The Financial Position of Dental Practice Sellers and Buyers
In working out the sale of a dental practice to a buyer in a long term purchase and sale agreement, seller-dentists should recognize the important rights that they retain to have that long-term sale agreement fulfilled, regardless of the financial downturn of the buyer and the practice afterwards. This may give the sellers more freedom sell their practices to buyers whose business plan may not be the best course of action, and not the way they would run the practice if it were not sold. If the payments for the practice by an associate will take place over a long term, by the time the owner-dentist exits the practice their business philosophies may be different, perhaps even to the point that the seller suspects that the practice may go downhill and not be as successful as when he or she ran it.
This very issue was dealt with quite definitively in a case confirmed twice by the United States Court of Appeals in 2002 and 2006 in the Massachusetts case of Groman v. Watman (I and II). There, an associate, Dr. Aaron Watman, attempted to sell out of a faltering practice in Lowell, Massachusetts he was purchasing in a long-term agreement with Dr. Lawrence Groman, the previous owner of Children’s Dental of Lowell. Watman tried to file for bankruptcy and discharge the debts he owed on the sale to Groman at around the same time as he was setting up a new practice not too far away under his own name. The Court weighed heavily the facts that Watman may have used the good will of the practice, as well as some of the same employees he had with Children’s Dental, in setting up the new practice, in their ruling that Watman had committed a fraudulent transfer of the assets of Children’s Dental in order to avoid paying the remainder of the debts he owed on the sale to Groman. For dentists it is important that the Court ruled that the good will of the practice was a definite asset under the Bankruptcy Code which couldn’t be transferred away to leave behind the shell of a bankrupt practice.
Long term agreements with associates or other prospective purchasers of practices should be carefully drawn up, with clauses allowing for the possibilities of personality conflicts and business disagreements which would require different resolutions of the contract for sale in these circumstances. One commonly used agreement is a six year term, with an “opt-in” or “opt-out” decision to be made after the first three years of the relationship of the selling dentist and the purchasing associate. Then the two parties can decide whether the relationship is going well enough to continue the sale of the rest of the practice and the exit of the selling dentist completely. In dentistry preserving the ongoing relationships with patients necessary to keep the practice thriving in the transition period from the seller to the buyer is more essential than with many businesses.
The Groman decision and a well designed purchase and sale agreement gives buyers and sellers of dental practices a great deal of freedom to develop a mutually acceptable agreement to transition the practice without burdening one of the parties unfairly with the lack of business management skills and patient development skills that might prevent the practice from thriving after the selling dentist finally exits. The selling dentist can then look forward to enjoying retirement years with the benefits of long-term agreement payments without the fear of the incoming dentist mismanaging the practice and going bankrupt to escape those payments.