Dental Practice Payoff Letters: Why They Matter and How They Can Delay Closing

Payoff letters are essential in a dental practice sale. Learn what they are, why they matter, and how to avoid closing delays when buying or selling a dental practice.

Each week, I share a quick insight from my dental law practice. This week’s topic: payoff letters and why they’re so important at closing.

Scenario: We had a client that just closed on a dental practice in the Midwest. She had been an associate at the practice for several years before buying it from her employer. All things considered, the practice transition was going smoothly up until about two weeks before closing. The holdup: payoff letters. This is one of the most easily overlooked, yet critical pieces of the process of buying or selling a dental practice. These simple documents can make or break a smooth closing.

Answer: First, let’s discuss what a payoff letter is. A payoff letter (or payoff statement) is a written statement from a lender showing exactly how much is owed to pay off a loan in full as of a certain date. In a dental practice sale, payoff letters are often needed for practice loans or equipment financing. A payoff letter typically includes:

• The total amount due, including principal, interest, and any fees
• The per diem interest (the amount of interest added each day)
• Payment and wiring instructions
• The date through which the payoff is valid (usually around 10 days)

Before a dental practice changes hands and the lender wires the money to the seller, any existing liens or loans tied to the seller and the assets of the practice must be paid off. Most dental acquisitions are in the form of an asset purchase, meaning the buyer only purchases the assets of the business and assumes none of the liabilities. So, in order for the buyer to take ownership of the assets free and clear of any encumbrances, all the liens must be paid off.

Lenders don’t always move quickly when it comes to payoff letters. It can take several days or even a week to issue a payoff letter, and sometimes lenders won’t release it until just before closing. If the buyer’s attorney (if the buyer is not using any financing to fund the purchase) or the buyer’s lender (if the buyer is financing the purchase) does not have the payoff letter(s) in hand before closing, the deal will not proceed.

Some best practices for dealing with payoff letters are the following:

1. The buyer’s attorney should perform a UCC search early in the process (right as the purchase documents are starting to be drafted and reviewed) to determine if there are any liens against the practice or assets. The buyer’s lender will also perform this search to verify and confirm what the buyer’s attorney found.
2. The seller should start requesting payoff letters as soon as the closing date is decided.
3. Like we discussed earlier, the payoff letters might only be good for the next 10 to 30 days. If the anticipated closing is longer than the good-through date, the seller should make a note to follow up with the lender again when the time is right closer to closing.

Payoff letters are one of those small details that can make a big difference in your closing timeline. By planning ahead, you can prevent unnecessary delays and ensure a smooth, successful dental practice sale. If you’re preparing to buy or sell a dental practice, contact Finn Legal to make sure every step, including the handling of any payoff letters, is handled correctly from start to finish.