Purchasing a dental practice in stages is becoming more common, particularly for specialty practices. Purchasing in stages occurs when the purchaser dentist (Purchaser) buys a dental practice from the selling dentist (Vendor) in two or more stages over an extended period of time. This transaction is used when the Purchaser is not prepared to purchase the entire dental practice immediately, but wants to enter into a long-term plan and a legally binding agreement with a Vendor that clearly set outs out that a purchase in stages that will occur over time.
A purchase in stages which extends over a period of several years is not the typical arrangement when purchasing a dental practice. The common route is for the Purchaser to buy 100% of the Vendor’s practice, purchasing shares of the Vendor’s dentistry professional corporation or purchasing assets. If the Purchaser wants the Vendor to remain at the practice and continue practicing dentistry after the purchase, the Vendor does so as an associate of the Purchaser.
An associate agreement is entered into with the Purchaser as principal and the Vendor as the associate typically receiving 45% of collected billings. While the norm is 40% for associate remuneration, since the Vendor provides mentoring and assistance during the transition phase to the Purchaser, 45% is typically the level of remuneration.
In a purchase in stages, the Purchaser is often already an associate of the Vendor and has worked with the Vendor at the dental practice for a number of years. The parties have worked well with each other and share the same practice philosophy and values. The Purchaser wants to buy the practice but, for various reasons, wants the Vendor to retain an ownership interest in the practice and continue to practice dentistry as a co-owner.
The associate wants to buy the practice and agrees to do so over time. Why? Having the Vendor remain as a co-owner of the practice is excellent support for the Purchaser. The Vendor may have far more experience in dentistry and has run the practice successfully for many years. This wealth of experience and having an in-house mentor is invaluable to the associate.
The arrangement often works as follows. The parties enter into a purchase and sale agreement whereby the Purchaser buys a portion of the Vendor’s shares of the Vendor’s dentistry professional corporation. Or, in the case of an asset sale, the Purchaser buys an undivided interest in the Vendor’s dental practice assets. From the Purchaser’s perspective the initial percentage purchased is typically not less than 50%,so that the Purchaser has equal control of the practice.
The Purchaser and Vendor become common shareholders in the case of a share purchase, or partners where assets are purchased, for a period of time until the staged purchase is fully completed. A detailed shareholders agreement or partnership agreement is the primary document governing their ongoing relationship during the purchase in stages. The shareholders agreement or partnership agreement will provide that the Purchaser agrees to purchase the remaining portion of the dental practice from the Vendor at a future specified date or dates for a specific price. The price may be a fixed price or based on a formula that is sufficiently clear so the parties will be able to determine easily what the price will be for the next stage or stages of the purchase.
If the Vendor dies or becomes disabled, the agreement should provide that the future staged purchase dates for the Purchaser’s purchase of the Vendor’s remaining interest in the practice will be accelerated upon such triggering events. To ensure the Purchaser can fund the buy-out in such events, the Purchaser typically obtains life insurance and disability insurance policies on the Vendor, with thePurchaser as beneficiary.
Similarly, from a Vendor’s perspective, the Vendor may obtain life insurance and disability insurance on the Purchaser. If the Purchaser dies or becomes permanently disabled before completing the final purchase step, the Vendor might have the right to re-purchase the Purchaser’s interest in the practice at a specified price.
Insurance issues when purchasing a practice in stages can be complicated and require careful tax planning. The parties must retain insurance advisors who have expertise in advising dentists and who understand these issues to provide appropriate advice to the parties. Insurance policies should be arranged early in the process to ensure that the parties qualify for such insurance and that appropriate buyout funding is in place.
Purchasing a dental practice in stages can be an excellent arrangement for both Purchaser and Vendor in certain circumstances. However, staged purchases are complex and require careful planning and extensive legal agreements.The best advice is to retain professional advisors, including an insurance advisor, accountant and lawyer, who have expertise in these structures and who focus on advising dentists in purchasing dental practices.
The associate wants to buy the practice and agrees to do so over time. Why? Having the Vendor remain as a co-owner of the practice is excellent support for the Purchaser.
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.
