Our thoughts . . . 07-02-10

BASIC TRANSITION AGREEMENTS

Dental practice sales are very difficult transactions. First, they typically involve a young buyer with limited experience in the world of business and an older seller who has great concerns regarding the continuation of their legacy. Then to compound the problem, this is usually a once in a career event for both parties and neither party is all that knowledgeable about how to proceed. While there is almost always an expectation of a sales contract between the parties, there are also a number of lesser know documents that are an important part of the process. Let's see if an understanding of these peripheral agreements can move us towards a more successful transition.

The first item of business is an ENGAGEMENT LETTER between the seller and their transition specialist. Whether the desired service be a listing, appraisal, associate search or consulting services, there should be an understanding of what is going to happen when, by whom and what the expected costs (including any travel costs) should be. I would liken this document to the presentation and agreement on a patient's treatment plan and the fee for that service. This agreement about how you intend to work together should be reviewed and understood by the seller/client and signed by both parties.

After an analysis of the practice has been completed and the seller is ready to place the practice on the market, a LISTING AGREEMENT will be drafted between the seller/client and the transition company. This document will detail the terms of the working relationship to include such things as commissions and duration of the agreement, liabilities and representations and, perhaps most importantly, the asking price for the practice. If real estate is involved, a separate agreement is created to address similar issues in that transaction. The listing agreement makes it very clear who the broker and transition company represents. We believe any sort of dual representation presents a clear conflict of interest in a contingency sales agreement.

Once a listing agreement has been secured, potential buyers and/or associates are made aware of the opportunity through website and media marketing, direct mail and personal contact. All prospects should expect to sign a NONDISCLOSURE or confidentiality agreement. The heart of this agreement states that the prospect will not disclose any information about the subject practice to anyone other than their spouse and professional advisors. Those advisors should be made aware that their client has signed such an agreement. Take this issue very seriously and consider all information and conversations confidential until after the closing. This agreement works both ways as the buyer may be in a situation where they have some risk of losing their job if their current employer finds out they are looking for another opportunity. The old wartime phrase "loose lips sinks ships" can be directly applied to the sale of dental practices. Sellers should demand compliance as any breech may have a negative impact on the transfer of goodwill between the parties and could terminate the sale.

Once a prospective Buyer has decided that this is the opportunity they wish to pursue, the next step is the presentation to the Seller of a LETTER OF INTENT (LOI), or OFFER TO PURCHASE. While resembling contracts, they are usually not binding except for certain provisions such as honoring the Nondisclosure agreement and the covenants to negotiate in good faith. This document should outline the basic plan about how the parties will move forward in good faith towards closing. It includes price, any proposed seller carry back and terms, escrow amount, and closing date. Since a COVENANT NOT TO COMPETE is frequently a major item in these cases, we suggest it also be proposed. We have discussed covenants in the past and remind all parties that regardless of what is agreed to, treat it as though it is fully enforceable. Contingencies to closing might include the availability of financing, proper licensing and appropriate DUE DILIGENCE. In plain English, this is the mandatory review process done by the buyer of information presented by the seller to make sure they are getting what they plan to pay for.

Once Due Diligence has been accomplished and everyone is satisfied with the outcome, the parties can move towards finalizing the PURCHASE AND SALE AGREEMENT and conducting a closing. I will not go into great detail about this agreement (sometimes also known as an Asset Purchase agreement) as it demands an article unto itself. We strongly suggest however that both sides be represented by legal counsel in the creation and negotiation of this document. It is as foolish to think you can do this on you own as to believe an attorney could cut a nice crown prep. Signing of this document (along with a BILL OF SALE) at closing is the consummation of the transaction and a signal for "consideration" to be exchanged.

One final document, while not having a direct bearing on an agreement between Buyer and Seller, may never the less have a profound effect on the future value and continuation of a dentist's life work. All doctors should have a MEMO OF DIRECTION for their practice on file. Why let the value of perhaps your largest asset decline because you have given surviving family members no clue as to who to call and how to dispose of your practice in the event of your unexpected death or incapacitation? Every practicing doctor should be aware of who in their area is recognized for their experience in transitioning dental practices. Most professionals will be happy to meet with you, record some basic information about you and your practice and provide you with the proper form. You owe it to your family, staff and your patients.

Dentists see themselves as fair and honest people who could do business with a handshake. The purchase or sale of a practice is not the time for such sentiment. Expect to receive, review and live by the terms of any agreement you make and the odds of a successful transition will be greatly improved. Examples of most of these documents can be found in the "Forms and Agreements" section of our website

Steve Wolff, DDS
UMKC Class of 1977