Selling a practice and the necessary due diligence for preparation of the agreements

October 16, 2017 News

By Bruce Bryen, CPA, CVA

What documents must be available to have a successful transition involving the advisors?

 Sometime after the negotiations have taken place between each party to the transition, there needs to be a memorialization of the terms and conditions of the transaction so that a successful closing may occur. Unless an excellent brokerage house is involved that may have a template of the underlying agreements available, an attorney is typically retained to prepare the documents needed to complete the sale.  There may be a non-binding letter of intent that is prepared in advance of the retention of the attorney or the use of the template by the brokerage house that sets the terms and conditions in writing for review by the parties as well as the attorney.  This is sometimes an agreeable step so that the attorney has a clear understanding of these circumstances regarding the sale to incorporate into the agreements. It can save considerable time and money by not having the attorney sit through the entire process that has already been completed. If good dental CPAs are already part of the equation, or if the brokerage house has a lot of experience in dental transitions and input into agreements, , the attorney can be responsible for the legal and not the business side of the agreement.  Having a brokerage house with templates ready to forward to everyone will speed up the process as well. It is typical for the buyer and seller to have representation with attorneys so the simpler and faster the process, the more quickly the transition will occur.

The documents and their timely production:

 Too many times an attorney will slow the process by not producing the documents in a timely manner. While the agreements are being prepared, the buyer and seller do not have to wait for them before they begin their steps in readying themselves for the transition.  The buyer can be applying for financing needed to complete the transaction.  Both parties can be discussing the letter and content to be used to send to patients and referring dentists.  The dental CPAs can be readying the format to prepare their respective clients for the tax or savings that will occur when the sale takes place.  These points of concern for the dental CPAs are important for the final allocation of the purchase price that must be put into the final agreements and settlement sheet.

The roles of the lender, the dental CPA and attorneys for the buyer and seller:

 Each of the above has an important role in bringing the buyer and seller to the transition table for the closing and transfer of funds. It is important for the buyer to transmit a full package of documents to the lender as quickly as possible for approval of the financing. Lenders take different amounts of time with their own guidelines for granting loan approval.  Typically the local bank has very little experience in lending to dentists, other than loans secured by equipment or real estate.  Remember that a dental practice transition if primarily composed of the goodwill of the dental practice and the seller’s personal goodwill.  The transition loan is considered based on cash flow and most local banks don’t lend without a physical asset supporting that loan.

The dental CPA’s role:      

This may be the buyer and seller’s most important advisor in the transition. A dental CPA with plenty of experience will know what must be delivered to the lender. Not knowing what to transmit will cause a tremendous delay in the process.  If real estate is involved, knowing that the appraiser must come from the lender’s approved list, means that the financial package presented should be complete. A person purporting to be a dental CPA who has represented only a few dentists is not the right person for the buyer to retain even if it is the long time CPA.  The old expression of time being money is accurate.

The attorney for the buyer and the seller:

This is where things can get testy. It is really important for each advisor to know their individual role. Getting bogged down with the attorneys taking on the role of the dental CPA is a taboo.  Understanding that the role of the attorneys is not the business side of the transaction but the legal knowledge is necessary so that the papers don’t revert between the attorneys needlessly. When the attorneys start offering advice that is the bailiwick of the dental CPAs, it is time for the buyer or seller to step in and  remind them who each has chosen for the roles they have been retained.