In volume 95 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.
There are many legal issues to consider. Ideally, these matters should be dealt with early in the sale process. This will enable you, the vendor, to make informed decisions about the nature of the sale transaction and to 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 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 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) that the term of lease is at least 10 years, including renewal options (the purchaser and purchaser bank will typically require at least 10 years).
b) 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’s right to relocate the practice within the building or plaza.
ii. Demolition – landlord’s right to terminate the lease early if the building is to be demolished or substantially renovated.
iii. Termination – landlord’s right to terminate the lease when the vendor sells the practice and requests landlord consent to transfer lease to purchaser.
iv. Vendor liability after the sale of the practice - typically leases do not release the vendor from obligations under the lease even on a practice sale.
d) what the negotiations are regarding 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 the vendor liability after sale.
11. 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) Are there proper written agreements for all staff (dental hygienists, chairside assistants and others) working at the practice?
b) Is notice to terminate an employee limited to the 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 the purchaser will retain all staff after closing and on what terms:
a) Understand the vendor’s 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 period of time after closing.
16. Consider whether you wish to remain on as an associate after closing and on what terms and conditions. Typically, a vendor can expect to be paid 45 per cent (not 40 percent) of collected billings.
17. Hire industry recognized professional advisors who focus on advising dentists in transitioning and selling dental practices.
Please send comments to david@drlaw.ca
David Rosenthal is a senior lawyer with Spiegel Rosenthal Professional Corporation whose practice is devoted to corporate, commercial and business law, with special emphasis on advising dentists. He can be reached at (416) 865-0736 or e-mail to david@drlaw.ca.
