Selling a dental practice in stages is becoming more common, particularly for specialty practices. Selling in stages 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 when the Vendor is not prepared to sell the entire dental practice immediately but wants to enter into a long-term plan and a legally binding agreement with a Purchaser which clearly set outs out that a sale in stages will occur over time.
A sale in stages which extends over a period of several years is not the typical arrangement when selling a dental practice. Usually, the Vendor sells 100% of the Vendor’s practice, selling shares of a dentistry professional corporation or by a sale of assets. If the Vendor still wants to remain at the practice and continue practicing dentistry after the sale, 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 who receives 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 sale 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 Vendor wants an exit strategy but, for various reasons, wants 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.The 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 Vendor sells a portion of the shares of the Vendor’s dentistry professional corporation, or, in the case of an asset sale, the Vendor sells an undivided interest in the Vendor’s dental practice assets. The percentage sold might be less than 50%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 fully completed. A detailed shareholders’ agreement or partnership agreement is the primary document governing their ongoing relationship during the sale 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 sale.
If the Vendor dies or becomes disabled, the agreement should provide that the future staged sale dates for the Vendor’s remaining interest in the practice will be accelerated upon this type of triggering event. 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 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 when selling a practice in stages can be very complex and require careful tax planning. The parties must retain insurance advisors who have expertise in advis-
Selling a dental practice in stages can be an excellent arrangement for both the Vendor and Purchaser in certain circumstances. However, staged sales are complex and require careful planning and extensive legal agreements.
ing 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 buy-out funding is in place.
Selling a dental practice in stages can be an excellent arrangement for both the 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 have expertise in these structures and who focus primarily 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.
