Selling a dental practice in stages is becoming more popular in recent years. A staged sale occurs where the owner of a dental practice (Vendor) sells the practice to a dentist purchaser (Purchaser) in two or more stages over an extended period of time. This transaction is used where the Vendor is not prepared to sell his or her entire dental practice immediately, but wants to enter into a long-term plan and a legally binding agreement with a Purchaser that clearly set outs out the staged sale that will occur over time.
A staged sale which extends over a period of several years is not the typical arrangement when selling a dental practice. The more usual route is the Vendor sells 100 per cent of his or her practice, selling shares of a dentistry professional corporation or by a sale of assets. Where the Vendor still wants to remain at the practice and continue practicing dentistry after the sale, he or she 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 receiving 45 per cent of collected billings. While the norm is 40 per cent for associate remuneration, since the Vendor provides mentoring and assistance in the transition of the practice to the Purchaser, 45 per cent is typically the remuneration level.
In a staged sale, 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 Vendor wants an exit strategy but, for various reasons, wants to retain ownership of the practice and continue to practice dentistry as an owner.
The associate wants to buy the practice and agrees to do so over time. Why? Having the Vendor remain as a partial 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. That wealth of experience can be invaluable to the associate. Having an in-house mentor on an ongoing basis is a wonderful resource to the associate.
The arrangement often works as follows. The parties enter into a purchase and sale agreement whereby the Vendor sells a portion of the shares of his or her dentistry professional corporation or, in the case of an asset sale, the Vendor sells an undivided interest in the dental practice assets. The percentage sold might be less than 50 per cent so that the Vendor still retains control of the practice.
The Vendor and Purchaser become common shareholders in the case of a share sale or partners where assets are sold for a period of time until the staged sale is complete. A detailed shareholder’s agreement or partnership agreement is the primary document governing their ongoing relationship during the staged sale. The shareholder’s 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 that the parties will easily be able to determine what the price will be for the next stage or stages of the sale.
If the Vendor dies or becomes disabled, the agreement should provide that the staged sale date for 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 is required to obtain life insurance and disability insurance policies on the Vendor, with the Purchaser as beneficiary.
Similarly, the Vendor should obtain life insurance and disability insurance on the Purchaser. If the Purchaser dies or becomes permanently disabled before completing the final stage of the purchase, the Vendor should have the right to re-purchase the Purchaser’s interest in the practice at a specified price.
Insurance issues in staged sales can be very complex and require careful tax planning. The parties need to retain an insurance advisor who has specialized expertise in advising dentists, who understands these issues and is able 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 buy-out funding is in place.
A staged sale can be an excellent arrangement for both Vendor and Purchaser in certain circumstances. However, staged sales 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 are all very familiar with these structures and who focus on advising dentists in transitioning and selling dental practices.
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.
