QUESTION: What are the roles of a dental office broker and a lawyer, and how can they be successful in working together?
William P. Prescott, JD, EMBA
The role of the broker
If the selling dentist has not found or cannot find a buyer for the sale of the dental office, it is important to use a broker and it is worth it. Brokers typically charge 10% of the sale price, including any real estate, as a finder’s commission to match buyer with seller. The broker does not need to attempt to prepare legal agreements to justify the brokerage fees, which can delay the transition and increase legal fees.
The broker typically prepares the practice assessment, along with a confidentiality letter to be signed by prospective buyers prior to disclosure of confidential practice information. Additionally, the broker secures funding for the sale and purchase of the firm and any real estate, which is more important than ever given the credit environment due to COVID-19. Fortunately, the selling dentist can still be fully paid for the sale of the practice in cash, but it takes some effort on the part of the broker to secure the financing, subject to the approval of the selling dentist’s CPA. The broker can also define the commercial conditions for the sale and purchase of the firm and any real estate. If the broker is preparing the letter of intent for the sale and purchase of the practice and any real estate, it should be carefully reviewed by the selling dentist’s lawyer before the letter is sent to the selling dentist.
The broker prepares a registration agreement which is signed by the selling dentist to secure the services of the broker. The listing agreement provided to the selling dentist by the broker is a contract that provides that the broker will find a buyer for the selling dentist’s office based on the valuation of the broker’s office in return for a specified brokerage fee.
The role of the lawyer
The lawyer reviews the registration agreement that the broker provides to the dentist. The registration agreement may contain exclusions from brokerage fees paid by the selling dentist for candidates already identified. In addition, the terms of the listing agreement should be for a specified period of time and contain termination provisions for non-performance by the broker, subject to the selling dentist providing the practice information requested by the broker in order to that the broker effectively sells the practice.
The lawyer will prepare or revise and comment or rewrite the letter of intent if it is prepared by the broker. The letter of intent does not have to be a “one size fits all” agreement; it may take longer to rewrite than to prepare. For example, disagreement over some key terms has been the failure of an agreement on the sale and purchase price, the radius and duration of restrictive covenants, the completion of orthodontic cases or other specialties. unfinished business, incorrect allocations to tangible assets or goodwill and continued full-time employment of the seller and possibly some staff, eg spouse. The lawyer must prepare the sales and purchase contracts based on a detailed and complete letter of intent. The lawyer, in collaboration with the CPA and the broker, takes care of tax matters and allocations for the sale and purchase.
Working together successfully
The broker has prepared the practice assessment, letter of agreement and confidentiality letter to be signed by the purchasing dentist before receiving confidential practice information. Counsel for the selling dentist has reviewed the letter of intent and revised it. The lawyer then prepared the sales and purchase contracts based on the letter of intent. The sale and purchase went well.
Problems can arise when the broker prepares a letter of intent that is signed before lawyers review it. In one case, the letter of intent indicated that the closing would take place in several months and that the practice would be taken off the market. However, the sum of the deposit, which was in a check, was insufficient for the selling dentist to do so. If the deposit had been in the form of a promissory note, the sum could have been much larger. The letter of intent also did not specify when staff would be notified of the sale. He also said the selling dentist would work for six months after closing, but did not set the after-sales, clinical and / or administrative schedule, or compensation. Thus, negotiations were necessary for the doctors to agree on what should have been previously agreed and contained in the letter of intent.
In another case of a sale to a corporate buyer, the letter of intent did not provide for the default of two holdback amounts due at the end of the first and second 12-month periods following closing. The deductions were based on the performance of the practice. In addition, the selling dentist was required to work for three years after closing for the buying company with limited ability to leave, regardless of the quality of the management or the non or incorrect payment of the doctor’s remuneration and bonuses. In addition, the broker prepared the sales and purchase contracts that did not comply with the deficient letter of intent. The lawyers had a lot to say!
It is important that the broker and lawyer work in the best interests of the selling dentist, keeping in mind that if the selling and buying is unfair to the selling or buying dentist, sooner or later there will be a dispute. . And remember that the broker’s fees are worth the cost if the selling dentist cannot find a buyer otherwise.
Thomas L. Snyder, DMD, MBA
Since a broker is retained by the seller to find a suitable buyer, he or she should have first-hand knowledge of all aspects of the practice. So it makes sense that the broker takes responsibility for negotiating and developing consensus on all trading points of the transaction. The broker must be knowledgeable and able to communicate to both parties how best to handle accounts receivable, patient credit balances, work in progress, and any corrective dental work (eg, remakes).
The broker should also be able to help the parties come to a fair price and deal with the practical elements that need to be completed for a smooth close and post-close experience: for example, putting the buyer in focus. route with a credit card machine and payroll service. Brokers should be able to define the milestones that must occur to reach the closing date, such as meeting the lender’s closing conditions in a timely manner, as well as coordinating the actual close. The best brokers can also provide contract template agreements that will help guide parties through best practices for all points of business.
The role of the lawyer should be aimed at informing the parties of their rights, risks, obligations and responsibilities under sales contracts, which may be drawn up by the lawyer at the discretion of the parties. A seller’s lawyer will generally want to ensure that the seller can opt out of the transaction with as few conditions as possible. Conversely, a buyer’s lawyer will want to try to tie some strings, so if things don’t go well or there have been misrepresentations, the buyer can have recourse against the seller. Much of the lawyer’s involvement should be in developing fair compensation terms, or a party’s contractual right to have its costs covered by the other party if the compensated party suffers losses. Indemnification is the primary means available to lawyers to ensure that liabilities that arise after closing are the responsibility of the buyer, and that liabilities resulting from the operation of the firm by the seller remain the responsibility of the buyer. seller. It is also possible for a lawyer to engage in negotiating business terms, especially if the broker wishes not to be as committed as mentioned above.
Ultimately, it is important that the broker and lawyer communicate up front so that they both understand their respective roles and avoid duplication of effort.
Editor’s note: This article appeared in the July 2021 print edition of Dental economics.
WILLIAM P. PRESCOTT, JD, EMBA, of Wickens Herzer Panza in Avon, Ohio, is a tax and practice transition lawyer, as well as a former general manager and dental equipment and supplies representative. His new book, Joining and Leaving the Dental Practice, is available from the American Dental Association Center for Professional Success. ADA members can download the eBook for free at ada.org/prescottebook. For this and other Prescott publications, visit prescottdentallaw.com. Contact him at (440) 6958067 or [email protected]
THOMAS L. SNYDER, DMD, MBA, is the Director of Transition Services for Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or [email protected]