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Purchase Agreements: More Than Meets the Eye - Preparing for Acquisition, Part 1

By: Ali Oromchian

When you are looking to buy or sell a dental practice, it is important to protect your legal interests by paying special attention to the various contracts that the dental attorneys will be preparing for you. The letter of intent and the purchase agreement are vital to any successful transaction as it ensures what the parties agreed to is included in the agreement. However, you must be very careful because if it's not in the purchase agreement then it's not part of the transaction even if it is in the letter of intent or you've been discussing it verbally with the other party.

With the above in mind and the information below, you will be well on your way to developing a successful purchase agreement.

Letter of Intent- While generally non-binding, a letter of intent is key to many business transactions, not the least of which involves your dental practice. Such a letter is an agreement between both the seller and buyer of a practice, which specifically spells out the terms of your agreement. Examples of the types of items laid out in a letter of intent include: the date and purchase price of the sale, discussion of any transfers of accounts as a result of the transaction, deadlines for approval of financing and delivery of that financing, and deadlines for securing or transferring any lease related to the sale. In addition to these items, a letter of intent should state that all information related to the potential sale should be strictly confidential as a means of protecting all parties should the sale fail to be executed.

Allocation of Purchase Price- When allocating the purchase price of a transaction involving your dental practice, the assets involved are generally tangible items such as patient records and dental equipment and supplies. Your CPA and legal counsel should consider these items, along with a goodwill and non-compete covenant, when allocating the purchase price of assets. In turn, you should use expenses, depreciation, and amortization in order to get the most bang for your buck when seeking to recover the amount spent for your purchase price. One example of this includes depreciation of your practice's supplies or furniture over a 5 or 7-year period.

Contingencies- A contingency involves language that specifies that the purchase agreement relies on the result of certain actions being taken. Should those actions fall through, you would then, therefore, not be held liable for executing the sale or purchase of the practice. One frequent example of a contingency is determining the terms of the dental lease and when and how those terms may be assumed by another party. Other examples include your CPA's review of your records and accounts prior to a sale of your practice, the ability to obtain financing for the sale, and review of the purchase agreement by your legal counsel. To protect yourself from liability, these contingencies must be clearly enumerated in your purchase agreement.

Non-Compete Covenant- One of the most important parts of your purchase agreement, as a buyer, is a non-compete and goodwill covenant. This, in essence, prevents the seller of the dental practice from practicing within a certain geographical location for a specific amount of time. Under California law, this is allowable so long as the covenant includes the goodwill of the practice. In order to protect yourself from competition as the new purchaser of a dental practice, it is absolutely critical for you to include such a clause in your purchase agreement.

Collection of Seller's Accounts Receivable- When buying or selling your dental practice, you should consider whether or not the seller will attempt to collect their accounts receivable. In actuality, it is in the best interest of both parties not to have the seller attempt to collect. If a patient suddenly discovers that he will have to pay another entity rather than his regular dental office, the likelihood that he will not pay is higher than if the buyer of the practice seeks to promote a good relationship with the patient through the transition process. In order to protect yourself from this potential consequence, you should be very clear about when and if the seller can collect his accounts receivable, what the collection fee will be, and how to reconcile any patients that remain with the practice who have an outstanding balance.

After you have thoroughly discussed and prepared your letter of intent, allocation of purchase price, contingencies, non-compete covenant, and collection of accounts receivable, you should feel better equipped to move on with completing your purchase agreement. While those are not the only clauses you should include, they provide a great foundation for preparing for acquisition.

About the Author

Mr. Ali Oromchian is one of the nation’s leading legal authorities on topics relevant to dentists. Since its creation, the Dental and Medical Counsel PC law firm has been regarded as one of the preeminent health care law firms devoted exclusively to healthcare professionals. His clients seek his advice on practice acquisitions and sales, creation of corporations and partnerships, associate contracts, estate planning, employment law matters, office leasing and state board defense. Additionally, he is a frequent speaker on topics such as employment law, negotiations strategies, contract and estate planning throughout North America. He is frequently quoted and has written articles for the California Dental Association, Progressive Dentist, Progressive Orthodontists, and The New Dentist magazines. His website: www.dentalcounsel.com

View all articles by Ali Oromchian


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All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.

All financing is subject to credit approval.