Texas Dental Practice: Buying a Practice
Q: I have completed some practices sales in my day, and the broker provided me a standard form contract. Why do I need a dental transition attorney to help me with my transaction?
Although dentists and brokers are intelligent and well trained in their fields, they do not have the legal training, continuing education and experience necessary to safely complete your transaction. It isn’t so much the contract terms that are a problem, but the deeper implications of those terms, and the contract terms that are NOT in the document. Furthermore, THERE IS NO SUCH THING AS A STANDARD FORM CONTRACT; every document will be for the benefit of the party who drafted it. Finally, just as medical advances change treatment plans, legal developments change contract strategies.
Q: When in the sale process should I hire you as my attorney on a dental practice sale or purchase?
Your primary goals in hiring an attorney are to ensure the sales documents are completed properly and that the sale closes on time, but at the same time not to undergo expenses until you are relatively certain the sale can be completed. Unfortunately, waiting to hire an attorney when the sale is certain will frequently prevent the sale from closing on time.
You should hire an attorney to complete/review the Letter of Intent before it is signed. That letter will, or should, contain specific deadlines for the Buyer to complete the loan application, obtain loan approval, and complete due diligence review of the practice, as well as many other important issues. Once the Letter of Intent is signed, it becomes difficult to change those terms in the full contract. Using a Letter of Intent also provides you attorney representation, at less than the full practice sale price, to confirm the more important terms: price, method of payment, non-competition provisions, transition provisions, and deadlines.
If the letter of intent has been signed, buyers may wait to hire an attorney until the buyer has obtained loan approval and has completed the due diligence review of the practice. For sellers, their legal work can more easily be reused for a new buyer (saving attorney fees) so an attorney can also be hired immediately after the letter of intent is signed. Significant contract drafting issues and landlord negotiations also need completion, and these can take a significant amount of time. Buyers and sellers both need to KEEP IN MIND that waiting until the loan approval and due diligence issues are completed before hiring me could significantly delay the closing, resulting in lost loan approvals, missed vacations or moves, or circumstance changes that prompt buyer OR seller to refuse to proceed with the sale. In my experience, it is rare for a sale to not have at least one week worth of unexpected delays – and I have seen one delay of six months (lender approval issues and a selling dentist who died during the process).
The main source of delay, if any, tends to be the landlord. There may be existing lease terms that the buyer will need amended before the landlord even KNOWS about the proposed sale. The seller may want the negotiate the lease assignment to include specific seller protections (infrequently granted). Keep in mind that the landlord has no obligation to rush the sale to completion, and absentee landlords or committee members can cause even a friendly assignment scenario to drag on for over a month. The other party’s attorney, non-dental industry lenders/ escrow companies, and even the client himself (by not responding to attorney/lender requests in complete and timely fashion) can cause significant delays.
Please consider carefully the date you hire an attorney to start work on your sale or purchase. Keep in mind that the attorney fee is a relatively small percentage of the total practice value, and delays can cause the sale to fail.
Q: Is joint representation for a practice purchase advisable?
Joint representation is never advisable if one or the other potential client is uncomfortable with joint representation. If the parties are comfortable with the idea, joint legal representation is allowed under Texas law if the clients have received full disclosure of the potential risks and have agreed to do so before joint representation begins. The question then becomes is joint representation advisable in your particular situation?
Practice sales have significant opportunities for conflicting issues: non-competition, retreatment, representations, and tax allocations being first among many. Therefore, it is not generally advisable for a buyer and seller to be jointly represented. However, joint representation can work well when (1) the seller is retiring, (2) the sale is to the seller’s child or a 10 year (or greater) associate, and (3) both sides express a genuine desire that the contracts be drafted in a fair and nonpartisan manner. In these cases, a significant level of trust and understanding has developed during the relationship, and the threat of renewed competition is almost non-existent. In this case, an experienced dental transition attorney will be able to propose a set of balanced and pragmatic contracts. Even in this situation, the two sides should discuss the tax allocation with their respective CPAs before coming to a final decision on that issue. On a related note, joint broker representation has the same possible pitfalls as joint legal representation.
Partnerships and corporations tend to have fewer conflict issues, since operations and procedures in each will apply equally to the partners or shareholders, and attorneys tend to represent the organization only in this scenario to avoid a literal conflict. However, some clients will choose to hire separate counsel in addition to the joint counsel, particularly if the client will hold a minority interest in the organization and thus less able to prevent detrimental changes.
Joint counsel for stand-alone independent contractor agreements are not recommended. There are too many conflicting issues, and too much room for future disagreement, to consider joint counsel a viable option.
Q: When, in the process of buying a dental practice, should I incorporate?
There are reasons to incorporate both before and after buying the dental practice. Reasons to incorporate beforehand include: (1) preventing personal liability from the practice while you are unincorporated and on contracts signed in your personal name, (2) avoiding cost and delay of completing the name change on letterhead, signage, bank accounts and insurance panels. Reasons to incorporate after the purchase include (3) you will receive no significant or immediate limited liability or tax benefits by incorporating, (4) your practice purchase loan will be your personal debt, and therefore can be treated as “basis" for the purpose of deducting losses in an S corporation. The right answer may even be to incorporate before the purchase, but purchase the practice in your individual name and immediately assign the practice to your new corporation. However, your individual circumstances should be discussed with an attorney and your CPA before making this final decision.
Q: What should I name my professional corporation?
A: You must use some corporate designation as part of the corporate name; no inclusion of the dentist’s last name is necessary in the corporate name. See Texas Business Organizations Code §5.054.
Q: May a dental practice use a fictitious business name or trade name?
A: Incorporated or unincorporated practices may use a fictitious business name if they comply with certain filing and advertising requirements. See Texas Business & Commerce Code §71.101, 22 Texas Administrative Code §108.4, and Texas Occupations Code 259.003.
IMPORTANT: Before spending money on your proposed fictitious business name, confirm that the name is protectable and available. In general, the first to actually use a name in the relevant locale has rights in that locale. Federal trademark is a major exception: once the filing is made, no new use of the name in the same business classification may be made anywhere in the United States.
Q: I have been approached by an investor who wants to form a Management Service Organization (MSO) to own a dental office and pay me a per-diem rate for my services. Is this legal?
A: Under no circumstances may an MSO own, maintain or operate a dental practice, or receive payments based on a share practice revenue or profitability. See Texas SBDE Rules & Regulations §108.70 and Penny v. Orthalliance, Inc., 255 F.Supp.2d 579 (N.D. Texas 2003).
Q: May I pay commmissions or referral fees to dentists or non-dentists for patient referrals?
A: A dentist may not pay anyone for patient referrals. The intent of this rule is to prevent “cappers" (pardon the expression) from drumming up business and being paid a fee for bringing in a patient. Traditional marketing services (print, radio or TV advertisements, mass mailings, publicly available coupons) are specifically allowed by this rule. See Texas Occupations Code §102, 22 Texas Administrative Code §108.1(6), Texas Occupations Code §102, 22 Texas Administrative Code §108.60, Texas SBDE Rules & Regulations §108.60 and §108.70(b).