Before agreeing to buy a dental practice, you should ask yourself, the seller, and your advisors various questions to ensure you understand the deal and the responsibilities you plan to assume. Here are some of the most critical questions to ask during the purchase process.
What Am I Buying?
First, you need to understand the structure of the transaction. Parties to the purchase and sale of a dental practice may agree to structure the transaction as an asset or stock purchase. With an asset purchase, the buyer acquires all or substantially all of the practice’s assets, including a lease for or ownership of the practice’s location, equipment, furniture, fixtures, supplies, accounts receivable, patient records, trade names, and goodwill. With a stock purchase, the buyer acquires the legal entity that operates the practice, whether the seller has organized the business as an LLC, corporation, or other type of legal entity.
Whether negotiating an asset or stock purchase, buyers and sellers must also determine the allocation of the practice’s existing liabilities, which may include lease obligations, loans, accounts payable, payroll and benefits, payroll and income taxes, and ongoing or potential malpractice lawsuits.
Is the Practice Financially Stable?
The due diligence period during a dental practice acquisition allows you to review the practice’s financial and operational records to determine the practice’s financial health. The financial review during due diligence will include an assessment of the practice’s profit and loss statements, cash flow statements, balance sheets, and tax returns. Buyers should also review contracts for the practice’s ongoing financial obligations, such as mortgages or commercial loans. Red flags that buyers should watch out for include:
- The practice’s revenue depends primarily on the selling owner’s goodwill
- The practice has had a recent spike in collections
- The practice has an inconsistent cash flow with no identifiable pattern (e.g., seasonal fluctuations)
Buyers should also assess the payer mix in the practice’s cash flow, including the percentage of revenue from patient payments versus insurance reimbursements.
Does the Practice Comply with Professional Regulations and Healthcare Laws?
Due diligence should also assess the practice’s legal and regulatory compliance, as ongoing violations may create significant liability for a buyer. Does the practice have current, valid certifications and licenses from the state dentistry board and state or local health boards? Does the practice also hold other necessary licenses, such as certificates of occupancy or local business licenses?
Buyers should also review the practice’s patient records and data security policies to ensure compliance with HIPAA, state privacy laws, and cybersecurity best practices. Buyers can also inspect the practice’s facilities to confirm compliance with OSHA and state workplace safety regulations.
What Contracts Will I Take Over?
Buyers should make sure they understand the contractual obligations they will assume when acquiring a dental practice. Common examples of contracts that transfer from seller to buyer during an acquisition include:
- Lease agreements for the practice’s office(s)
- Staff employment agreements
- Independent contractor agreements with providers who work in the practice
- Supplier agreements
- Equipment leases and service contracts
- Laboratory services contracts
- Service agreements for computer systems, including billing and patient records software
How Will the Transition Happen?
Finally, buyers and sellers should negotiate the details of the transition of the practice from the seller’s management to the buyer’s. Transition plans may include provisions for the seller’s assistance, such as post-closing employment or contractor agreements under which the selling dentist remains with the practice for a set period to support staff transition and patient retention. Plans may also address patient retention through specific communications strategies. The transition plan can also create a timeline to ensure a seamless transition of licenses, certifications, and insurance coverage.
Contact Our Firm Today
When you begin the process of purchasing a dental practice, you may have numerous questions, and hiring seasoned counsel can provide you with the guidance you need to navigate an acquisition. Contact Mahan Law today for an initial consultation with our experienced legal team to review the things you need to ask yourself, the seller, and others before deciding to buy a dental practice.
