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.
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.
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.
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.
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.
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.
