Newer dental practices may seek outside investment to finance continued growth, such as through opening new locations. However, practice owners should familiarize themselves with best practices to follow when selling equity.
Understanding the Type of Entity You’ve Formed
The first step in bringing on investors for your dental practice should involve understanding the type of business structure you’ve established for your practice. You may have organized your dental practice as a partnership, LLC, S-corporation, or C-corporation. Understanding the entity structure for your practice can help you analyze various factors related to soliciting investment, including how to sell equity, taxation, and investor preferences. You may determine that you need to restructure the business form for your practice before accepting outside investment.
Compliance with Securities Laws
Obtaining investment by selling equity in your dental practice will require you to comply with state or federal securities laws, as equity in a business falls within the definition of a “security.” Although state and federal securities laws typically require businesses to register before soliciting outside investors, the law offers numerous exemptions from registration requirements, such as Regulation D exemptions under federal securities law. Tailoring your investment solicitation to meet exemptions from registration requirements can make the investment process less complicated and less expensive.
Draft or Update Bylaws or Operating and Shareholders’ Agreements
You may need to create or update governance documents for your practice to define the ownership structure following outside investment. Governance documents should address issues such as voting rights, profit distribution, and procedures to permit investor exits. A well-drafted, comprehensive governance document can avoid potential problems with investors, such as governance disputes, distributions of profits, or buyouts.
Prepare and Perform Due Diligence
Before you can close on investment deals, you will need to conduct due diligence with prospective investors. Outside investors will want to examine your practice’s operational and financial records to ensure you have a healthy business and identify potential risks for the investors to consider. As a result, you will need to organize your practice’s records to have them ready for prospective investors to inspect.
Depending on the type of investment you plan to solicit, you may also require due diligence from prospective investors to ensure they can help you further your business goals. As a result, consider what information or documents you should request from a prospective investor during due diligence.
Consider the Long-Term Consequences of Selling Equity to Investors
You should also consider the long-term implications of selling equity to outside investors, such as dilution of your ownership and profits, and the potential loss of control of your practice. These implications can vary depending on the type of investors you seek (e.g., strategic, silent, or active partners). Furthermore, you should balance these implications against the potential benefits of outside investment, such as gaining the resources you need to grow your practice. The growth in business that outside investment may unlock can outweigh the equity and profits you initially give up to secure that investment.
Work with Legal and Financial Advisors
Finally, working with legal and financial advisors when soliciting outside investment can best protect your rights and interests. Dentists and dental practice owners should seek to work with advisors who have experience in the dental or healthcare industries, as they can address the unique needs and challenges that dental practices may have when pursuing outside investment. An advisory team for soliciting investment should include attorneys, CPAs, and healthcare compliance experts. Proactive legal planning can help practice owners avoid mistakes or issues that can lead to serious disputes that may jeopardize the business.
Contact a Dental Attorney Today
If you’re considering bringing in investors to expand your dental practice, you need experienced legal counsel to help you evaluate the pros and cons of selling equity and structure an investment deal that protects your rights and interests. Contact Mahan Dental Law today for a confidential consultation to learn more about the process of soliciting investment for your dental practice.
