In volume 65 of The Professional Advisory I wrote about legal matters when purchasing a dental practice. This article focuses on legal issues when selling a dental practice.
When selling a dental practice, there are many legal issues to consider. 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 avoid costly problems later. Outlined below is checklist of some of the legal matters to consider when selling a dental practice.
1. Retain an industry recognized expert professional appraiser to conduct a detailed appraisal and valuation of your practice
2. Determine what you are selling – shares or assets
3. Review the appraisal carefully with your accountant to determine the allocation of purchase price and to assist in finalizing the purchase price
4. Understand the tax effects of the allocation of purchase price to different asset classes if selling assets
5. If you have an existing dentistry professional corporation, ensure the minute book and corporate filings are current
6. If you do not have an existing dentistry professional corporation, consider forming such a corporation before closing and sell shares to take advantage of the capital gains exemption
7. 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
8. Understand your rights and obligations (and purchaser rights and obligations) in the definitive legal purchase and sale agreement including, in particular, any post closing vendor liabilities
9. Review your existing arrangements with the current associates working at your practice, including:
a. Do proper written agreements exist
b. Are associates bound by non-solicitation and non-competition covenants
c. Can the associate agreements be transferred to the purchaser
10. Carefully review your premises lease to determine:
a. The term of lease is at least 10 years, including renewal options (the purchaser and purchaser bank will typically require 10 years)
b. For the options to renew the lease, is rent to be fair market rent as mutually agreed by the landlord and tenant or failing agreement by arbitration
c. What ‘danger’ clauses exist in the lease including:
i. relocation – landlord right to relocate the practice within the building or plaza
ii. demolition – landlord right to terminate the lease early if building to be demolished or substantially renovated
iii. termination – landlord right to terminate lease when vendor sells the practice and requests landlord consent to transfer lease to purchaser
iv. vendor liability after sale of practice – typically leases do not release the vendor from obligations under the lease even on a practice sale
d. When negotiating the next renewal term with your landlord, as part of that renewal process include making changes to the premises that will enhance the value of the practice and limit vendor liability after sale11. Review your equipment leases to determine early buyout rights and penalties (purchasers typically expect to acquire all assets free and clear of any lease obligations)
12. Carefully review all staff arrangements you have, including:
a. Do proper written agreement exist for all staff, whether dental hygienists, chairside assistants and others working at the practice
b. Is notice to terminate an employee limited to Employment Standards Act (Ontario) minimums or does common law extended notice periods apply
13. Introduce proper written agreements with all staff at least two years before a sale if you have only verbal agreements with your staff
14. Determine if 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
15. Understand that the purchaser will require the vendor not to solicit patients after closing and not to compete with the purchaser within a defined geographic distance for a certain time period after closing
16. Consider whether you wish to remain as an associate after closing and on what terms and conditions; typically a vendor can expect to be paid 45 per cent (not 40 per cent) of Collected Billings
17. Hire industry recognized expert professional advisors who specialize in advising dentists in transitioning and selling dental practices
By: David E. Rosenthal
