and other states permit non-dental ownership without restrictions. Regardless of legality, I strongly disapprove of non-dental ownership in dental practices, since the dentist will be the one subject to discipline for the MSO's professional decisions. While MSO contracts specify that only the dentist makes professional/clinical decisions, the MSO does make professional/clinical decisions when it chooses vendors for supplies, equipment and lab services, determines insurance coding, engages in hiring and supervision of licensed personnel, and claims control over patient charts.
Dental.Law.Pro™ attorneys do not provide MSO work to other than licensed dentists, and even then the recommendation almost always will be to not participate.
It is extremely unlikely that referral fees are permitted in your state. Of special note, use of coupon advertisers that are paid per patient treated (or each patient buying a coupon) will almost certainly be considered an illegal referral fee once the dental boards catch up to that reality. Advertisers that are paid for mailings, not patients treated, are unlikely to be considered a violation.
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