Three Major Considerations in Dental and Medical Transitions
There are a few considerations that you should take into account when selling or buying a dental or medical practice. Each practice and practitioner is different and the number of considerations and decisions vary from client to client. However, the parties involved in a practice transition should be prepared to deal with three (3) issues discussed below. Our dental and medical practice attorney are skillful lawyers who can help steer your contract and transaction in your favor.
1) The Structure of Transaction: Stock or Asset Purchase?
One of the first decisions that requires the parties’ agreement is whether the transaction will be structured as an asset purchase or a stock purchase. In a stock purchase, the buyer purchases the shares or membership interest of the seller in an existing company. In other words, the company remains the same but the owner of the company changes. As a result, the company remains the owner of all the assets but a new shareholder or member (the buyer) will own the business entity.
From the perspective of the dental practice attorney who represents the buyer, the downside of a stock purchase is that all the liabilities of the existing company carry-over, which means that all the company’s legal and financial liabilities remain in place, and the new owner/buyer of the company becomes indirectly responsible for those debts and liabilities.
There are a number of other pros and cons in structuring a deal as a stock purchase; however, the “carry-over” liability is too big of a risk for most buyers to consider a stock purchase as a viable option. In my experience, most transactions are structured as asset purchases.
For additional information on whether to structure your medical or dental transition as a stock purchase or asset purchase please visit our article The Structure of Transaction: Should you buy the stocks or assets of a practice.
2) Practice Valuation in Dental & Medical Transitions
There are various methods used in valuation of practices. Some are based on the gross revenues of the practice for the last few years, some are based on the recent years’ net profits, some are based on the value of assets and/or a combination of these methods. The valuation of a practice is best left to professional valuation experts; however, in many cases clients cannot justify or do not want to pay thousands of dollars to a practice valuation expert.
Although I recommend obtaining an opinion from a valuation expert, there are many sources that can be helpful in deciding the range of the purchase price if you decide against hiring and paying for a valuation expert. These sources range from dental brokers to helpful professionals at the bank who may be financing your acquisition. Other factors that should be considered in calculating the purchase price are the age and condition of the equipment, the length of the transition period, any major fluctuations in the revenues or profits of the practice, etc.
Even after deciding and agreeing on the purchase price, the parties and their counsel often engage in serious negotiations regarding the allocation of the purchase price. You should be mindful that allocating the purchase price between the assets versus goodwill could have significant tax consequences for you for years to come.
3) Due Diligence When Buying Dental & Medical Practices
In a typical asset purchase, the attorney representing the dental or medical practice buyer should engage in various legal, commercial, healthcare and other investigations to assure that there are no undisclosed judgments, claims, liabilities, and/or debts that could be attached to the practice’s assets. After all that is why you structured your deal as an asset purchase instead of a stock purchase.
Commercial due diligence includes reviewing the legal and corporate documents of the selling party, conducting a UCC lien check to make sure there are no recorded liens or debts that are not disclosed by seller, reviewing the lease agreement for the premises, investigating court records for any unsatisfied judgments or pending actions against the seller, and reviewing the employment contracts of the employees, managers, officers, and directors.
Healthcare due diligence includes checking for any violations under the Stark law, Antikickback statutes, and False Claim Act. It should also include investigating the licensing boards for any prior disciplinary actions by the practitioners that worked at the seller’s office in recent years.
A. Shane Kamkari, Esq.
Member of Maryland Bar
Member of DC Bar
Dental Transition Lawyers
Dental practice attorney, medical contract attorney, dental practice transition lawyers