Dental practices are a profitable and stable business venture, but the process of buying one comes with its own unique challenges. Here are the key steps to consider:
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Find a Team You Can Trust
Start with the most important step: assembling an effective team. The right team will give you timely advice and make sure you avoid costly mistakes. These are the key roles you’ll need to fill:
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Accountants
Accountants will help you understand the financial aspects of the transaction and the deal structure. They’ll also assist you with financial and tax due diligence.
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Lawyers
Lawyers will help you structure the deal, draft and negotiate the purchase and sale agreement, and explain to you the allocation of risks, obligations, and exposure.
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Bankers
Bankers are essential in helping buyers finance the practice purchase.
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Brokers
Brokers will connect buyers and sellers and facilitate the transaction and the exchange of information.
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Find a Practice or Purchaser That Fits Your Goals and Criteria
Buyers or sellers will need to understand what they’ll be looking for before they start the search for the right practice or purchaser.
As a buyer, you’ll want to look for a practice with a prime location and a secure lease — this will have a significant impact on patient volume and revenue potential. You’ll also want to keep an eye on the practice’s patient base. Do they have high retention rates and a loyal patient base? Does the surrounding area have favourable demographics for potential future growth?
And finally, you’ll want to assess the practice’s facilities, equipment, and technology. Do they meet current industry standards? Will the practice require substantial upgrades or capital expenditure?
As a seller, you’ll need to decide whether you’ll sell your business as an asset sale or a share sale since each will have different financial and legal implications. It’s important to discuss the right structure with your lawyer and accountant, keeping in mind current market trends. You’ll also need to get your practice appraised to know what it’s worth.
Finally, you’ll need to organize all your key practice documents. When buyers conduct due diligence on a practice, they’ll request copies of lease documents, staff agreements, and any general office contracts. It’s important to have them organized and ready for due diligence.
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Draft a Letter of Intent (LOI)
To officially initiate the sales process, a buyer will formally express their interest by presenting a letter of intent to the seller. LOIs are often non-binding, however, they’re invaluable to establish general agreement on the essential terms of a transaction, like the purchase price, the due diligence process, and negotiating the formal purchase and sale agreement.
While LOIs are not intended to be comprehensive or binding, a seller will want to ensure that certain aspects of the LOI, such as confidentiality provisions, are binding even if a transaction does not proceed.
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Conduct Due Diligence
This important and extensive process will require a lawyer, accountant, and banker to assist the buyer in evaluating the financial, legal, and operational aspects of the dental practice. This step is crucial for mitigating risk and ensuring a smooth transaction. If you’d like to learn more, read our full breakdown on due diligence.
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Draft and Understand the Agreement
The purchase and sale agreement is generally prepared by the buyer’s lawyer and negotiated with the seller’s lawyer. Once signed, it forms a binding commitment between the buyer and seller. These are a few key terms in the agreement that you’ll need to know:
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Representations & Warranties
When drafting the agreement, sellers will need to give certain representations and warranties. These are statements made by the seller in respect of the dental practice, which the seller certifies are true and accurate and which the buyer relies on in closing the transaction.
For example, a seller might “represent and warrant” that the dental practice has no ongoing litigation. Sellers will want to limit and/or narrow the scope of these statements to ensure that they are true and accurate in all respects. Accurate representations and warranties could prevent a claim against the seller.
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Covenants
These are promises made by a seller to do (or not to do) certain things both prior to and after the closing of the transaction. As covenants create enforceable legal obligations on a seller, they’ll need to ensure they’re able to keep these promises.
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Indemnification
Often heavily negotiated, indemnities are promises from the seller that they will compensate the buyer if specific complications occur after the sale closes. Indemnification provisions are designed to protect a buyer from unforeseen risks after purchasing the business.
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Take Care of Post-Closing Matters
After the sale closes, you’ll need to complete your post-closing filings and obligations.
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Legal & Regulatory Compliance
A buyer will need to complete all necessary post-closing legal and regulatory filings, which may include those with the RCDSO, CRA, Ontario’s business registry, and the Ministry of Health.
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Contractual Compliance
It is typical for the agreement to contain certain post-closing obligations on part of the buyer and the seller. For example, the obligation for the seller to associate at the dental practice for some period of time after closing. For a smooth business transition, ensure that you understand your post-closing contractual rights and obligations.
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Are you interested in buying, selling, or starting up your own dental practice? At Blackburn, our expert team has decades of experience with these transactions and can help guide you through it. Contact us for a free consultation today.
* Please note that the information in this article is not intended as legal advice, but rather as a general overview on the subject. If you are seeking legal advice, please consult with a lawyer.
