Welcome back to Part 2 of our blog series on Mergers and Acquisitions in the dental space. In Part 1, we explored the Letter of Intent (“LOI”), and in Part 2a we discussed the Asset (and Goodwill) Purchase Agreement (“APA”) with a focus on the purchase of assets and price allocation. In this post, we’ll delve into some of the most critical provisions of the APA: representations and warranties, covenants, and indemnifications.
These sections help protect both the buyer and seller by ensuring transparency, defining obligations before the deal closes, and outlining the responsibilities each party holds after the sale. Whether you’re buying or selling a dental practice, these clauses are essential for risk allocation, information disclosure, and post-closing protection. Let’s take a closer look at how these provisions work and why they matter.
Part 3: The Asset (and Goodwill) Purchase Agreement
Representations and Warranties of Buyer and Seller
In order to induce the buyer into buying the practice and to induce the seller into selling the practice, the buyer and seller will make certain representations and warranties to each other. These are crucial components of the APA for several reasons:
- Risk allocation: They distribute risk between the buyer and seller by specifying which party bears responsibility for various aspects of the transaction.
- Information disclosure: They require the seller to disclose important information about the asset or business being sold, helping the buyer make an informed decision.
- Legal protection: They provide a basis for legal recourse if the statements made prove to be false or misleading.
- Due diligence support: They complement and reinforce the buyer's due diligence process by formalizing the seller's claims about the asset or business.
- Pricing justification: They can affect the purchase price by providing assurances about the condition and value of what's being sold.
- Post-closing protection: They often survive the closing, giving the buyer ongoing rights if issues arise later.
- Negotiation tool: They serve as a negotiation mechanism, allowing parties to address specific concerns and reach agreement on key issues.
Representations and warranties are often used interchangeably, but they have significantly different meanings. Representations are factual statements about past or present circumstances (e.g., "The company owns all the assets listed in Schedule A"), while warranties are promises that those statements are true and commitments to indemnify if they prove false. We can think of representations and warranties like buying a used car. The representation is like the seller telling you, "This car has never been in an accident and has 50,000 miles on it.” Representations state facts. The warranty is like the seller saying, "And I promise that's true. If you find out I'm wrong, I'll make it right."
Covenants of Seller
In addition to the representations and warranties, the seller will also covenant and promise a few additional items that it will continue to do before closing. These are going to be things such as making sure all insurance is maintained, that the seller continues to comply with all laws, that it will not assign any of the practice’s assets, that it will continue to perform all necessary obligations under all binding agreements, that it will not commit any act that impairs the goodwill of the practice, that it will continue to cooperate with the buyer to ensure a successful transition, and that it will make sure that all accrued benefits (vacation, sick leave, pension contributions, etc.) owed to employees and/or contractors will be paid in full at the time of closing.
Arguably the most necessary covenant is that the seller will continue to operate the practice in accordance with sound business practices in a manner consistent with the seller’s historical operating of the practice. This one is crucial for the buyer. The last thing that a buyer wants is for the seller to let his/her foot off the gas and the practice declines before closing. This includes keeping the patient schedule full and maintaining the practice’s current financial condition. Supremely important for any dentists practicing in a specialty, for example oral and maxillofacial surgeons, the buyer will want to make sure the seller is continuing to cultivate, nurture, and preserve intact all current referral sources.
Indemnification by Buyer and Seller
The last important section of Part 3 is the mutual indemnification by both the seller and buyer. Indemnification provisions in the APA are clauses that protect one party from financial losses caused by the other party's actions, inactions, or breaches of the agreement. These provisions are crucial in allocating risk between the seller and buyer. Indemnification provisions are often heavily negotiated as they significantly impact the risk allocation and potential financial exposure for both parties in an APA. Some examples of typical language in a dental APA:
- Seller agrees to indemnify, protect, defend, and hold buyer harmless from any and all damages resulting from (a) the seller’s use or ownership of the assets prior to closing, (b) a breach of any of the representations, warranties, convents of agreement made by seller, (c) and any claims arising out of the APA for any act or omission for which seller is responsible that occurred prior to closing.
- Buyer agrees to indemnify, protect, defend, and hold seller harmless from any and all damages resulting from (a) the buyer’s use or ownership of the assets after closing, (b) a breach of any of the representations, warranties, convents of agreement made by buyer, (c) and any claims arising out of the APA for any act or omission for which buyer is responsible that occurred after closing.
From this blog post, it’s clear that the legal complexities involved in buying or selling a practice go beyond simply agreeing on a price. Representations, warranties, covenants, and indemnifications are key elements that ensure both parties understand their responsibilities and risks, not just before closing, but long after the transaction is completed. Next up – , we will look at the last key sections of the APA that the parties will draft and negotiate (assuming an asset transaction). These last sections address what is required right before the parties close the transaction.
For both buyers and sellers, it’s crucial to have a well-drafted APA that clearly outlines these provisions. This protects you from unforeseen liabilities and helps ensure a smooth transition of the practice. If you’re considering a dental practice sale or purchase, consulting with an attorney who specializes in these transactions is essential. To learn more or schedule a complimentary 30-minute consultation, please contact Stock Legal.
