Whether you are in the earlier stages of your dental career looking to buy a practice or in the late stages of your career looking to sell, a dental transition could be one of the largest transactions in your life. And of course, any transaction of such magnitude must be taken seriously and approached carefully seeking to avoid some of the more common mistakes we see in dental transitions.
The first mistake we tend to see is not having a complete group of recommended advisors in place to assist you with the transition. You should take the time to fully assemble your transition team before initiating the process. While you may have already established relationships with some members of your transition team, such as your accountant or attorney, qualified and experienced professionals are critical to ensuring your interests are appropriately addressed and protected. Make sure your team of advisors each have substantial experience representing buyers and sellers in dental transitions. Ideally, the experience should include everything from solo general practices, to specialty practices, to multi-location and DSO-structured practices, including private equity backed acquisitions.
A second mistake we sometimes see is not having a professional valuation of the target practice performed. Regardless of whether you are the buyer or seller, having the practice valued by a reputable and experienced valuation professional can help ensure you are not paying too much or leaving too much on the table. While there are several methods typically used for practice valuation, there are pluses and minus to each method. Further, there are many variables that will affect a practice valuation, such as active and new patients, technology, furnishings and equipment, location (rural, suburbs, city, etc.), collections to asking price ratio, and other factors. With so much at stake, professional who understands the best dental practice valuation method and formula that will fit the target practice’s office and market becomes imperative.
Failing to recognize the impact of the letter of intent (“LOI”) is a third common mistake. A LOI is a legal document. More often than not, especially in the area of smaller dental transitions, many parties engage legal counsel and the rest of their advisory team after the LOI has been executed. A poorly negotiated LOI often leads to a LOI without clear identification all of the assets intended to be acquired; failure to specify whether accounts receivable is included or excluded; failure to include the scope of restrictive covenants, such as the geographic scope and term of the non-compete, or failing to include them altogether; and other key matters. Clients tend to rest in the idea that the LOI is not binding and that details can be ironed out later. However, confronting the major terms and issues at the outset may avoid a possible uphill battle during negotiation of the definitive transition documents.
Drafting and negotiating the definitive agreements should be left primarily to legal counsel in coordination with the tax and financial advisors, as well as the client of course. Many dentists tend to find this phase of the transition their least enjoyable part, especially when there is a lot of back and forth and hard negotiation of the details, including representations and warranties and indemnity provisions. The challenges are greatly reduced when competent legal counsel experienced in dental transitions are involved on both sides. Conversely, the challenges are magnified exponentially when one side has engaged counsel not only with no experience in dental transitions, but little to no experience in M&A generally. With the right selection of the professionals involved, however, transitions can go smoothly resulting in both sides being happy with the process and results.
While some matters may be more or less important depending on the structure and size of the transition and the target practice’s specialty, you should always involve outside professionals in the process to avoid some of the mistakes highlighted in this article. Regardless of a person’s sophistication and experience, every transition will require legal and financial assessment and advice to help ensure success and reduce the risks.
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