Buying an existing practice is a potentially more attractive alternative to opening a scratch practice. The necessary permits, leases, equipment and patient base are already in place, so you should be able to start practicing immediately after the sale. However, there are some considerations to keep in mind in negotiating and finalizing the purchase of a practice.
What Due Diligence Should I Do?
Although looking at a practice’s annual production and collections can give you a rough estimate of a practice’s value, determining a practice’s true worth is more complex. You should look at a number of sources, such as the practice’s CDT codes, the office overhead, the lease, the existing patient base and the new patient rate, to give you a more complete picture of the practice.
How Should I Allocate The Purchase Price?
Once you have decided on the purchase price for the practice, you will also want to determine how best to allocate the price between categories such as equipment, goodwill and the covenant not to compete. Although this may seem to be a minor issue, the allocation of purchase price can have significant tax consequences for both the buyer and the seller. Generally speaking, buyers will want to allocate as much of the purchase price to equipment as possible, while sellers will want to allocate the purchase price to goodwill.
What Should I Do About Accounts Receivable?
Typically, and especially where a practice accepts insurance, there will be an outstanding accounts receivable balance as of the date of the practice sale. The accounts receivable must be addressed in the purchase and sale agreement. The purchase and sell agreement should specify whether the selling dentist will be on his or her own to collect outstanding balances and, if so, how much the buyer must help the selling dentist in collection efforts. Alternatively, if the accounts receivable are to be factored into the purchase price and, you will need to determine what kind of credit should be given to the seller for the receivables. Often, the buyer will value the receivables as of the closing date and adjust the purchase price based on an agreed-upon formula, but circumstances can vary.
How Can I Protect My Investment?
Sometimes a selling dentist will remain with the practice as an associate following the sale, or he or she will simply retire or move away. However, in many instances, the selling dentist will want to continue practicing in the same city. If the selling dentist intends to stay in the area, you will need to protect your investment in the practice by preventing the dentist from poaching his or her former patients from your practice. Any purchase and sale agreement should include strong restrictive covenants, including non-compete and non-solicitation provisions, which will prohibit the dentist from owning or working in a new practice within a certain radius of your practice for a specified period of time, and from directly marketing to his or her former patients.
For more information, please visit our website, comitzstanley.com.
While we are making an effort to share general knowledge with the dental community and answer dentists’ questions, this not a substitute for individualized advice from an experienced healthcare lawyer. If you would like to speak with our attorneys and have them take an in-depth look at your particular situation, please feel free to contact us directly.