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Monday, August 3rd, 2009 | by Steve Wolff

The Agreements Before the Agreement

Dental practice sales are very difficult transactions. They typically involve a young buyer with limited experience in the world of business, and an older seller who has great concerns regarding the perpetuation of his or her legacy. To compound the problem, this is usually a once-in-a-career event for both parties, and neither party is very knowledgeable about how to proceed. While there is a general expectation of a listing agreement for the seller and an asset sales contract (both of which deserve more discussion than this space allows), there are also a number of lesser-known documents that are an important part of the process.

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

Once a listing agreement between the seller and transition specialist has been secured, potential buyers and/or associates are notified about the opportunity. 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 his or her spouse and any professional advisors. This agreement works both ways as potential buyers may be in a situation where they have some risk if their current employer finds out they’re looking for another opportunity. This issue should be taken seriously and all information and conversations should be considered confidential until after the closing. The old wartime phrase “loose lips sink ships” can be directly applied to the sale of dental practices. Both parties should demand compliance as any breech may terminate the sale, or at the very least may have a negative impact on the transfer of goodwill.

Once a prospective buyer decides that this is the opportunity he or she wishes to pursue, the next step is to present the seller with a LETTER OF INTENT (LOI) or OFFER TO PURCHASE. While it resembles a contract, this is usually not binding, except for certain provisions such as nondisclosure agreements and covenants to negotiate in good faith. This document should outline the basic plan about how the parties will move forward toward closing. It should include price, proposed seller terms, escrow amount, and closing date. Since a covenant not to compete is frequently an important part of these transactions, it is suggested that it also be proposed.

Contingencies include availability of financing, proper licensing, and appropriate DUE DILIGENCE. In common language, due diligence is the mandatory information review process done by the buyer presented to the seller to make sure the seller is getting what he or she is paying for. While not a formal agreement, this is very important to the final results. Once it has been accomplished and everyone is satisfied with the outcome, the parties can move toward a final purchase, sale contract, and closing.

One final document, while not having a direct bearing on an agreement between a buyer and seller, may have a profound effect on the future value and continuation of the client/dentist’s life’s work. All doctors should have a MEMO OF DIRECTION for their practice on file. Dentists: Why let the value of one of your largest assets decline because you have not given surviving family members any clue as to how to dispose of your practice in the event of your unexpected death or incapacitation? All practicing doctors should know who in their area is known 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 this to your family, staff, and patients.

Most dentists see themselves as fair and honest people who could do business with a handshake. The purchase or sale of their practice is not the time for such sentiment. Dentists should inspect, review, and live by the terms of any agreement they make, and the odds of a successful transition will be greatly improved.

Dr. Steve Wolff

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