Top 10 Deal Points in a Dental Purchase and Sale Agreement
Every dental office sale requires that dental buyers, dental sellers, and attorneys agree to several, major deal points within the asset purchase agreement. Keep in mind that these negotiated deal points come after both parties have agreed to price and timing, and, while most of them are typical in the business-selling world, some are specific to dentistry. Below are our top 10:
1. Price Allocation
The buyer will most likely be purchasing the assets of the dental practice rather than the seller’s corporate stock (assuming seller is established as an S or C Corporation). For tax purposes, the purchase price of the practice will be broken down into categories including supplies, furniture & equipment, non-compete, personal goodwill and corporate goodwill. How the price is allocated to each of these categories impacts the taxes for the seller and the depreciation schedule (future taxes) for the buyer.
As a general rule, approximately 75-85% will be allocated to goodwill, unless all of the equipment is brand new. Most buyers and sellers ask their accountants to provide and agree to the allocation.
2. Account Receivable
Because payment for work done by the seller prior to the sale will be received by the buyer, the parties must agree how this is to be treated. The easiest and cleanest way to do this is for the buyer to purchase the accounts receivable at the same time they purchase the practice. This is done at a discount using a sliding scale. For example, the buyer would pay 90% of A/R in the 0-30 day tranche, 80% of A/R in the 31-60 day tranche, etc. There are three reasons for the discount:
- The seller receives the money now rather than waiting.
- The buyer now assumes the risk of non payment
- The buyer will be paying staff in order to collect the funds.
When purchasing the A/R, the calculation is customarily done one day prior to closing. If the buyer does not buy the A/R, the front desk will need to keep careful records of payments received, and buyer and seller will need to develop a method of depositing the seller’s money in the seller’s account. There is generally a 5% fee the seller pays the buyer for administering AR collections.
3. Delta Premier
Delta Dental has discontinued its Premier reimbursement rates for all new contracts. This means the buyer will only be able to receive Delta PPO rates, which are generally 25%-40% lower, depending on the sellers UCR schedule. If the seller is a Delta Premier provider, the buyer will most likely experience a reduction in collections for Delta patients (the difference between Premier and PPO fees). This is an important disclosure when buying and selling a practice and could make a significant impact on the value.
4. Covenant Not to Compete
The covenant not to compete ensures that the seller does not open a competing practice near the practice being sold. These covenants are usually for a specific period of time and specify a distance from the practice, 5 years and 15 miles for example. While these numbers are negotiable, the buyer should take great care in analyzing the impact of this covenant. This particular deal point should be addressed upfront on the letter of intent. Keep in mind that there is still some question as to the enforceability of this covenant in California.
Similar to the non-compete covenant, the seller must covenant not to solicit the dentist’s office patients or staff from the practice being sold. Doing so would be detrimental to the buyer and the buyer’s success. When buying a practice, a buyer relies on the staff staying in place and all patients staying with the practice (except for those noted by the seller such as family and friends).
6. Dental Retreatments
Retreatments can be burdensome for a buyer. A clear understanding of how retreatments are to be handled post sale is critical. Customarily, if a patient needs retreatment, the buyer allows the seller to perform the work in the office. If the seller is not available, the seller will pay the buyer a percentage, 75% for example, of the office’s normal fee for the work. This agreement is usually in place for a specific window of time, 12 months for example, and may already be agreed to as part of the letter of intent.
7. Uncompleted Pre-Paid Procedures
Similar to retreatment, work still outstanding that the seller is obligated to will need to be addressed. If the seller is going to remain working in the practice, the seller can perform the work uncompensated and reimburse the buyer for supplies and staff of the dental practice. If the seller is not able to perform the work in the office, then the seller should agree to pay the buyer for the work. If possible, the seller should try and complete any outstanding procedures prior to the sale.
8. Supplies in Stock
Supplies must be maintained as if the practice was not being sold. Customarily, supplies and inventory should equal to approximately 15 days of normal operations and be completely paid for prior to closing.
9. Included/Excluded Assets
Generally when selling a practice, the buyer can assume that all of the equipment, tools, cabinetry, leasehold improvements, computers and furniture convey to the buyer with the practice. Occasionally a seller will not include certain items. Often these are personal items (personal computer, pictures, etc) but occasionally significant assets may be excluded. It is important for the seller to disclose any items that are not included, so the buyer can properly value the practice. In addition, banks require a detailed inventory as an exhibit of the purchase agreement to have a record of the assets purchased.
An indemnity clause in the APA protects each party from claims arising from events which happen outside of their ownership of the dental practice. The seller indemnifies the buyer from claims which arise during the seller’s ownership, and the buyer indemnifies the seller from claims which arise during the buyer’s ownership. In this way, the selling dentist is protected against future claims and the buying dentist is protected against past claims.