Legal Issues in Financing a Dental Practice
Consultation with an attorney is crucial to a proper evaluation by a dental financing professional of the ability and costs of financing a purchase of a dental practice. The legal issues involved with agreements presently in place, or which will be required in any purchase of a practice must be reviewed with an attorney to clarify any outstanding legal issues and frame the legal standing and goals of the seller and purchaser of the practice.
Initially, all agreements currently in place for the seller, and any affecting the buyer must be reviewed. This involves the consideration of the lease of the property to be used to conducting the dental practice, and the terms of that lease should be analyzed to present to a bank or financing entity any legal restrictions on the assets of the property. The lease may have payment terms which affect the ability to pay down a loan for the purchase of the practice, and the amount needed to be financed at various times during the time of the operation of the practice.
The development of a purchase and sale agreement must be worked through with an attorney first in order to present some of the language that the financing entity has to work with in arranging financing with the various parties. Will there be an option to buy the practice by a new associate at a certain point in the practice? How much will each party contribute to ownership at that point? Often, an employment agreement with a new dentist or purchaser precedes the actual associate agreement and purchase and sale agreement. That will contain the terms for transitioning to a purchase of the practice, and how much financing will be necessary to finalize that purchase when the agreed on specific dates for the transfer come up. The abilities to expand the practice included within a purchase and sale agreement will have an important effect on the terms and amounts of financing required. Warranties and guarantees put in place by the seller, or production requirements placed on the buyer, will affect the ability to generate cash flow enough to fulfill the terms of any financing agreement. An attorney’s creation of the language involved in all these agreements, considering there are multiple other agreements involved in a purchase and sale, is absolutely necessary, and provides the basis for finalizing any financing arrangements.
A legal analysis the assets and liabilities of the buyer and seller must be made in order to allow the financing bank or entity to evaluate the value of the practice and the security needed to set up proper financing. Often the bank will require a financing agreement to include a first lien on the assets of the practice as security for the financing of the purchase. The hard assets of the equipment owned by the seller to be sold to the buyer, and accounts receivables available to be transferred by the seller to the buyer are aspects which must looked at by an attorney to ensure that ownership is free and clear of liens or other restrictions. Additionally, there needs to be an agreement between the purchaser and seller as to how accounts receivables are to be collected, who has ownership of them, if the seller has any residual benefit from their collection, and of what worth they are as a practice asset. This needs to be written out clearly with all legal aspects weighed in order to create an appropriate asset evaluation for the financing entity to work with.
The liabilities of the seller and buyer must be determined in order to present a clear picture of the abilities of the parties to get together with an appropriate financing mechanism for the transfer of the practice. What liabilities are to be assumed by the buyer should be in a separate agreement or provision of the entire agreement to purchase.
Restrictive covenants on the practice of dentistry elsewhere of an outgoing seller and also of an incoming purchaser are sometimes legal and sometimes not, depending on their reasonableness. They do affect the value of a practice and the bank may want to have an attorney evaluate them to ensure their legality.
Finally, a public records search should be conducted by an attorney to ensure that no outstanding mechanic’s liens, assignments, tax takings, tax liens, attachments, or lis pendens (unresolved legal actions) exist which will interfere with financing. The financing representative cannot proceed without knowledge that outstanding legal issues will not cloud the financing process.