Welcome back to our blog series on Mergers and Acquisitions in the dental space. Stay tuned for Parts 2b and 2c!
At this point in the transaction, we’ve negotiated and signed a Letter of Intent (“LOI”). After the LOI is signed, the buyer and seller will begin the due diligence process. From our previous blog in Part 1, we observed that typically the due diligence period for a dental practice will last anywhere from 30 to 90 days.
Due Diligence Begins
The buyer will want to conduct a deep dive into the practice's financial statements, including profit and loss statements, balance sheets, and tax returns from the past 3-5 years. This allows the buyer to understand the practice's revenue, expenses, and profitability. The buyer may also request payroll records, vendor invoices, and bank statements to verify the information. In addition to the financials, the buyer will review the practice's patient records, insurance and payor contracts, employee files, equipment and asset lists, and any outstanding loans or leases. This helps the buyer identify any potential liabilities or areas that need further investigation.
The seller plays a crucial role in facilitating the due diligence process. They should be prepared to provide the buyer with all relevant practice documentation in a timely manner. This includes making the office and staff available for site visits, organizing financial records, and answering any questions the buyer may have. Transparency is key - the seller should disclose any issues or areas of concern upfront, rather than risk them being discovered later in the process. This builds trust and can help the transaction move forward smoothly.
As the buyer reviews the practice information, they may uncover areas that require further investigation or negotiation. For example, if the financial statements show a declining revenue trend, the buyer may request a more detailed analysis or seek a reduction in the purchase price. Another issue that comes up in just about every dental sale during due diligence is an unterminated Uniform Commercial Code (“UCC”) lien. Most dental practices will take out loans for equipment and use the corresponding equipment as collateral for the loan. The lending institution will file a UCC lien against the equipment in the event the dentist defaults on his/her loan obligations. Once the loan is paid off, the lending institution is supposed to file for a UCC termination with the state the practice is located in. More times than not, the lending institution fails to do this, so it appears that some of the equipment and assets of the dental practice have a lien against them. Since most dental sales take the form as an asset purchase (see Part 1), the buyer’s bank extending a loan for the purchase of the practice will require any outstanding liens on any of the assets to be paid off at closing.
After the due diligence is done and the parties decide to proceed, the next big agreement (assuming an asset deal) is the Asset (and Goodwill) Purchase Agreement (“APA”). Again, just like with the LOI in Part 1, not all APAs are laid out the same, but all (well-written) APAs will contain similar language. Let’s dive into the meat and potatoes of a dental practice purchase/sale!
The Asset (and Goodwill) Purchase Agreement
Purchase of Assets
We first outline what types of assets are included in the sale. This will include items like all the dental equipment of the practice, the supplies on hand at the time of closing, the right to the use of the practice’s telephone number and website address, any contracts, purchase orders, or sales orders that the buyer is assuming, patient records, and the name of the practice (the goodwill of the selling dentist).
In outlining the assets, we want to address work in progress and maintenance of the assets. We will clearly need to outline the expectations for any dental work that is in progress and will not be completed by the closing. If the seller plans to stay on after closing to help the buyer (which is usually the case), it might be best for the seller to take on these clients for an easier transition. Along these same lines, if the seller has received any payments for prepaid patient credits, these will need to be transferred to the buyer. There should also be language regarding the maintenance of the assets (reasonable maintenance standard).
This section in the APA will also outline assets that are not included in the sale of the practice. This will include items like any cash the seller has, any pension funds, corporate records of the seller, and any security deposits.
Assumption of Liabilities
Since most dental practice sales are asset deals and since we are looking specifically at an APA in this blog post, this section is typically brief. It will provide that the buyer is not assuming any liabilities of the seller and any liabilities the buyer does assume will be explicitly stated. The assumed liabilities are usually things along the lines of contracts for utilities or services that the buyer will want to continue after closing. One important note for this section is that it should include some sort of risk of loss clause. This clause will state that in the event there is any loss, damage, or destruction of assets prior to closing, the buyer has the option to negotiate a lower sales price based on the damage or may opt out of the purchase completely.
Purchase Price
The section should only be a sentence or two and it will state the purchase price for the practice the buyer and seller ultimately agreed upon after due diligence. The section will also outline how funds are to be paid at closing. Adjustments to the purchase price at closing are often made for things like extinguishing any outstanding liens against the assets, broker’s fees, and prepaid expenses.
Allocation
As we discussed in Part 1, the allocation of the purchase price can sometimes be somewhat of a sticking point for parties. This section will reflect how the purchase price is be allocated between dental equipment and furnishings, dental and office supplies, and goodwill of the practice. It will also include language that both parties agree to file their respective tax returns in accordance with such allocation.
Closing
This section is usually just a sentence and will state the day, exact time, and location of the closing.
These might seem like boilerplate and mundane language, but even introductory sections like this can have massive consequences if not drafted and negotiated properly. Buying or selling a dental practice is one of the biggest decisions and actions you will take in your like, so please do yourself a favor and meet with an attorney to draft/review and negotiate your dental APA.
Next up - In Part 2b, we will look at the next big sections of the APA that the parties will draft and negotiate (assuming an asset transaction). These sections are all about protecting the respective parties in the event something goes wrong.
To learn more about an APA or to schedule a complimentary 30-minute consultation, please contact Stock Legal.
