Legal Aspects of Dental Practice Acquisition

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Legal Aspects of Dental Acquisitions

Let’s look at all of the legal aspects to a dental practice acquisition, starting with a letter of intent and going all the way through closing.

1. Letter of intent. You issue a letter of intent to initially engage the seller
2. Purchase agreement. This is the main legal document that outlines the terms of the acquisition. It should be reviewed by lawyers on both sides and include details like purchase price, assets included, representations and warranties, closing conditions, etc.
3. Due diligence. The buyer will want to conduct due diligence to verify the seller’s representations about the practice. This includes reviewing financial records, patient records, leases, employee agreements, regulatory compliance, etc.
4. Transfer of assets. Proper legal documentation is required to transfer assets like patient records, equipment, and inventory to the buyer. Patient consent may be needed to transfer records. An asset purchase agreement (APA) is your best friend here.
5. Real estate. If the practice owns the office space, the real estate transaction needs to be handled properly including title search, transfers, financing, and more. 
6. Licenses and permits. The buyer will need to apply for transfer of all licenses and permits required to operate the practice. Local zoning approvals may also be needed.
7. Closing. Your attorney will be heavily involved in the closing process and all the documentation involved.
8. Post-acquisition. You may encounter legal issues after closing on your practice. Good thing you have an established relationship with a great attorney.

Letter of Intent

A letter of intent (LOI) is a non-binding document that outlines the main terms and conditions under which two parties plan to enter into a future business agreement. While not legally binding, a LOI demonstrates the serious intent of both parties to move forward with a transaction.

In the context of acquiring a dental practice, a letter of intent covers:

• The proposed purchase price and terms of payment
• Scope of assets/liabilities to be transferred
• Timeline for due diligence and closing
• Exclusivity period for negotiations
• Non-binding provisions around employment contracts, non-competes, etc.

The LOI allows both parties to clarify intentions and major deal points upfront before spending time and money on a definitive purchase agreement. It can also help prevent misunderstandings down the road.

While an LOI is not a substitute for a legally binding purchase contract and does not guarantee a deal will be completed, it is an important step in the acquisition process. It provides a framework for lawyers to draft the formal purchase agreement while deal negotiations continue.

Purchase Agreement

A dental practice purchase agreement outlines the specific terms, conditions, representations, and warranties that the buyer and seller agree upon regarding all aspects of the dental practice transition.

Key concerns addressed in the agreement include:

• Assignment of patient records
• Transfer of leases and contracts
• Hiring/firing of employees
• Transfer of intellectual property
• Seller representations about financials, regulatory compliance, litigation, etc.
• A non-compete clause for the selling dentist

An experienced attorney plays a crucial role in reviewing, drafting, and negotiating the purchase agreement on your behalf. Your attorney looks out for your best interest in the areas of risk management, tax considerations, financing, and regulatory issues. 

The attorney also you on strengths and weaknesses of the proposed terms compared to industry norms for dental practice acquisitions. With complex dental practice transitions, your is key to achieving a fair agreement and successful result.

Dental Practice Due Diligence

As a dental-specific CPA firm, we guide you through the due diligence process and evaluate the practice’s financials. There are a few due diligence areas where it’s good to have an attorney’s help as well.

Here are the due diligence aspects where an attorney can be invaluable:

• Reviewing all legal documents—leases, contracts, employee agreements, shareholder agreements—to assess risks, obligations, and assignability.
• Doing a full analysis of potential litigation, regulatory actions, or compliance issues facing the practice.
• Vetting the corporate structure and proposed transaction structure for optimal liability protection and tax treatment.
• Investigating malpractice coverage, claims history, and related liability risks.
• Inspecting licenses and permits to ensure proper transferability.
• Evaluating intellectual property holdings and transferability.
• Researching certificates of occupancy, zoning classifications, and local requirements.
• Confirming HIPAA compliance mechanisms are satisfactory and up to standard.

We’re an invaluable part of your team as well. We help in the due diligence process in the following ways:

• Reviewing financial statements, tax returns, and accounts receivable aging reports to assess revenues, profitability, overhead, growth trends, and collectibility.
• Analyzing procedure mix, patient retention rates, new patient numbers, and other key performance metrics.
• Evaluating equipment, technology, and other fixed assets to determine fair market values.
• Assessing staff compensation models including bonuses, incentives, and benefits.
• Validating expense categories like rent, supplies, lab fees, utilities, maintenance, etc.
• Examining owner compensation and perks to determine if they are reasonable.
• Reviewing inventory management systems and inventory levels.
• Inspecting patient scheduling and billing systems.
• Analyzing accounts payable processes and vendor payment terms.
• Evaluating insurance coverage and premiums.
• Developing a pro forma budget for the first 1-3 years post-acquisition.
• Determining fair market value and making a valuation assessment.
• Identifying any discrepancies between tax returns and financial statements.

Transfer of Assets

When you buy a practice, a whole lot of different types of assets come with it. Your attorney’s job is to make sure those assets are transferred totally and legally so you have no issues down the road. 

• Review leases to ensure equipment, office, and other leases are assignable or develop strategies to terminate unfavorable leases.
• Oversee the process of obtaining patient consents for record transfer and ensuring compliance with laws.
• File UCC statements and other documentation to perfect security interests if financing is involved.
• (If real estate is being transferred) handle filings and document preparation for title transfer of any owned real estate.
• Draft or review the bill of sale listing all inventory, supplies, furnishings, tech, and other assets.
• Facilitate applications and regulatory filings to transfer licenses, DEA registration, permits, and more.
• Ensure existing vendor, maintenance, marketing, and other contracts are legally assigned to the buyer with consent.
• Ensure proper assignment and recording of trademarks, branding, and other intellectual property rights.
• Obtain key third party consents (landlords, lenders, etc.) that may be required and review them.

All of this stuff gets pretty complex; you definitely don’t want to be handling it yourself.

Real Estate

We recommend treating the real estate acquisition as a separate deal and evaluating it on its own merits. 

If you decide to acquire the property the practice occupies, an attorney can help in the following ways:

• The attorney can help ensure the practice and real estate are valued separately by independent appraisers. This prevents overpaying if the real estate is not actually worth what the seller believes.
• The attorney reviews zoning, permits, occupancy limits, and other factors to assess if the real estate is a good investment, regardless of the practice valuation. Location, visibility, parking, competition, and area growth projections are considered.
• The real estate can be negotiated independently from the practice sale. The attorney helps craft offers, counteroffers, financing terms, contingencies, and closing timelines specific to the real estate.
• The attorney conducts title searches, reviews leases, validates permits, and takes other steps to reduce real estate acquisition risks.

Licenses and Permits

There are a lot of licensing and permit requirements involved in running a dental practice, and they’ll all need to be transferred from the seller to you. Here’s how an attorney can help:

• Transfer medical licenses 
• Transfer DEA registration 
• Transfer business licenses
• Transfer facility licenses
• Manage regulatory filings
• Coordinate license renewals
• Confirm local permits

Closing

Congratulations, you’re at the final stretch of your dental practice purchase process! The documentation and closing phase is where it all comes together. Your attorney reviews all the purchase contracts, leases, employment agreements, and other documents. They make sure the terms fully protect your interests as the buyer before signing.

1. They confirm financing, licenses, permits, and any other contingencies are satisfied. No unwanted surprises!
2. The attorney oversees the asset transfer details: patient records, equipment, inventory, etc. They ensure legal requirements are met.
3. On closing day, the attorney coordinates everything. They manage signature and notarization of documents, distribution of final copies, and disbursement of funds.

Having an attorney handle these closing logistics reduces your risk and liability. You can feel confident that all aspects are handled correctly.

Post-Acquisition Legal Counsel

You’ve successfully crossed the finish line of dental mergers and acquisitions, but guess what? The legal guidance doesn’t stop once you’ve purchased the practice. Attorneys continue helping in key ways:

• If you add partners later, attorneys help draft buy-sell agreements or dental associate agreements.
• They review any modifications you make to the ownership structure to ensure it’s legally sound.
• Attorneys conduct periodic reviews of insurance and coverage to protect you from risks.
• If any disputes come up later with sellers or buyers, attorneys can provide counsel and aim for resolution.
• For practice operations and risk management, attorneys advise you on legal best practices and avoiding pitfalls.
• As the business evolves, attorneys review new contracts and agreements to keep things current.
• They also monitor legal compliance as laws and regulations change over time.

Your attorney remains a valuable partner after acquisition. They ensure your legal foundations stay strong as the practice grows and changes. Their ongoing counsel reduces liability and helps the business thrive in the long run.

How Can I Accurately Value a Practice I’m Considering?

We’ve covered the legal aspects of practice acquisition, but what about the crucial valuation step? That’s where we help. We’re experts in dental practice valuation. 

Here are some of the aspects that we consider when helping you value a practice:

1. Financial valuation. We look hard at the practice’s financials, including net income, collections, expenses, and more.
2. Market factors such as competition, demographics, and the economy.
3. Qualitative factors such as goodwill and brand recognition.

Along with dental attorneys, we’re a key part of your advisory board. As an experienced CPA and dental acquisition expert, Brian will help you conduct a thorough analysis of a practice’s quantitative and qualitative factors to arrive at a solid approximation of what it’s worth to you.

Contact our team for a free consultation today!

For a step-by-step guide, check out our 27-point dental practice acquisition checklist.

FAQ on the Legal Side of Dental Acquisitions

What is a dental merger?

A dental merger is the consolidation of two or more dental practices into a single entity. It involves combining resources, staff, patient bases, and operations to create a larger and more comprehensive dental practice. The legal and financial aspects of a dental merger often require legal advisors to navigate complex agreements and ensure compliance.

What is tort law in dentistry?

Tort law in dentistry refers to the legal principles that address civil wrongs or injuries caused by negligence, intentional acts, or omissions in dental care. It encompasses cases where patients experience harm due to inadequate treatment, misdiagnosis, or breach of duty by dental professionals.

What is dental procurement?

Dental procurement involves the process of sourcing and acquiring dental supplies, equipment, and services necessary for a dental practice to function effectively. It includes negotiating contracts with suppliers, ensuring quality standards, and managing the financial aspects of procurement.

Is it worth buying a dental practice?

Dental practice acquisition can be hugely worthwhile, as long as you do the necessary due diligence and valuation to ensure you get the right practice at the right price. We can help with this. 

Who should be part of my team when buying a dental practice?

Your team should include a dental attorney, a dental CPA (us), and a dental transition advisor (us). It should also include a financing professional (lender) and potentially a broker as well.

How should review fee schedules during an acquisition?

Dental attorneys review fee schedules to ensure they align with industry standards and legal regulations. They help negotiate any necessary adjustments to fees, safeguarding your practice’s profitability and compliance.

What is considered unethical in dentistry?

Unethical behavior in dentistry includes actions such as overcharging patients, recommending unnecessary treatments, misrepresenting qualifications, and not maintaining patient confidentiality.

Additionally, practicing without proper licenses or disregarding patient consent can also be considered unethical. Dental professionals must adhere to ethical standards outlined by dental associations and regulatory bodies.