Hinman Connects Blog

Regardless of whether you are purchasing a dental practice as an asset purchase sale, a stock purchase sale, or a practice merger, you must perform your due diligence.  Due diligence involves an in-depth investigation into the practice’s financial records. By conducting the appropriate due diligence, you will gain a thorough understanding of the dental practice as well as ascertain a fair purchase price. Depending on the outcome of your due diligence, you may want to incorporate certain seller obligations in a proposed letter of intent (term sheet).

Below are some important due diligence items to consider prior to purchasing a dental practice.

Legal Due Diligence

1.   Corporate Documents (or LLC Documents)

If the dental practice is owned by a seller’s corporation, including Professional Corporation, you should review the Certificate of Incorporation, Good Standing Certificate, By-Laws, Minutes of Shareholder and Director Meetings, Shareholder Agreements, and any outstanding agreements.
If the practice is owned by the seller’s limited liability company (LLC), you should review the Articles of Organization, Good Standing Certificate, Operating Agreement, Minutes of Membership Meetings, Manager Agreement.

2.   Agreements

Major Contracts:  You should review all associate agreements, non-compete agreements, intellectual property agreements (license agreements), and equipment leases.

Real Estate:  You should review all real estate lease agreements, purchase sale agreements, surveys, title insurance policies (if purchasing the real estate), and you should also ascertain whether any consents are required for the contemplated dental transaction.

3.   Licenses and Permits

Is the dental practice required to maintain certain local, state or federal licenses and permits?  If so, you should obtain a copy of all licenses that you may be required to obtain in order to proceed with the purchase of the practice.

4.   List of all (major) Assets and Liabilities

Prior to the sale, you must know exactly what assets you are purchasing. In addition, you must know all of the liabilities of the practice you are purchasing. The assets of the practice may include cash, securities, equipment, inventory, intellectual property (copyrights, trademarks, patents, domain names, and other proprietary rights), notes and accounts receivables, real property (leased and owned). 

Liabilities of the practice may include bank debt, employee benefits and bonuses earned and not yet paid, threatened, pending and current lawsuits, licensing violations, etc.  You should obtain a list of all employees and their current salaries, and you should also identify which employees are key to a successful transition.

5.  UCC Liens   

Before the practice sale takes place, it is strongly recommended that your attorney perform a UCC-1 lien search. This part of the due diligence process is one of the most important parts of the due diligence process, yet the most overlooked. The best time to conduct a UCC-1 lien search is immediately after the Letter of Intent (or term sheet) is signed. Never rely solely on your lender to conduct a lien search. By conducting the proper due diligence prior to the purchase of a dental practice, a purchaser will save a lot of post-sale time, stress and potential liability.

6.  Patient Complaints 

You should research the Internet to determine if there are any negative comments or patient complaints about the practice.  The Internet is a very powerful tool for investigating a practice prior to the sale. Also, you should determine if the seller of a dental practice had any board complaints or if the seller is on probation.

Financial Due Diligence

You should have your accountant or financial advisor review the financial stability of the practice before you enter into a Letter of Intent or execute a Term Sheet.

1. Tax Returns

Review up to 3 years’ prior federal, state and local tax returns, including any sale and use tax returns.

2. Financial Statements  

The owner of the practice should provide you with detailed financial statements (including balance sheets and profit and loss statements) for the prior 3 to 5 years.  If the practice is large enough, your financial advisor or accountant may want to request that the seller provide audited financials records.

3.   Tax Liens 

Your attorney should review any and all tax liens that may have been filed on any assets that are owned by the practice.

With a little due diligence at the start of the process, a buyer of a dental practice can save an enormous amount of potential liability after the sale takes place.

Stuart J. Oberman, Esq will be a speaker at the 2017 Thomas P. Hinman Dental Meeting and he handles a wide range of legal issues for the dental profession including cyber security breaches, employment law, practice sales, OSHA, and HIPAA compliance, real estate transactions, lease agreements, noncompete agreements, dental board complaints, and professional corporations.

For questions or comments regarding this article please call (770)554-1400 or visit www.obermanlaw.com If you would like Stuart J. Oberman, Esq. to speak at an event for your organization, please contact Katharine Drum, Marketing Coordinator (kath@obermanlaw.com)

Stuart J. Oberman, Esq