While most parties focus their negotiations when buying or selling a dental practice on the purchase price and financing terms, for obvious reasons, bring down certificates in dental practice sales are among the most important legal protections during the acquisition process.
As you will see in this article, these documents ensure that the information the seller provided remains accurate until the deal is fully closed. Because of this, carefully drafted bring-down certificates not only protect the buyer but also may increase the sales price, benefiting the seller as well, making them a super important element of Asset Purchase Agreements (APAs).
What Is a Bring-Down Certificate and Why Is It Important
A bring-down certificate is a document signed at closing that confirms that all representations and warranties made in the APA remain valid and enforceable at that time. This is especially important in dental practice sales, as these transactions can involve significant operational changes during the transaction period.
Scenario: We recently had a dentist who was purchasing a practice in Virginia. Both parties had signed the Asset Purchase Agreement a couple of weeks before closing, which is very typical for a dental purchase/sale. Between signing and closing, the office manager quit, leaving the office barely functioning. Thankfully, for our client, we had Bring-Down Certificates in place, which required the seller to state that all representations and warranties that were true when the parties signed the APA remained true at closing. Because these important, yet often overlooked documents were in place, our client was able to delay closing and renegotiate the purchase price to account for events that occurred between signing and closing.
How Bring-Down Certificates in Dental Practice Sales Protect Buyers
In ideal scenarios, a dental practice transition will go smoothly. However, in business, things are rarely ideal, and the period between signing and closing the deal is where problems most often occur. The industry and the economy are quite volatile, and many factors can significantly affect the deal and its value - staffing changes, declining revenue, compliance concerns, patient retention issues, and more.
When you combine that with issues that follow the deal, such as prepaid procedures, it is easy to understand why working with an experienced dental transition lawyer from the get-go is a smart choice if you want the dental practice purchase agreement to close as smoothly as possible.
How Bring-Down Certificates for Dental Practice Acquisitions Work
With bring down certificates, buyers get an additional layer of protection. Before finalizing the deal, the seller must once again confirm that the practice remains in the same condition as at the time the agreement was signed.
Bring-down certificates are closely related to the representations and warranties section of the APA. Here are some of the most important provisions to check:
- Financial performance
- Employee retention - especially for associate agreements and the W-2 vs. 1099 Positions
- Any active litigations
- Regulatory compliance (issues)
- Insurance participation and information
- Patient records and billing
Bring down certificates are there to ensure that these representations are accurate at closing. If not, the buyer will have legal grounds to delay the transaction, request new guarantees, renegotiate terms, or even terminate the agreement if the situation has changed drastically since the APA was signed.
Why Expert Legal Guidance Matters in a Dental Practice Acquisition
Many dentists severely underestimate the complexity and potential length of a dental practice sale closing process. Even minor issues can quickly compound into major legal and financial burdens. That's why identifying and mitigating risks as early as possible is crucial.
For those reasons, consulting a skilled and experienced dental practice acquisition attorney is one of the best ways to avoid costly errors that can even lead to court disputes.
Sellers should consult legal professionals to ensure the practice complies with the law before listing the business.
On the other hand, dental practice transition lawyers help buyers perform due diligence as early as possible, identify potential issues, and include adequate bring-down certificates in dental practice sale agreements, ensuring the business is in good condition upon closure.
If you are preparing for a dental practice sale or acquisition, contact Finn Legal today to avoid preventable legal issues that could derail your deal.
When buying or selling a dental practice, employee-related clauses in the asset purchase agreement are far more than standard, boring, tick-the-box legal verbiage.
Any experienced dental practice lawyer will confirm that these clauses define risk, which is why it is imperative to ensure both parties understand what is transferred and what liabilities will follow the closing.
Scenario: We recently represented a seller in the sale of his dental practice in Kansas. Under his paid‑time‑off (PTO) policy, all employees received their full annual PTO allotment on January 1 each year, to be used throughout the year. Because the practice was being sold in March, our client was potentially responsible for paying out an entire year’s worth of PTO to all employees at closing. We were able to negotiate a solution with the buyer under which the buyer agreed to assume the existing PTO policy going forward. This avoided a scenario where both parties were paying for the same year of PTO and prevented employees from effectively receiving a double PTO benefit.
As we will discuss, employee representation provisions clarify the status of employees, but also existing obligations and the potential for future exposure. Without a full understanding of these terms, the buyers may inherit issues, while the sellers risk post-closing disputes and reputational damage due to inaccurate sales disclosure.
Employment Agreements, Compliance, and Dental Employment Contract Review
Commonly, employees are terminated by the seller and then rehired by the buyer. But things are rarely that straightforward, and acting without thorough due diligence carries significant federal and state law risks.
One of the key areas a dental practice lawyer will examine is whether the employment agreements are properly disclosed, whether for W-2 or 1099 positions. A thorough dental employment contract review will ensure no hidden obligations will show up post-sales, such as bonus structures, restrictive covenants, or long-term commitments.
However, employment law compliance is more than just ensuring no hidden costs are present. The contracts need to comply with wage and hour laws, worker classification rules, anti-discrimination regulations, and also be in line with the codes of practice.
Plus, not being compliant with federal laws such as the Fair Labor Standards Act (FLSA) or Title VII of the Civil Rights Act can expose buyers to federal scrutiny after closing, which is why it's imperative to conduct a thorough legal review pre-purchase.
Employee Claims, Compensation, and Hidden Liabilities
While proactively identifying problematic employment issues in contracts is the best option, a dental practice acquisition attorney will also look into any existing employment disputes.
During the transition process, sellers will typically represent and warrant that there are no pending or threatened claims (or disclose the status of existing ones), usually arising from wrongful termination, wage disputes, workplace harassment, and similar issues.
If the seller is transparent, the buyer will know exactly what they are getting at the time of sale. On the other hand, if the seller wasn't transparent, and there indeed were active disputes, the buyer can hold them accountable as they have a signed clause that guarantees the opposite.
It's also important to fully disclose compensation and benefits, which include salaries, bonuses, and benefit plans. Benefit plans can be problematic as they may fall under the Employee Retirement Income Security Act, further complicating the due diligence.
Depending on state law and any contractual language, including, but not limited to, Employee Handbooks, employers may be required to pay any accrued, but unpaid benefits upon termination. Since the employment of all employees terminates as of the closing date in a dental sale/purchase, the seller is potentially responsible for payment of these accrued benefits. This can equate to thousands or tens of thousands of dollars for the seller.
Conclusion: Protect Your Transaction with the Right Legal Guidance
In short, a thorough upfront financial and legal due diligence will uncover any undisclosed liabilities, which tremendously impact the value of the deal. That's why it's best to work with a dental practice M&A lawyer early and set the transition on the right foundation, reducing the headaches that come from the issues that were put under the rug.
Don't let avoidable legal challenges bottleneck your transaction. Contact Finn Legal now and schedule a personalized consultation that will help you go through your dental practice transition with peace of mind.
In this post, we will explain why a dental service organization attorney often recommends forming DSOs as partnerships, why this arrangement works operationally, and how it offers legal and tax advantages.
Scenario: At the beginning of this year, we helped set up a DSO for a practice in Kentucky. In our initial discussions with the client, the inevitable tax question came up, and the client wanted to know how the DSO entity would be taxed and which tax election would be most beneficial for the DSO entity.
As you will see, making the choice carries implications – tax, legal, organisational, and compliance-related, which is why it is always a good idea to consult legal professionals who have experience working with DSOs.
Dental Service Organization Attorney Explains DSO Structure
As Dental Service Organizations (DSOs) continue to grow, one question arises quite frequently:
Why are most DSOs taxed as partnerships?
To explain it, we first need to understand the nature of DSOs: A Dental Service Organization is a business entity that provides non-clinical services to dental practices.
These services usually include billing, marketing, operations, HR, but never clinical care or treating patients. This is a crucial distinction as the corporate practice of dentistry is forbidden.
As a result, DSOs usually operate as LLCs (limited liability companies) and partner with and contract with independently owned dental practices that provide clinical and treatment services.
Hiring a dental service organization attorney at the business formation stage ensures the structure is fully compliant with state laws and ethical and industry standards.
Why DSOs Are Taxed as Partnerships
Even though DSOs are formed as LLCs, they elect to be taxed as partnerships under the IRS's partnership taxation rules. The key benefit of this approach is that it avoids entity-level taxation. Instead, the income is passed directly to the owner.
This type of structure is ideal for DSOs as they often work with several types of stakeholders - dentists, private equity investors, management companies, and similar. Choosing partnership taxation gives DSOs greater flexibility, as the structure closely mirrors the business's economic and operational realities.
Key Benefits of DSO Partnership Taxation
As explained, the main benefit of partnership taxation is the pass-through treatment, which provides added flexibility.
Subchapter K of the Internal Revenue Code states that the DSO will not pay federal income tax, as profits and losses are reported on each owner's return.
The added flexibility of partnerships is ideal for customized ownership and compensation arrangements, as profits can be distributed in ways that don't always follow ownership percentages, as is often the case when clinicians and investors are involved.
Lastly, DSOs expand quickly, and partnerships are much easier to scale. Location and ownership changes, adding new partners, all of that can be easily handled without corporate restructuring. Working with an experienced DSO lawyer will help draft agreements that navigate the business's turbulent nature. You will be fine.
Maintaining Compliance Through a Dental Service Organization Attorney
While DSO taxation as a partnership offers significant advantages, ensuring proper structure and ongoing compliance is an absolute must. To avoid costly issues, DSOs need to balance tax efficiency with legal requirements, primarily the corporate practice of dentistry doctrine.
Whether you are forming a DSO or joining one, working with a dental service organization attorney ensures your DSO remains compliant while simultaneously preserving the beneficial partnership tax status, spurring future growth.
Contact Finn Legal today to schedule your personalized consultation and ensure your DSO is structured for long-term success.
When preparing to sell their business, dentists usually focus on valuation and finances, as well as finding the best buyer.
You will see why working with an experienced dental practice transition lawyer prevents headaches and complications during a dental practice transition: handling pre-paid procedures that haven't been completed.
Scenario: Last month, we had a periodontist purchasing 80% of the outstanding membership units in a multi-location practice in Washington. Our client, the buyer, found out in due diligence that this particular practice carried a significant amount of pre-paid procedures. Our client was concerned that the seller would keep all the pre-paid money, but he would have to perform all the procedures at no cost. This comes up in almost every dental sale/purchase in varying degrees.
While pre-paid procedures are great for cash flow, they raise several legal and financial questions when it comes to selling your business, and addressing them improperly can carry legal and compliance risks.
Understanding Pre-Paid Procedures During a Practice Transition
Paying in advance for treatment plans is nothing unusual in the dental practice industry. Orthodontics, implants, full-mouth restorations, and similar more complex procedures require several trips to the dentist, and can last for several months.
But because these services haven't been completed, they are often treated as "unearned revenue." And when trying to sell your business, this type of revenue can create tension.
The reason is that the seller treats the money as revenue collected, while the buyer is obliged to complete the treatments, which creates expenses for chair time, equipment, staff, and potential patient issues.
Those are some of the reasons why identifying pre-paid procedures early in the transaction process is crucial. With the proper legal guidance, your letter of intent should already outline the terms of sale, even before the purchase agreement draft, and both will include unfinished treatments and explain how to handle them.
Handling Pre-Paid Services in an Asset Purchase
Often, dental practice acquisitions are structured as an asset purchase. That arrangement allows the buyer to acquire the dental practice's assets rather than the legal entity itself. Those assets usually include equipment, patient records, and goodwill, as well as similar components of the practice, depending on the arrangement. But the buyer also acquires the unfinished treatment obligations.
One way asset purchase agreements address the unfinished treatments issue is by allowing buyers to request a credit at closing to account for the future costs of completing procedures that have already been paid. In other words, the future costs are discounted from the total selling price of the dental business.
However, that is only one potential bottleneck, which is why working with an experienced dental practice transition lawyer can help you with risk management and structure the provisions to define responsibilities for future treatments clearly.
Stock Sales and Continuing Treatment Obligations
While asset purchases are more common, in some transactions, the buyer purchases the legal entity that owns the dental practice. When that happens, things continue to operate as usual, with the only change in the ownership structure.
Because stock sales result in liabilities remaining with the entity, buyers should carefully evaluate the financial statements during due diligence. Those unfinished treatments should be considered as an important part of the overall practice valuations, and a significant factor in determining the final price.
Regulatory Compliance and Patient Care
While finances are important, dental businesses directly deal with patients' health. For that reason, it's imperative that a dental practice transition not infringe on patients' rights.
Patients should be informed proactively about the ownership change and allowed to choose to continue care with the new provider, if they wish.
That type of communication not only ensures regulatory compliance but also builds strong patient trust and maintains the reputation of both the seller and the buyer, which is why ensuring good standing matters for future transitions, too.
Why a Dental Practice Transition Lawyer Is Important in Practice Sales
During practice sales, a dental practice transition lawyer plays an important role in structuring agreements, especially when dealing with unfinished treatments.
When done correctly, purchase agreements will detail the pre-paid procedures and the obligations arising from them. A good dental business lawyer will include the right clauses in the letter of intent to ensure unfinished treatments are discussed from the get-go.
Contact FINN LEGAL today to get expert guidance and a smooth, compliant practice sale.
One of the more common issues in a dental asset purchase agreement transition is determining the after-sale status of the selling dentist or existing associates.
As you are about to see, dental practice sale associate agreements are not just simple paperwork. Failing to select the agreement type that aligns with the actual business circumstances may expose the business to worker misclassification risk, leading to audits and penalties.
Scenario: Recently, we represented a buyer who bought his first dental practice in Missouri. The seller was going to stay on and do some post-closing clinical work to help our client transition the practice. The question then became whether the seller should remain an employee or become an independent contractor.
We will discuss when to opt for W-2 employment vs. 1099 for associate dentists and the pros and cons of each choice.
The Core Debate: W-2 vs. 1099 for Associate Dentist
After the transition, the dilemma is choosing between an employee vs. independent contractor for a dentist. The option you choose will primarily depend on the length of the transition and the level of control the buyer requires.
However, the choice isn't entirely free and will depend on the specific business circumstance.
The independent contractor agreements must meet the standards set by the DOL 2024 Final Rule and the upcoming changes.
The Department of Labor applies a "totality of the circumstances test" to determine whether an independent contractor is truly independent.
Labeling a contract as "1099" is largely meaningless if the dentist is economically and functionally dependent on the buyer.
Let's break this down through two scenarios:
Scenario 1: The Short-Term Transition (1099)
Private sales are usually followed by an arrangement in which the selling dentist stays 30-90 days. This allows them to introduce patients to the new owner and complete procedures that require their personal involvement.
In this situation, the seller is usually hired as an independent contractor. This allows the buyer to avoid payroll taxes and benefit costs for that temporary period.
But this type of arrangement carries risks.
Even if it is a short-term situation, if the new owner dictates the seller's hours, provides materials, and exerts significant influence over their practice, this can still constitute a misclassified employment agreement, leading to regulatory scrutiny.
Scenario 2: The Long-Term Associate (W-2)
In situations when the seller plans to work for a longer period post-sale, which is common in DSO acquisitions, the post-closing deal dental associate contract should almost always be a standard W-2 Employee arrangement.
When the associate dentist works as a W-2 Employee, the buyer has full control over scheduling, staff management, materials, and everything else.
But because there is no dispute over who is in charge of the business, the buyer must also assume responsibility for the benefits and handle the tax obligations.
Best Practices for Transition
Choosing dental practice sale associate agreements that do not align with the actual working relationship and conditions is one of the fastest ways to trigger an audit.
To prevent that, buyers should talk to an experienced dental practice transition lawyer to audit the business's existing 1099 associates. If they are integral to the business, they might need to be converted to W-2 Employees at the sale closing.
Sellers, on the other hand, should clean up the agreements before the sale. Even though it might temporarily increase expenses, a practice with properly classified W-2 employees is worth more and easier to sell than one that relies solely on high-risk 1099 contractors.
Dental Practice Sale Associate Agreements: Bottom line
The key takeaway from this article should be that dental practice sale associate agreements are not just simple administrative documents you tick off your transition checklist. These arrangements directly impact legal risk and post-sale business stability, and therefore deal value, making them super important for both buyers and sellers.
Experienced legal guidance can help you evaluate existing associate agreements, reduce risk, and simultaneously increase business value, benefiting the seller and protecting the buyer's investment.
Contact FinnLaw today to schedule your consultation and ensure your dental practice transition is handled with confidence.
Each week, I share a brief insight from my dental law practice. This week’s focus: how a seller’s lack of “good standing” can impact a dental practice transition.
Scenario: Recently, we had a client buying an oral surgery practice in Texas. As buyer’s counsel, we prepared the first draft of the purchase agreements. We received the seller's revisions, which included a major red flag. One of the standard representations and warranties that the seller of a dental practice will make to the buyer is that the seller is “duly organized, validly existing, and in good standing” with the state. In this case, the seller deleted that language. Upon further investigation with the state, we found that the seller’s legal entity had been administratively dissolved due to a nominal amount of unpaid taxes. Our client asked about his options regarding the purchase and the consequences for the seller.
Let’s break down why ensuring good standing of your dental business is one of the most important factors that will determine a successful dental practice transition.
We will cover what good standing is, how it affects the transition, and why working with an experienced dental practice acquisition attorney will help you avoid common pitfalls in the dental business transition process.
Understanding Good Standing in a Dental Practice Transition
Good standing is not just a simple technical term. It is official confirmation that a business meets all state requirements, including filing the required documents, paying any taxes owed, and paying annual or other recurring fees.
When it comes to a dental transition, good standing is essential, as it shows that a legal entity exists and can operate legally. That’s why a dental practice transition lawyer often starts by verifying the good standing status before moving the transaction forward, which prevents headaches further down the road.
The issue is that many dental practice owners, due to their packed schedules, become unaware that their business is no longer compliant.
Administrative dissolution may occur due to as minor an issue as an unpaid annual fee or a missed filing. But even these small things might derail a transaction long before it reaches a closing table.
Prioritize this step early. Ensure your business is in good standing. This is another reason to work with a dental practice lawyer.
Why Legal Capacity and Good Standing Are Critical Before Closing a Dental Practice Sale
When it comes to completing the transaction, good standing directly affects the seller's legal ability. A dissolved entity is likely to lack the legal capacity to even sign an Asset Purchase Agreement, rendering the contract voidable or unenforceable, posing an immediate legal risk, and impacting practice value.
On the other hand, poor standing is a major red flag for any buyer. This type of non-compliance signals deeper issues, such as tax concerns, liens, or poor record-keeping. An experienced dental practice attorney recognizes this as a critical due diligence concern. They will advise their client that a lack of good standing likely indicates hidden liabilities the buyer may inherit.
While it is important to ensure good standing early, proof of compliance at closing is non-negotiable. You will usually find a Certificate of Good Standing required to finalize the deal. Not having it will delay or stop a transaction.
The Impact of Good Standing on Dental Mergers & Acquisitions
In larger DSO transactions, compliance standards are higher. In practice analysis, there will be zero tolerance for any seller not in good standing.
When the stakes are higher, a lack of good standing will create more delays, as a dental practice M&A lawyer cannot finalize the transfer until the entity is reinstated. Depending on the state and case, this can take weeks or months, significantly affecting practice valuation and the final price.
Plus, sellers usually must make specific representations in the purchase agreement. For example, they may guarantee that the business is “duly organized and validly existing.” If that statement is inaccurate, it opens the floodgates to the seller’s legal liability. This can put the entire deal into jeopardy.
Maintaining Compliance Through a Dental Practice Lawyer
The best way to avoid significant legal issues is to address non-compliance early, before the sales process begins.
As a dental practice seller, you want to ensure your business is in good standing before it even goes to the market. As a practice buyer, performing basic due diligence as early as possible will prevent later issues that can derail the entire transaction.
Even if problems are discovered, an experienced dentistry business attorney will help you navigate the reinstatement process with the Secretary of State. While the process is sometimes more complicated, it often comes to filing missing documents and paying outstanding fees, which can be resolved quickly.
Whether buying or selling, don't let avoidable legal challenges stall your dental practice transition and undermine your business's market value. Contact Finn Legal now to schedule your personalized consultation and safeguard your dental practice's future success.
