When purchasing a dental practice, many legal documents will need to be carefully drafted and executed in order to complete the transaction. There are 3 main steps in every dental purchase transaction that can be summarized as follows:
LETTER OF INTENT
Once a purchasing dentist has visited the dental clinic and reviewed the evaluation report provided by the selling dentist, the basic terms and conditions for the purchase must be detailed in a letter of intent. This document is generally a non-binding letter, but it may contain certain binding provisions with regards to deposits and exclusivity. The purpose of the letter of intent is to outline the general understanding between both parties in order to conclude the transaction. It is customary for a letter of intent to address the following points:
Type of transaction i.e. purchase of assets or shares
Estimated closing and transfer date of the practice
Amount of deposit if any
Time requested to conduct a due diligence of the seller’s legal documents
Confidentiality clauses (i.e. the parties are to keep the negotiations and agreements confidential)
Restrictive covenants like non-compete, non-solicit clauses (i.e. to restrict or prevent the seller from competing in the business or soliciting the employees and / or patients of its old practice)
Other conditions (i.e. in order for the deal to go through, certain conditions must first be met –such as financing, a review of documentation concerning the seller and the assets, a consent from the landlord, entering into a confidentiality, non-compete, non-disclosure agreement, etc.)
After a letter of intent is signed by both parties, a due diligence review is performed by the purchaser. During this process, the purchaser investigates every aspect of the dental practice prior to its acquisition in order to avoid any future disputes or problems from third parties, staff and associates and the tax authorities. At this stage of the transaction, the purchaser must analyze various documents such as: the patient charts, equipment inspection, financial documents and the lease of the premises among other things.
OFFER TO PURCHASE
Once the purchaser has completed a thorough investigation during the due diligence process and declares himself satisfied of the results, an offer to purchase is drawn up and presented to the seller. The offer to purchase includes additional terms than the ones contained in the letter of intent by which the seller must abide or provide. This document is a preliminary formality before the final drafting of a purchase agreement at closing of the transaction. Furthermore, the offer to purchase is binding in nature unlike the letter of intent. Often, the purchaser will remit a deposit in trust after the offer to purchase is accepted by the seller in an amount equal to 10% of the purchase price.
ASSET AND SHARE PURCHASE AGREEMENT
The final step in a dental purchase transaction is the asset or share purchase agreement. All the key terms of the letter of intent are generally found in the agreement but in a more comprehensive and formal way. This document is binding for both seller and purchaser, the breach of which could be very onerous and litigious. It is important to note that one size does not fit all. Every transaction entails different arrangements between the selling and purchasing dentists and the final agreement must reflect these variances. A standard template just won’t cut it. Our team of experienced professionals regularly assist in the negotiation and drafting of asset and share purchase agreements to ensure that all aspects of the transaction have been addressed.
The most typical clauses contained in a purchase agreement are as follows:
Consideration: In an asset sale, the purchase price must be allocated between the various assets being purchased, such allocation having a direct impact for both the seller and purchaser. GST and QST must also be addressed in the agreement whether applicable or not. There are also adjustments that need to be calculated post-closing for items such as taxes owing and advance payments made by the seller prior to closing.
Representations and warranties: Both the seller and purchaser make statements considered to be true and based on which both parties have decided to enter into such a purchase agreement.
Indemnification: Typically, an indemnification procedure must be put in place in case of a breach of one of the representations and warranties contained in the agreement to protect the buyer and seller.
Covenants: Often, the seller makes certain promises to the purchaser post-closing such as concluding an associate agreement for a certain number of time, ensuring a proper transition to the clinic, introduction to the patients. The most important clauses include non-solicitation and non-competition agreements after the transaction.
An associate agreement is a document where the purchaser and the seller of the dental practice agree that the selling dentist will continue working in the clinic for a certain time period after the transaction has closed. An associate agreement addresses the remuneration of the selling dentist, the hours expected to be worked and the length of time the selling dentist must stay on as an associate. Having the selling dentist work in the clinic, even on a part-time basis can help ease the purchaser into the new role of owner and also facilitate the introduction to the patients in order to maximize the retention rate of the patients.