LEGAL MATTERS
Five things to consider when selling your dental practice Attorneys Casey Gocel and Jonathan S. Rhone offer tips to prepare for one of the biggest transactions in a dentist’s career
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f you are considering selling your dental practice, but do not know where to begin, you have come to the right place. Selling your dental practice will likely be the biggest financial transaction in your career, so it is important that you are properly prepared to sell and properly protected after the sale occurs. The work you do upfront can potentially save you money and headaches in the future. Before selling your practice, it is important to have your house in order. That means that your practice is in good financial, legal, and operational condition. A potential buyer will likely conduct extensive due diligence on your practice and will ask to review your tax returns, financial statements, insurance policies, associate contracts, vendor agreements, provider agreements, accounts receivable history, real estate leases, and more. If you conduct your own diligence ahead of time, you will be much better prepared by knowing the status of your practice and potential issues that need to be addressed before the time comes to enter into an agreement to sell. Below is an outline of five key items that you should consider reviewing, preparing, and understanding before exploring a sale of your dental practice in earnest.
1. Know what kind of buyer you are targeting The type of buyer you are targeting will greatly impact your preparation for, and negotiation of, a sale. There are three different potential buyers for your dental practice: a DSO, an outside dentist, or one of your associates. Typically, a sale to a DSO yields the highest total sale price; however, DSOs pay selling dentists using more complex payment structures that could result in less cash in your pocket at closing, and DSOs usually place very restrictive non-competes and employment requirements on their dentists. Let’s consider an example where a DSO values your practice at $1.5 million, while another dentist or one of
Casey Gocel is a Partner and Co-Chair of the National Dental Law Group at Mandelbaum Barrett PC in Roseland, New Jersey. She can be contacted at: cgocel@mblawfirm.com.
Jonathan S. Rhone is an Associate in the National Dental Law Group at Mandelbaum Barrett PC.
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your associates is prepared to buy your practice for $1 million. While it is enticing to take the higher offer, there are several considerations you must take into account before deciding which offer to take. DSO sales often include non-cash consideration such as rollover equity, earnouts, holdbacks and indemnity escrows. Generally speaking, a DSO buyer will pay at least 30% of your total purchase price in the form of rollover equity, meaning that 70% (or less) of the total sale price will be paid in cash. Using the example above, your closing cash payment only will be $1.05 million of the $1.5 million valuation. While the DSO equity may be a fruitful investment that pays in the future, it is not guaranteed, and often times, doctors are left with illiquid or even worthless rollover equity. Further, some of the sale price may be tied to an earnout. An earnout is a mechanism by which the DSO will pay you a sum of money if certain metrics are attained over time. The earnout criteria will likely be drawn out over several years. Sticking with our $1.5 million valuation example, if the DSO offers an earnout worth $250,000, that amount will also be reduced from your payment at closing, with no guarantee that you will hit the earnout metrics. Your closing cash payment is now reduced to $800,000. Additionally, DSOs often require an indemnity escrow, which is money that the DSO will hold back, usually for 1 year, to be able to protect itself from any lawsuits or liabilities that arise from your former ownership of the practice. If this money is not used, it will be returned to you. The indemnity escrow further reduces the cash paid to you at closing. To recap, in this example, the seller will only get $700,000 of the $1.5 mil-
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