May 4, 2023
Ask an Expert: Your Biggest Dental Practice Transition Legal Questions Answered
When looking to transition your dental practice, there are often a number of legal and technical questions that arise on both the buyer’s and seller’s side. We asked Justin Marti of Marti Law Group to walk us through this process. Marti brings a unique perspective to the process as he previously owned his own dental support organization (DSO) prior to selling it and venturing into law. Marti leveraged his previous experience within the dental field and chose to fine-tune that knowledge. Because Professional Transition Strategies (PTS) and Marti share a similar clientele, we partnered to provide our readers with a list of our most frequently asked questions. Here is what he had to say.
One of the first questions that comes to mind when transitioning is whether the seller should remain at the dental practice post-closing. What is your perspective on this?
My advice when it comes to this type of transition is dependent upon the seller and where they are in their career. A dentist who is selling because they are looking to retire is likely going to prioritize selling to another individual dentist. On the contrary, a partnership with a DSO is a great option for a dentist wanting to stay at their practice for another few years.
What happens on the closing date?
When closing on a practice, the process can be confusing for both parties. It is the job of the brokers and attorneys to ensure the closing day runs smoothly, and as such, it is imperative to be prepared. It can be chaotic, but we try to pre-plan to avoid that as much as possible. Oftentimes, documents are signed in advance, so closing day is more just a matter of settling any credits or debits one way or the other. The buyer and seller should only really need to focus on transition logistics, such as talking to the staff to introduce the new owner. When it comes to handing off the keys to the new owner, the seller gets to do the honors.
Is there anything that can prevent a closing day from happening?
There are a few steps to take — and a few steps not to take — when preparing for the sale or purchase of a dental practice to help keep closing on track. If there are major discrepancies in deal terms or financials from the initial conversations, it can send a deal sideways. I also advise both buyers and sellers to avoid making large purchases before the deal closes and keep finances as steady as possible in the days leading up to closing. In essence, anything that could rock the boat or alert a bank lender should be avoided.
Should a buyer form a new legal entity to purchase the practice or keep the existing?
There are three primary types of purchases: asset purchase, stock purchase and membership interest purchase. This is a case-by-case scenario when determining if it’s best to form a new legal entity or keep an existing one as each transition is unique to the buyer’s and seller’s respective needs.
In the case of an asset purchase, the parties execute an asset purchase agreement (APA). In this scenario, a new legal entity (PC or PLLC) is used to complete the purchase of all the assets from the selling company. One benefit of an asset purchase is that the buyer is acquiring the practice as a brand new entity, and thus, it limits the exposure from any skeletons that may be in the seller’s closet. A downside of an asset purchase is the potential for hiccups when the new owner is attempting to credential the new legal entity with insurance payers.
During a stock purchase, a stock purchase agreement (SPA) is used, and the buyer acquires the stock of the existing practice entity. This process allows the buyer to avoid the aforementioned processes of obtaining credentials under a new legal entity as the buyer is simply purchasing the stock of the already existing legal entity.
Lastly, there’s a membership interest purchase. A membership interest purchase agreement (MIPA) is generally used for this transaction. A MIPA is used typically when the selling entity is an LLC or PLLC. In each case, tax benefits or consequences can differ drastically so it is important we collaborate with the client’s certified public accountant (CPA) to ensure we represent their best interests.
What should our readers take away from this?
It’s important to find representation in your practice transaction, whether on the buyer’s or seller’s side. As a buyer or seller, understand you can leverage resources, like dental acquisition brokers or attorneys, to help navigate your transition.
To learn more about dental practices transition, check out a few helpful links below. Then, contact the experts at Professional Transition Strategies to get the process started.