In volumes 88 and 89 of The Professional Advisory, I wrote about ‘dental service organizations’ (DSO) purchasing dental practices. This is Part 3 of the article and will continue to explore what vendor dentists need to know when selling their dental practice to a DSO.
From the vendor’s perspective, there are numerous matters to consider, including the following items. Ideally, these matters should be dealt with early in the sale process. This will enable you to make informed decisions about the nature of the sale transaction and help to avoid costly problems later.
1. Retain an industry recognized professional appraiser to con duct a detailed appraisal and valuation of your practice.
2.Review your cost share agreement or partnership agreement, if applicable, and determine if you are required to first offer to sell your practice to your cost sharers or partners before you can sell to a third party.
3. Review your existing arrangements with the current associates working at your practice, including:
a. The existence of proper written agreements
b. Non-solicitation and non-competition covenants which bind current associates
c. Transferability of the associate agreements to the purchaser
4. Carefully review your premises lease to determine:
a. The term of lease is at least 10 years, including renew al options (the purchaser and purchaser’s bank will typically require 10 years).
b. Whether rent will be fair market rent as mutually agreed by the landlord and tenant or failing agreement by arbitration when the option to renew the lease comes up
c. What ‘danger’ clauses exist in the lease including:
i. Relocation – the landlord’s right to relocate the practice within the building or plaza;
ii. Demolition – the landlord’s right to terminate the lease early if the building or plaza is to be demolished or substantially renovated;
iii. Termination – the landlord’s right to terminate the lease when the vendor sells the practice and requests the landlord’s consent to transfer lease to purchaser;
iv. Vendor liability after sale of practice – typically, leases do not release the vendor from obligations in the lease even on a practice sale.
5.Review your equipment leases to determine early buyout rights and penalties (purchasers typically acquire all assets free and clear of any lease obligations).
6.Carefully review all staff arrangements you have, including:
a. Whether proper written agreements exist for all staff, including dental hygienists, chairside assistants and others working at the practice.
b. Notice to terminate an employee limited to Employment Standards Act (Ontario) minimums or common law extended notice periods.
7. Consider introducing proper written agreements with all staff at least two years before a sale if you have only verbal agreements with your staff.
8. Determine if the purchaser will retain all staff after closing and on what terms:
a. Understand vendor legal obligations regarding staff after closing.
b. Typically, if a purchaser terminates any staff after closing, the vendor is required to pay half of the staff termination costs for three months after the closing date.
9.Consider what terms and conditions you require when you become the purchaser’s associate after closing; typically, a vendor is paid 45 per cent (not 40 per cent) of collected billings.
10. Hire industry recognized professional advisors who focus on advising dentists in transitioning and selling dental practices.