Our thoughts . . . 10-25-07

The Tale of Two Terms
Nondisclosure and Due Diligence

These two very important terms deal with one issue that starts the transaction process and one that helps bring it to a close. Both may be unfamiliar yet both are critical to getting a sale completed. Let’s examine them individually in some detail to understand their importance.

All prospective buyers are required by EMA (and I’m sure any other broker, consultant, accountant or attorney who is representing a client in the sale of their practice) to sign a nondisclosure agreement before any personal information about the practice can be given out. The heart of this agreement states that the prospective buyer will not disclose any information about the subject practice to anyone other than their spouse and any professional advisors. Likewise, those advisors should be made aware that their client has signed such an agreement.

Our seller clients expect us to be a gatekeeper of the information about their practice. Obviously, they do not want patients, staff or the dental community to know that they are planning a sale and possibly a subsequent retirement. Patients may decide it is time to pick a new doctor and leave the practice prematurely. Additionally, referring doctors may decide to stop sending new patients. In short, the practice may begin to decline in spite of the Seller’s best efforts. Declining revenues translate into declining value. The old wartime phrase “loose lips sinks ships” can be directly applied to the sale of dental practices. The discussion about disclosure of the sale to staff members can be a very touchy subject as they have become like family. Withholding the listing of the practice for sale can seem unkind, but in our experience the “business as usual” approach is far kinder than finding out through the grapevine and wondering when and to whom the practice will be sold. In the vast majority of cases, the staff will co-operate well with the new doctor and they may have gone through considerable amounts of anxiety for nothing.

A reverse effect of this agreement involves the prospective buyer. Often the buyer is in a situation where they have some risk of needlessly losing their job if their current employer finds out they are shopping for another practice. It is certainly in the prospect’s best interest to see that the nondisclosure agreement is respected. At EMA, we take this issue very seriously and consider all transactions confidential until after the closing. A breech of this agreement may terminate the sale and at the very least may have a negative impact on the transfer of goodwill between the parties.

The second subject involves the concept of “Due Diligence”. When a practice has been listed, certain information has been provided to the broker by their seller client. The buyer needs to understand that while the broker or other consultants may have analyzed that data, it has not been verified. That obligation rests with the buyer. After an offer to purchase has been accepted, the buyer has a reasonable period of time before closing to examine the practice and its records to be certain that what has been represented is in fact there. Lenders familiar with dental practice sales will sometimes provide checklists to their buyer clients. After assurance that items such as patient counts, deposits, accuracy of Federal Tax returns, liens and leases are acceptable, the parties can move towards the signing of a purchase and sale agreement and a final closing.

No sale will get started without an understanding and commitment to nondisclosure and no closing should ever occur without reasonable due diligence. To do otherwise would be risky and unprofessional.

Steve Wolff, DDS
UMKC Class of 1977