The dental industry is undergoing a significant shift towards consolidation, with an increasing number of dentists and dental practice owners opting to sell their practice to Dental Service Organizations (DSOs). While this move may be beneficial for some, it is important for dentists and private practice owners to understand what to expect when selling to a DSO, as the transaction process can be both complex and lengthy.
The sale process can be divided into four distinct stages, each of which is critical for success.
Stage 1: Letters of Intent and Non-Disclosure Agreements
When considering the sale of a private practice, one of the first steps is to sign a Non-Disclosure Agreement (NDA) and Letter of Intent (LOI). These are important documents that allow for confidential information to be exchanged between the parties, as well as set out the key terms of a proposed business transaction.
A NDA is essential to protecting proprietary data such as the practice’s financials, client/patient list, supplier information, and employee information from falling into the hands of a competitor or being released to the staff. It provides assurance to the seller that information exchanged with a potential buyer will remain confidential.
The LOI is a non-binding offer to buy a practice and outlines the terms of the proposed transaction. It includes details such as the purchase price, payment terms, employment terms following the sale, due diligence, restrictive covenants and closing contingencies. Signing an LOI should specifically state a willingness to negotiate exclusively for a set period and allows for any concerns or unique requirements for the deal to be raised by the seller.
Stage 2: Due Diligence and Quality of Earnings Assessment
Due diligence refers to a buyer’s careful assessment of the benefits and liabilities of a proposed acquisition. It involves looking into all the aspects of the practice—from financial statements to legal contracts and employee data.
When selling to a DSO, due diligence will also involve a Quality of Earnings (QofE) assessment. This process gives potential buyers an understanding of how much a practice earns and its potential for profitability.
A thorough due diligence process will help ensure that the buyer is getting the best deal and that the seller is not exposed to any unforeseen liabilities or problems.
Stage 3: Contract Negotiation
When engaging in a dental DSO transaction, contract negotiation is a critical step in the process. At this point, all terms agreed upon must be followed precisely or both sides could face consequences under state law or industry standards.
The Asset Purchase Agreement (APA)
The Asset Purchase Agreement (APA) is the primary sale document which incorporates and develops the terms from the Letter of Intent (LOI). It is important to ensure that all details are clearly stated in the APA to ensure that the transaction goes smoothly. The APA should contain details such as a description of the assets, tax allocations, post-closing employment obligations, contingencies to closing and restrictive covenants, to name a few.
Business Services Agreement
The Business Services Agreement is another important document to review and negotiate during the transition process. This document outlines the services that the DSO will provide after the acquisition, including training, recruiting, staffing, billing, marketing, human resources and other services that are required for successful operation of the business. It is important to make sure that all responsibilities are clear, that the documents comply with applicable state law, and that both parties understand their respective roles.
Business Associate Agreement
A Business Associate Agreement is a contract between a covered entity and a business associate, outlining the roles and responsibilities of each party in fulfilling the business services and securing Protected Health Information (PHI). This agreement ensures that all parties involved in the handling of PHI are aware of their obligations and commitments to protect it.
Credit and Security Agreement
The Credit and Security Agreement is typically used when there is a financing component involved in the transaction. This document outlines all the terms and conditions of lending and advancing funds from one party to another.
In addition to the documents identified above, the parties may negotiate documents relating to the a) issuance of stock or equity as partial consideration for the sale of the practice assets; b) additional consideration that will be paid upon the satisfaction of revenue or performance targets; and c) other agreements, consents and verifications required to complete the transaction.
Stage 4: Closing
On the closing date, both the buyer and seller, as well as their respective attorneys, will review all executed documents, exhibits and contingencies to ensure everything has been completed or satisfied as agreed upon by the parties. Once this occurs, the buyer or escrow or both authorize payment of the purchase price to the seller, typically by wire transfer.
Selling Your Dental Practice? Get the Support You Need
As a dental practice owner, you have worked hard to build up your business. When there comes an opportunity to sell your practice to a Dental Service Organization (DSO), you want to ensure that you get the most out of your transaction. That’s why it is important to get the right support—our experienced dental lawyers at Wood and Morgan can help.
Since 1984, our dental attorneys have represented over 8,500 dentists with their business needs. Whether you have questions about DSO transactions or need personalized guidance, the team at Wood and Morgan can help. Contact us today at 800-499-1474.