In this episode, hosts Brad and Michael share the story of a dentist who left his corporate job, only to get in over his head after rushing into buying a dental practice. Pressured by a business broker, he skipped the necessary due diligence and ended up facing outdated systems and growing debt. Tune in as we explore the risks of jumping into business deals too quickly and how competing interests can cloud your judgment. Learn how to protect your practice and avoid these costly mistakes.
Listen to the full episode using the player below, or by visiting one of the links below. Contact ByrdAdatto if you have any questions or would like to learn more.
Transcript
*The below transcript has been edited for readability.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123 with ByrdAdatto. I’m your host, Brad Adatto, with my co-host, Michael Byrd.
Michael: Thank you, Brad. As a business and health care law firm, we meet a lot of interesting people and learn their amazing stories. This season, we’re entering the most sophisticated season of a business. Our theme this season is Buying and Selling a Business.
Brad: Yeah. And Michael, for those that don’t know, that’s just one of the seasons. What are the all the seasons combined?
Michael: We have the building season, starting a business; the operating season, running a business; the scaling season, growing a business, and here we are now getting fancy with the buying and selling season.
Brad: Love it. Michael, I’ve been meaning to ask you something. Do you believe in magic?
Michael: [00:01:00] In magic? Like card tricks and rabbits out of a hat, that kind of thing?
Brad: Yeah. But more like the real magic, you know?
Michael: Oh, that’s fake news, Brad. You know that, right? I mean, I’m not into or believe in real magic. I’m not an astrology guy or a voodoo guy, or tarot cards. All that stuff is imagination.
Brad: I disagree. Voodoo is real, too. Where’s your sense of wonder? I mean, let me tell you a story.
Michael: Well, first let me just say this, Brad. you can have a sense of wonder without believing in fake things. I guess go ahead and tell me your story.
Brad: All right. When I was a kid, my dad would have all the neighborhood kids over and he would do these magic tricks for everyone. So all the kids in the street would come over and he’d do this amazing magic show.
Michael: Your dad the orthopedic surgeon?
Brad: Yes.
Michael: Okay. Just making sure that’s the same dad. [00:02:00] Well, that’s interesting. What kind of tricks did he do?
Brad: He did all kinds of card tricks. He had this one trick where he’d pour water in the newspaper and would disappear. He could make flowers appear. He had this little magic box thing that would make different things disappear. It was really cool. Just amazing.
Michael: Actually sounds like fun.
Brad: Yes, it was. And I’m sure if back then, if we had iPhones and you saw the looks on our faces, it was pure amazement.
Michael: Well, kids are easily impressed, Brad, and I’m including you now and then.
Brad: Fair, fair assessment, but that kind of had me start believing in magic. I mean, if my dad, the orthopedic surgeon could do that in our house and he’s just a plain old doctor, imagine what a real professional magician could do.
Michael: Well, I will agree with you that they’re talented, but they’re talented performers, Brad, it’s an illusion.
Brad: Tomato, tomato. I mean, alright, I’ll give you an example. I went and saw David Copperfield in Vegas. [00:03:00]
Michael: Did you sneak out on me on one of these conferences? I don’t remember that. You saw David Copperfield live?
Brad: No. I didn’t sneak out on you. I would’ve dragged you there if I could have, but I took my family to a trip to Vegas a few Christmases ago.
Michael: Oh, I definitely remember that because I remember thinking and asking you what in the world you going to do with your kids in Vegas?
Brad: You take them to see David Copperfield. That’s what you do.
Michael: There we go.
Brad: And it was mind blowing. The illusions were like next level. He made a car appear out of thin air. He had a UFO appear and then disappear. He had all these amazing illusions.
Michael: Well, these are all pretty well-known illusions. He’s kind of famous for all of that. And Brad, there are explanations for how they’re done.
Brad: So you say Michael, but explain how he made an audience member who was one row in front of us just disappear and then reappear on stage.
Michael: Well, I’m not a master of illusion, so I can’t give you the answer, but they have trap doors, mirrors, all other types of techniques [00:04:00] that make it appear real.
Brad: I know, but I was there. I saw it with my own eyes. One second the guy’s in front of me and poof, like magic, he’s out there.
Michael: Well, I’m sure it was impressive. They are called illusionists for a reason. Illusion is not magic, Brad – but I would agree with you that Copperfield is a master of his craft.
Brad: I’m very disappointed.
Michael: It’s just not real magic.
Brad: So disappointed. I mean, we’re again, going back to – just believe in it just a little bit, Michael?
Michael: No, Brad, we’re just beating a dead horse here. I can appreciate the skill, but not real.
Brad: Okay. We can agree to disagree on this one.
Michael: Okay. Well, let’s move on and get into today’s story. Maybe we can agree on that part.
Brad: Great. Okay. So this is something I think we can agree on, Michael, right away. I have been told by several of our audience members, they want to have more movie talk on this show.
Michael: I also don’t agree there. I don’t believe you’ve talked with anyone other than yourself.
Brad: I’m a fan.
Michael: Okay. Let’s try to keep it tight on the legal. That’s kind of our purpose of this episode.
Brad: I’ll try, but I make no promises. Picture this, a young dentist, fresh out of Hogwarts, I mean dental school. And he’s been working as a cog, kind of a large multi-location, dental practice. Basically, it felt like he was working on a dental assembly line for the last couple years. But he was totally content just kind of getting by the way he was set up. And we’ll just call this dentist Dr. Harry Potter.
Michael: There it is Brad, movie characters and magic. You’re probably feeling pretty proud of yourself right now, aren’t you?
Brad: Yes.
Michael: Okay. Well, the important part, other than the Harry Potter reference as our star of today’s show, our dentist is understanding kind of this employed corporate [00:06:00] dentistry cog thing that you were talking about. And that’s really common in dentistry. So many, many years ago, private equity kind of came into the dentistry space and it’s actually become a relatively large part of the market across the United States. And so what that creates for young dentists is, they come out of school and they’re kind of an employee. I mean, there is that vibe of assembly line. Like they show up and there are humans in the chair ready to be treated and so they are completely focused on their craft. And for a lot of people that works just well, because they don’t have an interest in the business side. They went to school to learn how to take care of patients, not to be involved in all that business stuff. But go on tell me more about Dr. Potter.
Brad: [00:07:00] Great context there, Mr. Byrd. So Dr. Potter he gets approached by a business broker. And Michael, you know what a business broker is, right?
Michael: Yes, Brad, I know what a business broker is. But we’ll share a little for those at home, maybe even like a mini vocabulary word. A business broker helps facilitate the sale of a business. And so, they are kind of like a matchmaker for businesses. They’re a kind of a loose analogy as like a real estate agent trying to help someone sell their house or trying to find people and match up the seller and the buyer. So they connect them kind of like a dating app, but with a little more paperwork and a little less swiping. And let me guess, Brad, going with your Harry Potter theme, is this business broker, are you going to call him Dumbledore?
Brad: No. We’ll call him “He Whose Name Should Not Be Said.” [00:08:00]
Michael: Okay. Well, you’re getting deep into Harry Potter, and I’m sure many of our audience has read or watched the Harry Potter movies. But in case you haven’t, Brad is talking about Voldemort also from the Harry Potter movies. And that was his reference that, “He Who Should Not Be Named.”
Brad: I’m so proud of you, Michael. Kennedy, just put another gold star next to Michael’s name. All right, so Voldemort comes along and he’s wearing this super sharp suit and he’s pitching faster than Nolan Ryan on game day. And he’s telling Dr. Potter this amazing opportunity to buy out this retiring dentist and take over and have his own practice.
Michael: Okay. You’re really bringing the references in today. You got Harry Potter, assuming everyone knows who that is. And now you bring in Nolan Ryan, who, by the way, I agree, he’s an amazing pitcher. But you and I are also old Brad. Nolan Ryan, Hall of Fame baseball player, he’s been retired for 20 years. He was known for his fastball the [00:09:00] way you just described our Voldemort even just by his name, gives me that classic “too good to be true” vibe. So I’m thinking what you’re going to tell me now is that this is where you entered the story and you were the hero for young Dr. Potter and helped steer him away from making bad decisions. And you’re probably going to call yourself Hagrid?
Brad: I like that. And unfortunately, that’s not the way this story went because there’s a twist here. So, Dr. Potter is hesitant because he is never been more than an employee of a dental world, much less manage a dental practice on his own. And he wanted an advisor to help run a business once he sold if this deal was going to work.
Michael: Is this when you were trying to help him? Were you trying to help him at this point?
Brad: Not me yet, Michael.
Michael: So far he’s running absent Mr. Brad or ByrdAdatto. Okay, I got it. So do we have [00:10:00] anybody like a Dumbledore or someone like that, that jumped in to help give him kind of at least some business advice, if not legal advice?
Brad: Nope. Unfortunately, no Dumbledore in this story at all, Michael, which I do like the fact you keep trying to bring him in, though. Voldemort claimed he could guide him and could assist him in covering the training, the staff and the billing and the other administrative nightmares that happens with post-closing, and he would just charge him some small fee for it. But Voldemort kind of explained, look, he had done this over the last few years, dozens of these dental deals per year, and this is how that works. And I guess if we’re going with the Harry Potter, cue theme music here, you can cue some of the dramatic Harry Potter music here. Here, the catch was, Dr. Potter had to decide fast. The current dentist might sell it to someone else if Dr. Potter didn’t start moving faster.
Michael: So the broker who’s clearly a sales guy that you’ve aptly [00:11:00] named Voldemort, also happens to suggest that he can guide him along the way. And nothing like a little pressure to put on the deal, like act now or you’re going to lose out. So I’m afraid to ask, but I’m guessing he jumped in.
Brad: You bet. He borrowed a truckload of cash to buy the practice thinking this was him stepping into a new magical practice. But post-closing, Voldemort vanished. Worse, there was no agreement for Baltimore even to help Dr. Potter post-closing just Voldemort’s word.
Michael: So Voldemort the help he promised was about as real as magic. Wait… magic’s not real.
Brad: I thought we established magic was real. I’m getting confused here now. Dr. Potter was stuck with a practice that might as well have been run by caveman, how outdated it was. Everything was analog and he wanted to be – it had to be digital. The practice had boxes [00:12:00] and boxes of paper charts with patient data that Dr. Potter needed to grow the practice. So he and his wife started going through all them to try to get them into their new electronic system.
Michael: Well, that’s quite the digital divide. So he’s now on his own trying to convert from the stone age, and I guess reality’s hitting him.
Brad: Yes. The numbers really weren’t adding up. And he realized he may have bought a dental practice that was really based on pretty promises. But by the time he called us and me, I guess, he was sinking in more debt and really cursing the chaos that he had bought. And he was still looking for Voldemort at that time to show up and assist with running the practice. And he wanted to understand his legal remedies of getting help with the Voldemort to assist with running the practice and or just getting out of the deal altogether.
Michael: Well, You know, if magic were real, he could have just used his wand and found Voldemort. [00:13:00]
Brad: Well, he had not been taught yet by Dumbledore.
Michael: Oh, okay. Well, this is starting to sound like it could have been one of, using our analogies today, one of Dr. Copperfield’s solutions.
Brad: Right, Dr. Copperfield. I like that. So now every time I see a broker involved, I’m always wondering, is this person going to be the hero, the anti-hero, or someone else’s story?
Michael: Yeah. Fair question. And there are like other professionals, there’s definitely some good ones and some bad ones. And this sounds like the latter. Well, let’s take a pause go into commercial, and when we return, we can talk about the legal steps Dr. Potter could have done differently. I would like to hear what happened to him.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto, with my co-host, Michael Byrd. Now Michael, this season, our theme is Buying and Selling a Business, and we have a story today that doesn’t sound too magical, does it?
Michael: No, no. To kind of recap where we are right now. We have our hero, Dr. Harry Potter, who’s a dentist. He was a kind of an employed dentist doing the kind of corporate stuff where he showed up, treated patients, and went home and he was paid and he was happy. And he met someone that [00:15:00] you’ve called Voldemort, who’s a business broker, and he persuaded young Harry that there was an opportunity for more, that there was going to be lots of financial upside and freedoms, and who knows what else he sold to say, “Hey, maybe you want to buy this practice.” And so unfortunately for Dr. Potter, he did not go and independently get an attorney, even someone like you, I mean anything, right? Or even some other type of advisor. Rather, as he was kind of falling captive to Voldemort’s ways and promises, kind of felt like according to Voldemort, that he would be his guide. That not only would he help him with this amazing opportunity to buy this amazing practice, but because of his vast experience with all these deals, Voldemort would be able to kind of guide him post-sale and help him realize all his dreams of what this could be.
And so there was this element of time pressure that was in there, and Dr. Potter fell to it and decided to buy it. And what we learned is that Voldemort disappeared after closing, and Dr. Potter found that he had bought a kind of archaic practice that was paper charts and had all sorts of messes to it, and Voldemort was nowhere to be found. And so we left off kind of realizing that he had done business and trusted the wrong person and had a mess on his hands. And so, kind of before we hear more about the story, I’d love Brad for you to talk about the risk [00:17:00] associated with these kinds of speedy practice sales.
Brad: Yeah. And we’ve talked about this in other episodes about the five phases of any good deal. And if we’re trying to talk about even before you go buy someplace that’s sometimes you’re trying to find out is that practice sales ready. In this particular case, certain things he could have done ahead of time to help reduce this risk would be – if the deal’s moving too quickly, that’s just a reason why we call it the five phases; you don’t really have enough time to really do a great job of doing the due diligence. Rushing into this deal could, you’re overlooking like, critical issues, like how do you deal with your patients charts and what systems you’re using and how accurate are your financials that you’re representing?
And when you have the speed being pushed at you, you don’t have a chance to really look at it at least from the administrative and financial side. Then you start thinking about it from a legal review. Fast track deal, we’ve heard this before, Michael, where, “Oh, this is the same deal that all the dentists sign. [00:18:00] And this is the exact same deal that we’ve done dozens of times. There’s really not a need to have an attorney kind of bless it because it’s just so standard now.” And that, again, exposing the buyer to these unfavorable turns because they don’t even know what are their protections after the fact. And then finally, although not legal or financially, there’s an emotional decision making that’s going to have to happen here when someone’s about to buy a practice. And then you’re being asked to do something under a pressure situation, which sometimes can be one of the biggest financial decisions ever made by an individual much that you’re buying almost like – sometimes more expensive than a house, depending on what the sale of the business is. So, are you coming in there with emotions that are not really slowing it down and coming in with a business judgment decision versus completely emotional pressure to do it.
Michael: Yeah. All great points. And wait, did I say that out loud? [00:19:00]
Brad: Put it on repeat. Put it on repeat, Kennedy. Kennedy’s giving me a thumbs up.
Michael: Well, here’s one you didn’t talk about that is, I think just as important is that even if you have a good broker, like a broker is getting paid to close a deal. So there’s this pressure that they have to push a deal. And when we deal with good brokers, I mean, their job is to facilitate and move and keep everybody on track. The problem you can run into is when you have one of the bad guys like we’ve talked about.
Brad: Is maybe name Voldemort?
Michael: Yeah, exactly. Like, he would not want an outside advisor involved because they’re going to mess things up – at best, slow things down and at worst, blow the deal up. And so he would’ve probably discouraged young Harry from hiring an attorney or hiring another business advisor and do things like say, “Oh, I’ve done this a million times.” [00:20:00] We’ve seen brokers that will say, “Oh, I’ve got the paperwork myself, I’ve got my own, I’ve done these 12. We’ll just use the legal documents from that.” Which I think we’ve done an episode on that issue alone. And so, clients can get caught up in getting the deal to close on time versus ensuring that they have the right deal. And we can agree, I think we can all agree that meeting deadlines is important, and that prioritizing speed over accuracy, however, can cause big mistakes. So, a well-structured deal with appropriate contingencies and safeguards is way more valuable than this kind of quick to close but flawed agreement. And at a minimum, we have to recognize that, hey, you’re taking on a bunch of risk if you go that route.
Brad: Yeah, I totally agree with that. And the party should be focused on what’s going to [00:21:00] happen post-closing. What are these obligations they’re taking on, what are they going to be bound by? And then how is that documented? If it’s important, it should be in the written grievance outlining the actions of each party, especially in deals where, oh yeah, we’ll get that taken care of, or well, this will happen. So relying on these verbal promises like Voldemort assuring that post-closing, he was going to assist. That’s extremely risky. Where was that, in this case, a dental support agreement that he should have signed. Of course Dr. Harry didn’t even know he should be asking for something, otherwise, it’s hard to really know what are the parties truly agreeing upon and what are the obligations they’ll be taken care of after the fact.
Michael: Yeah. There’s two possible outcomes with a verbal agreement and neither of them are good. Neither of them. So first it might be unenforceable, so there are certain types of verbal agreements that are considered unenforceable because they have to be in writing. Or there may be some question as did they actually agree to enough [00:22:00] things verbally to establish that there is a contract? So it may be just interpreted that I, “Oh yeah, I said I would help you, but we didn’t agree to an arrangement there.” And so, you have that end of the spectrum, which is you have nothing. Or the other thing, which is also not a good thing is you might actually have an oral contract. Well, the problem with that is, you have to enforce it. And we’ve talked many times about contracts and the most important element to a contract is that you’re getting everybody on the same page. You have expectations aligned.
Well, in a verbal contract, there is so much room for disconnect, so much detail that most often is not included. Because they when they verbally agree, it’s going to be something very basic. Like, “Oh yeah, I can help you.” Well what does that mean in details? And so you might [00:23:00] have this verbal contract and the only way for you to enforce your rights is to sue on it. And a lawsuit over a verbal agreement is going to typically cost way more than what your rights are in the first place with a lot of risk that a jury’s not going to agree with, the he said, she said – arguments that go back and forth. And of course, not to mention he couldn’t even find Voldemort because he disappeared.
Brad: Yeah. And I think we’ve said this in other episodes, that oral contract really is not worth the paper it’s written upon because it’s not written on anything. So good explanation on why oral contracts are bad, and the legal terms used to enforce these kind of contracts, let’s just pretend there was one, is known as specific performance. This is a contractual remedy in which a court can order a party to fulfill their obligations as closely as possible as was promised in a contract. Again, so it’s just assuming that there was a contract and you want someone to do something and [00:24:00] then you ask them to do it, a court can order that person do it rather than that individuals paying damages for failing to do so.
Michael: Yeah. And the problem is, and I doubt, I’m betting that Dr. Potter wanted to go to court over this, but for something like services, courts are rarely going to go with that specific performance remedy. I mean, it might be, had it been a verbal contract for the sale of the practice or something, meter like that, that that can work. But I could see why Dr. Potter would like to have this post-closing support training or transition, but there’s way too much risk. Whether again, going back to the cost, the risk of a verbal agreement, the risk of being able to even get the relief he’s seeking, like could he actually get a court to order specific performance and make this Voldemort performed these [00:25:00] services – and it wasn’t a viable path.
Brad: Yes. And so in this particular case, Dr. Potter, when we were speaking with him, he already obviously lost any trust that Voldemort and his company could actually bring to the table anyway. He was obviously relying on this promise to help, but in reality, he did not want his help. He wanted to understand what kind of help should the broker have provided pre-closing and post-closing.
Michael: Yeah. Good. I mean, and to assist, thinking about reducing risk in these deals, the more knowledge about the practice’s true condition that the buyer has and can obtain, the better. And so, you can fall into a trap with over-reliance on these brokers, because brokers, I mean, they can facilitate the deals, but as we’ve talked about, their interests do not align with the buyer. So have your CPA or an attorney or outside party help take a look. [00:26:00] Of course on the number side, you want someone with more financial background like a CPA, and they can help see what it is that you’re about to buy.
Brad: Yeah. And help them agree to help them crunch those numbers, figure out what’s going on. And so, Dr. Potter was fighting the fact that he lacked experience in buying much less running a practice. And as a first time practice owner, he didn’t really fully understand the complexities of actually running a business and lending, I mean, sorry, leading to unfortunately really unrealistic expectations.
Michael: So you mentioned that Dr. Potter wanted to know if he could get out of the deal after the fact. Is that right?
Brad: Yeah. And he felt like he had been deceived by the broker. The problem was, by the time he reached out to us, it’d already been 12 months. He’s 12 months into this practice already. And we were discussing litigation options and as it relates to the seller, which really wasn’t not there, but more importantly, the broker; none of it’s really interested him because he [00:27:00] realized what a commitment that would be to go into litigation. And in addition, we started discussing the ability – what would it be his ability just to shut the practice down and walk away.
Michael: Well, I assume the walk away was not going to be easy since you had said he borrowed money to buy the practice.
Brad: He borrowed a truckload of money, and we discussed if Dr. Potter closed his practice, he would still need to pay off these loans or face several potential consequences from a legal and from a practical perspective. And in this case, it really depends on the terms of the loan agreements. In particular, most immediate consequences was if he defaults on this loan. Dr. Potter had a personal guarantee and he and his wife actually had recently also bought a house, so now he has the potential of not only losing your practice but then having other big issues. And maybe Michael, you can kind of talk about some of the practical considerations that you have when you’re facing with something like this.
Michael: Yeah. I mean, the [00:28:00] banks are, when they loan money, they’re going to secure everything.
Brad: They want to get paid back.
Michael: Well, yeah. It’s weird. Like, that’s their number one thing. So people, they look at loan documents and say they’re overwhelming. And you say, “Well, if you just pay your debts, you’re fine.” Like, they don’t care. And so walking away from a business in of itself has other things to consider. But if you can’t walk away from the notes without it just being significant financial pain because they’re going to have pledges against all the assets. They’re going to have these personal guarantees, so now they’re going to come after you personally and go after your personal assets. And the problem is, is that the way they’ll go after this, if you continue not to pay, is in the form of lawsuits. And so now if you don’t have it, you may having to be hiring another type [00:29:00] of attorney to look at bankruptcy as an option. And that only will provide some level of relief, and so, it is an untenable path. And then you’re not going to be able to borrow money for the foreseeable future if you default on a bank loan like that. And so, it would be a disastrous outcome if he were to just kind of pretend like it never happened.
Brad: Yeah. So the walkaway option really was tabled. What we did start discussing was the ability to renegotiate the loan terms. We started talking about extending the payment period or reducing the monthly payment and see what option worked best for him.
Michael: Okay. Well, that’s interesting. What happened with Dr. Potter?
Brad: Nothing really magical in case you were really wondering. We assisted him on reviewing many of the agreements. We made some introductions to some good business advisors and we actually did able to [00:30:00] get some renegotiations on some of the payment terms that helped him have some breathing room. But after that, he just really had to grind his way out of it, working much harder than he ever did. And obviously he wished he had some independent advisor ahead of time, and maybe some legal expertise before he bought the practice. And you know what every buyer and seller always needs their memories is in the beginning, before he did any of this, if he felt that pressure, your ability to walk away from the deal if it doesn’t feel right to you, is the strongest thing that you have in your back pocket. And we said it before, the ability to say no is the strongest leverage you have in any deal. And in this case, he just didn’t think through with that. But Michael, we’re almost out of time. Final thoughts.
Michael: Yeah. It’s just so important to make sure you find the right broker if you’re going to hire a broker to help you with buying or selling a practice. And there are brokers out there that have fiduciary responsibilities that give you a higher level of trust [00:31:00] that they’re going to be looking out for your best interests and not just their own best interests.
Brad: Yeah and Michael, next Wednesday, believe it or not, we have a special guest, Ben Hernandez from Skytale Group will be in studio to discuss the state of the industry of M&A deals. Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our website at byrdadatto.com.
Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues. [00:32:00]
