Dental Practice Sales
FAQs (California)
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California Dental Law |
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Disclaimer: The contents of this website are not intended to be, nor shall they be considered, legal advice or legal opinions. Please see your 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 training, continuing education and experience necessary to safely complete your transaction. It isn't so much the contract terms that are a problem, but the deeper implications of those terms, and the contract terms that are NOT in the document. Furthermore, THERE IS NO SUCH THING AS A STANDARD FORM CONTRACT; every document will be for the benefit of the party who drafted it. Finally, just as medical advances change treatment plans, legal developments change contract strategies. I have written an article on these and related issues in the June 2008 California Dental Association Journal. Q: When in the sale process should I hire you as my attorney on a dental practice sale or purchase? Your primary goals in hiring an attorney are to ensure the sales documents are completed properly and that the sale closes on time, but at the same time not to undergo 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 signed. That letter will, or should, contain specific deadlines for the Buyer to complete the loan application, obtain loan approval, and complete due diligence review of the practice, as well as many other important issues. Once the Letter of Intent is signed, it becomes difficult to change those terms in the full contract. Using a Letter of Intent also provides you attorney representation, at less than the full practice sale price, to confirm the more important terms: price, method of payment, non-competition provisions, transition provisions, and deadlines. If the letter of intent has been signed, I tend to recommend that buyers wait to hire me until the buyer has obtained loan approval and has completed the due diligence review of the practice. For sellers, I am more ambivalent - their legal work can more easily be reused for a new buyer (saving attorney fees) so I can also be hired immediately after the letter of intent is signed. Significant contract drafting issues and landlord negotiations also need completion, and these can take a significant amount of time. Buyers and sellers both need to KEEP IN MIND that waiting until the loan approval and due diligence issues are completed before hiring me could significantly delay the closing, resulting in lost loan approvals, missed vacations or moves, or circumstance changes that prompt buyer OR seller 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 I have seen one delay of six months (lender approval issues and a selling dentist who died during the process). The main source of delay, if any, tends to be the landlord. There may be existing lease terms that the buyer will need amended before the landlord even KNOWS about the proposed sale. The seller may want the negotiate the lease assignment to include 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. Please consider carefully the date you hire me to start work on your sale or purchase. Keep in mind that the attorney fee is a relatively small percentage of the total practice value, and delays can cause the sale to fail. Q: Is joint representation for a practice purchase advisable? Joint representation is never advisable if one or the other potential client is uncomfortable with joint representation. If the parties are comfortable with the idea, joint legal representation is allowed under many state's laws if the clients have received proper disclosure of the potential risks (known and unknown) and have agreed to do so before joint representation begins. 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! Therefore, I do not consider it generally advisable for a buyer and seller to be jointly represented. However, I believe joint representation can work well when (1) the seller is retiring, (2) the sale is to the seller's child or a 10 year (or greater) associate, and (3) 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 renewed competition is almost non-existent. In this case, an experienced dental transition attorney will be able to propose a set of balanced and pragmatic contracts. Even in this situation, the two sides should discuss the tax allocation with their respective CPAs before coming to a final decision on that issue. On a related note, joint broker representation has additional, greater pitfalls than joint legal representation - for details, see my article on Dual Representation Brokers. Partnerships and corporations tend to have fewer conflict issues, since operations and procedures in each will apply equally to the partners or shareholders, and attorneys tend to represent the organization only in this scenario to avoid a literal conflict. However, some clients will choose to hire separate counsel in addition to the joint counsel, particularly if the client will hold a minority interest in the organization and thus less able to prevent detrimental changes. 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. Q: When, in the process of buying a dental practice, should I incorporate? There are reasons to incorporate both before and after buying the dental practice. Reasons to incorporate beforehand include: (1) preventing personal liability from the practice while you are unincorporated and on contracts signed in your personal name, (2) avoiding cost and delay of completing the name change on letterhead, signage, bank accounts and insurance panels. Reasons to incorporate after the purchase include (3) you will receive no significant or immediate limited liability or tax benefits by incorporating, (4) your practice purchase loan will be your personal debt, and therefore can be treated as "basis" for the purpose of deducting losses in an 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. However, your individual circumstances should be discussed with me and your CPA before making this final decision. Q: What should I name my professional corporation? You must use the last name(s) of one or more of the owners, plus some corporate designation, as part of the corporate name. I strongly recommend that a one or two person corporation use the full professionally licensed name(s) followed by "Inc." to avoid confusion with the dental board and dental insurance carriers. If you want to use a fictitious business name for the practice, you can request a permit to do so from the California Dental Board after the corporation has been formed. See California Business & Professions Code §1701, §1701.5 and §1804. Q: May a dental practice use a fictitious business name or trade name? Incorporated practices, or unincorporated practices of three or more dentists, may apply to the California Dental Board for a permit to use and operate under a fictitious business name. However, that fictitious business name (and the corporation's name, if incorporated) must contain the last name of at least one of the dentists in the corporation AND the phrase "dental group," "dental practice" or "dental office." Unfortunately, these restrictions do not allow for an easily marketable name. Get the application by clicking HERE or by calling 916.263.2300. See California Business & Professions Code §1701. A general fictitious business name application can be filed by ANY business in the county where the business operates, without California Dental Board review. This is probably what most of these dentists have done. However, it is certain that they have not attempted to register that exact name with the California Dental Board. I have spoken to the California Dental Board directly on this issue, and was told that while the Board does not go out looking for fictitious name violations (due to staffing shortfalls), it will take action against the dentist if a complaint is made and an illegal name is discovered during that investigation. I have also heard second hand that the Board may consider these restrictions to be unenforceable. Except under very limited circumstances, non-dentists are not allowed to own any part of a dental practice. See California Corporations Code §13401.5. One exception allows the dentist to hire an MSO to provide professional support services. These can include such services as office space and equipment rentals, accounts payable and billing services, scheduling, traditional marketing (but see below about patient referrals), and staffing of non-licensed personnel, SO LONG AS the compensation arrangement is not calculated, directly or indirectly, to the profitability of the professional practice. For example, an MSO that charges a dentist for such services with (a) a flat monthly rate, or (b) a set percentage of expenses regardless of income, is perfectly legitimate. A dentist may also hire an MSO if payment "… is based on a percentage of gross revenue or similar type of contractual arrangement … if the consideration is commensurate with the value of the services furnished or with the fair rental value of any premises or equipment leased or provided by the recipient to the payer." See California Business & Professions Code §650. It is my opinion that any payment arrangement based on gross revenues almost certainly does not meet this standard, particularly when the practice is profitable. While I am aware that arguments could be made in individual circumstances that the "gross receipts" approach is legal in specific circumstances, and although other attorneys may disagree with my position, I am not willing to do any legal work on a "gross receipts" MSO since I believe it could put your professional license at risk. Q: May I pay commissions or referral fees to dentists or non-dentists for patient referrals? A dentist may not pay anyone for patient referrals. The intent of this rule is to prevent "cappers" (pardon the expression) from drumming up business and being paid a fee for bringing in a patient. It is my opinion that traditional marketing services (print, radio or TV advertisements, mass mailings, publicly available coupons) are not prohibited by this rule, but I have found no legal authority addressing these matters. See California Business & Professions Code §650. Q: Can a landlord demand a portion of the sales price when I sell my dental practice? Yes, a landlord may demand a portion of the sales price as a condition of permitting assignment of the lease to the buyer, BUT only (1) when the specific right to make that demand is in the lease, and (2) to the extent that the lease is below market rate for the term being assigned to the buyer. Please see my Avvo Legal Guide: California Business Sales: When the Landlord Demands Part of the Sale Price for details. |
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