Message Boards
Today's Active Topics Today's Active Cases Browse Forum Categories My Recent Activity My Messages Private Groups My Marked Threads My Subscriptions
Today's Active Images Today's Active Polls Most Active Topics Global Townie Map Advanced Message Board Search Message Board Terms of Use

Dental Transactions Through the Looking Glass by Casey Gocel and Jonathan Rhone

Start Discussion
Categories: Practice Transitions;
Dental Transactions Through the Looking Glass 

Ten lessons from dental deals gone right (and wrong)

by Casey Gocel and Jonathan Rhone

The dental mergers and acquisitions (M&A) market is an active marketplace, driven by a greater number of entrepreneurial dentists, an increasing number of practices ready for transition, consolidation by dental support organizations (DSOs), and multi-practice owners, a stronger focus on maximizing efficiency through better management of fixed overhead expenses, and plenty of bank financing and other strategies available to purchase practices. With so much M&A activity and constant talk of buying, selling, and merging practices, this article is intended to provide 10 concrete lessons for a successful dental M&A transaction so that when you are ready to explore a transaction in earnest, you will be prepared and better positioned to avoid common pitfalls that could derail a deal.


Lesson 1: Negotiate a letter of intent
A letter of intent (LOI) is a non-binding offer to purchase a practice. LOIs typically include the high-level deal terms, and, depending on the deal, more specific key terms. While a non-binding LOI is precisely that—non-binding—it is one of the most important parts of a deal because it sets the expectations of the parties with respect to purchase price, anticipated closing date, payment structures, employment expectations, holdbacks and escrows, and more. The LOI should be negotiated and signed before the definitive deal documents are drafted because it will save the parties time and money in the long run. An LOI sometimes includes certain binding clauses, such as “no-shop,” “exclusivity,” and “confidentiality” provisions. No-shop and exclusivity provisions can prevent the parties from seeking other deals while they are negotiating the current deal, while confidentiality helps protect the parties from any unauthorized disclosures of confidential information. These are key terms that will protect the parties as they negotiate the deal.


Lesson 2: Beware of problematic leases
The real estate aspects of a transaction often disrupt M&A deals because if a seller leases its property, the buyer will need to assume the lease. That almost certainly means that the parties must obtain the landlord’s consent to assign the lease to the buyer. It is essential to review leases early in the M&A process to understand the landlord’s rights regarding lease assignment, any requirements for personal or corporate guarantees, and whether the landlord or lease terms impose unreasonable demands for lease assignment. Oftentimes, a landlord will request to review the buyer’s financials before consenting to the assignment, which could take time. If the lease is not addressed early in the process, and the parties move towards the closing date without the landlord’s consent to assign the lease, the entire deal can unravel if the lease cannot be assigned.


Lesson 3: The importance of reputational due diligence
Reputation matters. It is essential to understand what publicly available information exists about you before pursuing a transaction. DSOs and other buyers typically conduct basic research on Google, ChatGPT, and social media sites, and may even run background checks. Sellers often conduct their own research on buyers to better understand who they are entering into business with. That means you should remove provocative and inappropriate pictures from social media and be aware of any negative articles that exist about you. It is important to be truthful and forthcoming about potentially damaging publicity. In one case, a selling doctor, when asked by a DSO, informed them that he had never been arrested. The doctor, in fact, was arrested several years earlier, but the arrest had since been expunged from his record. However, a news article was unearthed by the DSO through Google research. The DSO canceled the transaction. The deal didn’t fall through because the doctor was arrested—it fell through because he lied about it.


Lesson 4: Multi-practice sellers/operators
When a seller has more than one practice or multiple locations, it can complicate a transaction, especially if the doctor is not selling all of their practices. It is especially important to conduct thorough financial due diligence to understand the financial health of the selling practice and ensure that the revenue reported to the buyer is derived solely from the practice being purchased. In some cases, practices will have debts that are cross-collateralized across their multiple practices, meaning that the assets of a selling practice could be encumbered by loans on the non-selling practices.

If a doctor has two practices in close proximity to each other, but is only selling one, it can blur the post-closing covenants parties agree to. In these cases, it is important for a buyer to have proper non-solicitation provisions to prevent patients, referral sources, and employees from moving to the non-selling practice. It is also crucial for a seller to be able to continue to operate the practice that it is not selling. The non-compete provisions must be closely tailored to the parties’ specific needs in these cases.


Lesson 5: Determine how accounts receivable (A/R) and patient credits will be handled
While a deal is being negotiated, the seller should ordinarily continue to operate the practice through the closing date; that means that at closing there will be outstanding A/R and patient credit balances. It is important to determine who will own the pre-closing A/R after the closing. Sometimes it is included in the transaction as a purchased asset; sometimes it is excluded. If the A/R is an excluded asset, the parties must decide who will collect the A/R after closing and for how long. Oftentimes, a buyer will charge a collection fee to collect and remit the outstanding A/R to the seller. It is also important to delineate how the collected A/R will be applied (i.e., on a LIFO or FIFO basis). Suppose it is applied on a LIFO (last in, first out) basis. In that case, the collected A/R will be applied to the newest invoice, meaning it will likely be paid to the buyer. Conversely, if it is applied on a FIFO (first-in, first-out) basis, the collected A/R will be applied to the oldest invoice. The money will likely be the property of the seller.

Also, patient credits are a liability for the selling practice. A buyer will not want to assume such liability and will often require that the purchase price be reduced by the amount of patient credits owed to patients as of the closing date.


Lesson 6: Understanding purchase price allocation
When buying or selling the assets of a practice, the purchase price must be allocated among the different types of assets being purchased for tax purposes. The IRS breaks this into seven different asset classes. The purchase price allocation among the seven classes is important because it can greatly impact the amount of tax each party owes. Typically, a seller would like to allocate as much of the purchase price towards goodwill as possible, because the sale of goodwill is taxed at long-term capital gains rates. Meanwhile, a buyer will typically desire to allocate as much as possible to tangible assets (i.e., equipment and machinery) because these physical assets can be depreciated very quickly. Oftentimes, the seller has already fully depreciated those assets, so the amount allocated to the physical assets will be taxed at ordinary income tax rates. It is important to work with an accountant to determine the appropriate and most tax-efficient allocation.


Lesson 7: Proper restrictive covenants
At its most basic level, a restrictive covenant is a limitation on the seller’s conduct after closing. Typically, four restrictive covenants apply in dental practice transitions: confidentiality, non-disparagement, non-competition, and non-solicitation. Every state has different rules regarding the enforceability of non-competes; however, in most cases, restrictive covenants are enforceable in the context of a business sale (even if state law prohibits non-competes in employment agreements).

When it comes to enforceability, the guiding principle is that the restrictive covenant must be “reasonable” in both time and geographic scope. In the context of a sale, a five-year restrictive covenant is generally enforceable. In the context of an employment agreement, the duration is typically much shorter, usually ranging from one to two years, depending on state law. Location matters tremendously when determining if the geographic scope of the restriction is reasonable. For example, in New York City, the scope will likely be a matter of blocks because of the population density, but in a more rural area, the non-compete can extend for 10, 20, or even 50 miles, depending on the region.


Lesson 8: Successor liability for buyers; what to look out for
In most cases, when acquiring a dental practice, the buyer will purchase the assets of the practice, rather than the selling entity. This is because the buyer does not want to assume any risk or liability associated with the seller’s entity. When purchasing the assets, the buyer can choose which, if any, practice liabilities it will assume post-closing. That being said, there are certain cases where a buyer can be found to have “successor liability” simply because they have taken over the operation of the practice.

The best way for a buyer to protect itself against successor liability is to conduct adequate due diligence on the practice. For example, buyers should have their accountant review all financial records, inspect the equipment, interview the staff to ensure operations are running smoothly and in compliance with applicable laws, audit the charts and billing records, review the practice’s insurance policies, and require that the seller obtain tail insurance coverage.

Another way to protect against post-closing liability is to include a robust indemnification provision, which requires the seller to reimburse the buyer for any out-of-pocket expenses incurred by the buyer as a result of the seller’s pre-closing actions or misrepresentations. A good M&A attorney can also provide additional protection by obtaining a tax clearance letter, including a setoff against amounts owed to the seller in the purchase agreement, or even structuring the purchase price payments to occur over a period of time to safeguard against potential future liability.


Lesson 9: Pursue tax-efficient structures
Before engaging in any transaction, you should consult with an experienced accountant and/or tax lawyer to ensure tax efficiency. There will be multiple decisions made throughout the M&A process that could affect your tax liability, including choice of entity formation, purchase price allocation, employment status, and rollover equity.

For example, when selling a practice to a DSO, you will want to structure the transaction in a manner that allows you to “contribute” a portion of the assets in “exchange” for equity in the DSO, so that the value of that equity is tax-deferred. Alternatively, if the equity is treated as purchase price, it will be subject to tax in the year of the sale.

In another example, if you are an associate buying into a practice, you may want to purchase that equity through your own S corporation, which will allow you to take advantage of certain business deductions that are not available if you own the equity in your own name.


Lesson 10: Have a robust and tailored partnership agreement
If you are buying into a practice or selling a practice that will result in you owning equity in the buyer entity after closing, it is imperative that you understand the rights and limitations associated with that equity. The answer to these questions lies within the partnership agreement.

The following is a non-exhaustive list of provisions that you (or your attorney) should review when examining a partnership agreement: voting rights; management rights; veto powers for minority partners; fees paid to manager(s); management responsibilities; clinical responsibilities, work hours and compensation; buy/sell terms (including valuation formulas); drag-along rights; minimum standards to retain equity; restrictive covenants; and the corporate opportunity doctrine.

If you are considering a dental M&A transaction, we encourage you to consider how these lessons can assist you in creating a successful, win-win outcome for all parties.

Author Bios
Author Casey Gocel is partner and co-chair of the National Dental Law Group at Mandelbaum Barrett PC in Roseland, New Jersey. Contact her at cgocel@mblawfirm.com.





Author Jonathan Rhone is an associate in the National Dental Law Group at Mandelbaum Barrett PC in Roseland, New Jersey. Contact him at jrhone@mblawfirm.com.


More In Practice Transitions
Buying a Dental Practice: Buyins/Buyouts & Mergers.
Buying a Dental Practice: Buyins/Buyouts & Mergers.
Mr. Tim Lott
CE Credits: 1.5
Is It Worth Creating an In-House Plan When Dropping Insurance?
Is It Worth Creating an In-House Plan When Dropping Insurance?
June 2024
Poll: Buying, Selling, Remodeling
Poll: Buying, Selling, Remodeling
August 2023
Purchasing or Selling a Dental Practice vs. Associate Buy-In
Purchasing or Selling a Dental Practice vs. Associate Buy-In
William Barrett, Esq.
CE Credits: 2
Dentaltown Magazine
September 2025
Dentaltown Magazine September 2025 Read Current Issue Read Archived Issues
Sponsors
Townie Perks
Townie® Poll
Who or what do you turn to for most financial advice regarding your practice?
  
Related Articles
4 Questions To Ask Before Hiring an Associate
4 Questions To Ask Before Hiring an Associate
by Jason Smith
December 2022
Howard Speaks: Learning Plus Earning
Howard Speaks: Learning Plus Earning
by Dr. Howard Farran, DDS, MBA
July 2024
So, What’s the Plan?
So, What’s the Plan?
by Dr. Suzanne Ebert
August 2024
Site Menu
Message Boards Magazine Continuing Education Podcasts Blogs Classifieds Dental News Events Townie® Poll Ebooks Townie Choice Awards
Company Info
Contact Us Advertise With Us Howard Farran DDS, MBA Policies and Agreements
Site Help
The Dentaltown Team, Farran Media Support
Phone: +1-480-445-9710
Email: support@farranmedia.com
©2025 Dentaltown, a division of Farran Media • All Rights Reserved
9633 S. 48th Street Suite 200 • Phoenix, AZ 85044 • Phone:+1-480-598-0001 • Fax:+1-480-598-3450