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.
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.
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.
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.
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.
