Learn why the seller’s “good standing” status with the state is an important representation in a dental practice sale and what can happen if the entity isn’t in good standing.
Each week, I share a quick insight from my dental law practice. This week’s topic: when a seller’s legal entity isn’t in “good standing.”
Scenario: Recently we had a client buying an oral surgery practice in the Southwest. As buyer’s counsel, we prepared the first draft of the purchase agreements. We received revisions back from the seller with 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 out that the seller’s legal entity had been administratively dissolved with the state due to a nominal amount of unpaid taxes. Our client asked what his options were regarding the purchase and what sort of consequences were there for the seller.
Answer: When selling a dental practice, one of the standard representations in the asset purchase agreement is that the seller’s entity is “duly organized, validly existing, and in good standing” with the state. That may sound like boilerplate legal language, but it actually matters quite a bit.
Being in “good standing” means the seller’s legal entity has kept up with all required state filings, paid annual registration fees, and complied with any franchise tax obligations. Essentially, the state recognizes it as an active and compliant business. If a seller’s entity has fallen out of good standing, it can cause real issues at closing. In some states, an entity that’s not in good standing technically doesn’t have authority to conduct business or transfer assets until it’s reinstated. That can delay the transaction or, like in our case, even invalidate certain representations in the purchase agreements.
From the buyer’s perspective, you want to make sure the entity selling the practice actually has the legal capacity to sell its assets. From the seller’s perspective, it’s an easy fix, but one that should be handled well before closing week to avoid scrambling for reinstatement documents at the last minute. For my client, this representation and warranty killed the deal at the time. The seller ended up paying the taxes owed and reinstating the entity with the state. We eventually closed the deal, but it delayed closing a couple months.
If you’re buying or selling a dental practice, take a quick minute to confirm the seller’s entity status with the Secretary of State early in the process. It’s a small detail that can prevent a big headache.
Need help reviewing your purchase agreements or getting your entity back in good standing before closing? Let’s talk.
