While valuations, financing, and transition planning are the focus of most dental business sales, any dentist contract lawyer will say that one of the most heavily negotiated provisions often is the indemnification clause.
As you will see from this article, a properly drafted indemnification provision protects both parties from unexpected liabilities post-closing. On the other hand, a poorly negotiated clause can derail a transaction.
An indemnification clause is a contractual provision requiring one party to compensate the other for damages, claims, losses, or liabilities. In dental practice sales, you can find indemnification clauses as a key part of the Asset Purchase Agreement (APA).
The key role of indemnification clauses is to allocate risk between the parties and minimize information asymmetry. For example, if a buyer discovers an undisclosed liability after closing (such as debt, open patient claims, or court cases), an indemnification clause may require the seller to reimburse the buyer for any damages. But they can work the other way, too, allowing sellers to ask buyers for reimbursement for the buyer's conduct after the transaction closes.
Indemnification provisions are often paired with representation clauses and warranties, all of which ensure the parties remain responsible for issues within their control. All of these clauses fall under the general principles of contract law. They are covered by many sources, such as Restatement (Second) of Contracts § 344 and certain provisions of the Uniform Commercial Code, making them common legal practice and highly enforceable.
Most indemnification requests concern issues that existed before closing but were discovered afterward. These often include insurance billing disputes, reimbursement claims, tax obligations, compliance concerns, and employee-related matters (which is why choosing the right type of contract for associates is super important).
While buyers usually want broad indemnification clauses to protect them from various scenarios, sellers want limitations on scope, amount, and the duration of their obligations after the deal closes.
That's why working with an experienced dentist contract lawyer during the negotiation phase is crucial, as vague or overly broad clauses may lead to disagreements.
We recently represented a dentist in the sale of his New Mexico dental practice. While the practice was being prepared for and listed on the market, the client was also engaged in ongoing litigation involving a state insurance program.
The negotiations with the potential buyer were going great, but the indemnification clauses proved to be a bottleneck.
Due to the open case with the insurance agency, the buyer wanted broad indemnification for any future insurance claims. Our client, the seller, was willing to indemnify the buyer for any liabilities arising from the current litigation; however, a blanket indemnification clause for any future issues was out of the question.
Unfortunately, neither party was willing to compromise on or change the scope of the indemnification language; the negotiations were terminated, and the deal didn't go through.
The situation demonstrates how indemnification provisions can directly affect the future of the entire deal, sometimes more than the purchase price or other financial terms.
Indemnification clauses are an integral part of any dental practice sale - buyers need them for protection against undisclosed liabilities, while sellers want reasonable post-closing obligations. Finding the right balance is essential to reaching a successful agreement that satisfies both parties.
The best way to avoid significant legal issues is to identify potential compliance concerns and liability risks as early as possible. That's why working with an experienced dentist contract lawyer as early as possible can help ensure negotiation of fair indemnification provisions and protect both parties' interests, keeping the deal moving forward.
Contact Finn Legal today to schedule a consultation regarding your next dental practice transaction.
