Frequently Asked Questions

Selling Your Practice

How much is my dental practice worth?

There is no single formula. Most practices sell in a range tied to a percentage of adjusted net income (also known as Seller’s Discretionary Earnings). Sometimes value is based on 3-year averaging, with greater credence given to more recent years if net income is trending in one direction. Location, equipment age, hygiene production, fee-for-service vs. PPO vs. HMO insurance ratios, and other factors also will change valuation significantly. Basing your valuation on gross collections alone is a big mistake, because two practices with identical collections can be worth substantially different amounts. Please see my Appraisals page for more details.

How long does it take to sell a dental practice?

Depending on the demand for your type of practice, a practice sale can close in as fast as 60 days, but allotting 120 to 180 days is a safer bet. Major sources of delay are (1) sellers failing to provide relevant due diligence information or access in a timely fashion, (2) buyer delay in completing due diligence, (3) lenders underwriting requirements before issuing a loan commitment letter, and (4) obtaining landlord consent to a lease assignment or new lease. Sometimes a party’s attorney or CPA is slow in responding. A tightly drafted Letter of Intent can speed up the process, setting definite time frames in which the parties are expected to complete their respective obligations.

When should I hire a practice transition attorney?

You need an attorney to ensure the contracts submitted and signed protect you properly, but at the same time allowing the sale to close on time and not incurring expenses until you are relatively certain the sale can be completed. Unfortunately, waiting to hire an attorney when the sale is certain will frequently prevent the sale from closing on time.

I generally recommend that you hire me to complete/review the Letter of Intent before it is submitted to the other side, and definitely before it is signed. That Letter generally will contain specific deadlines for buyers to obtain loan approval and complete due diligence review of the practice, among others. It also generally contains the main deal points, such as price, method of payment, non-compete time and distance, transition terms, and seller-as-landlord lease terms. The Letter you receive from the broker or other party may propose requirements that you don’t recognize as extraordinarily unreasonable. Once the Letter is signed, it becomes difficult to change those terms in the full contract, so attorney representation at this early stage can be extremely important.

Do I need an attorney if my broker or colleague already gave me a contract?

Although dentists and brokers are intelligent and well trained in their fields, they do not have the legal background necessary to safely complete the transaction. It isn’t so much the contract terms themselves that are a problem, but the deeper implications of those terms, and the terms left out of the contract (whether intentionally or otherwise). A simple adjective, or a single comma added or omitted in the wrong place, can completely change the legal meaning of a sentence.

There is no such thing as a “standard form contract.” Every document in existence is drafted with a particular perspective in mind. Also, legal developments and changes in the professional environment require new contract strategies at a much faster rate than medical advances change treatment plans, Please see my article on these and related issues in the California Dental Association Journal.

Taxes

What are the tax consequences of selling my dental practice?

Allocation of the purchase price matters: goodwill is taxed at capital gain rates, while equipment, supplies, and the non-compete are taxed at regular income (recapture) rates. I have an interactive calculator to model your tax impact at my December 31 vs. January 1 Sale: Tax Comparison app.

Does it matter for tax purposes if I sell this year or next year?

Absolutely! Selling this year piles the sale price on top of this year’s earnings, while delaying the sale to early next year spreads your income between two different tax years. That reduces your marginal tax rate (the rate you pay on each dollar of extra income) significantly. I have an interactive calculator to model your tax impact for this year vs. next year at my Taxation of Conventional Practice Sale app.

Deal Terms

What is a typical non-compete when selling a dental practice?

Non-competes always are enforceable in the context of a practice sale or partnership buyout when reasonable in scope. The duration ranges from 2 to 7 years, but the norm is 5 years from the date of sale. The distance (expressed as a radius) needs to be “reasonable;” 5 miles in downtown Los Angeles for a general dentist, and 50 miles for an oral surgeon in Barstow, both would qualify. Besides a “non-compete” you may also be expected to agree to not (1) solicit patients or staff or referral sources, (2) treat or make money from former patients within an even bigger radius than the non-compete, and (3) disclose any information forever about your former practice to buyer’s disadvantage.

Should I sell my practice to a DSO?

A DSO (Dental Service Organization) sale is a different animal from a doctor-to-doctor sale, and the headline offer is rarely the real story. DSO deals often blend an upfront payment with equity “rollover,” an earnout tied to future performance, and a multi-year employment or management agreement that keeps you working under new ownership at a negotiated compensation. See my Conventional Sale vs. DSO Post-Tax Comparison to see the tax-only impact of your proposed DSO sale.

In general, I am opposed to DSO sales. I believe they are harmful to both the doctor and the patients, since the focus shifts from patient care to profitability. I also believe that the promised equity rollovers will rarely if never materialize and may be subject to “failure to disclose” securities law violations. Of greater concern, DSOs can stray into making clinical decisions that put the dentist’s license at risk.

Can my landlord take part of my practice sale price?

Yes, in California a landlord may demand a portion of the sales price as a condition of permitting assignment of the lease to the buyer, BUT only (1) when the specific right to make that demand is in the lease, and (2) to the extent that the lease is below market rate for the term being assigned to the buyer. Please see my Avvo® Legal Guide: California Business Sales: When the Landlord Demands Part of the Sale Price for details.

Representation

Can one attorney represent both buyer and seller?

Joint legal representation is not advised if any party is uncomfortable with joint representation. If the parties are comfortable with the idea, joint legal representation is allowed in almost every state if the clients receive proper written disclosure and acceptance of the potential risks of joint representation. The question then becomes: is joint representation advisable in your particular situation?

Practice sales have significant opportunities for conflicting issues: non-competition, retreatment, representations, and tax allocations being first among many. In fact, many conflicts may not appear until negotiations have progressed; conflicts can even first appear after the sale has closed!

I believe joint legal representation is advisable when (1) the seller is retiring without leaving the community, or the sale is to the seller’s child or a long term associate, and (2) both sides express a genuine desire that the contracts be drafted in a fair and nonpartisan manner. In these cases, a significant level of trust and understanding has developed during the relationship and the threat of deception or renewed competition is almost non-existent. An experienced practice transition attorney then will be able to propose reasonably balanced and pragmatic contract terms. Even in this situation, the two sides should discuss tax allocation of the purchase price with their respective CPAs before coming to a final decision on that issue.

Partnerships and multi-shareholder corporations tend to have fewer conflict issues, and have a better environment for joint representation, since (1) operations and procedures apply equally to the parties, and (2) the success of the long-term working relationship requires that the terms not only appear fair, but in fact be fair. Nevertheless, conflicts exist when one party will carry a minority interest for any length of time or is very near retirement. Some clients even hire separate counsel in addition to joint counsel.

I do not recommend joint counsel for stand-alone associate agreements or office leases. There are too many conflicting issues, and too much room for future disagreement, to consider joint counsel a viable option.

Should I use a dual-representation broker?

I generally do not recommend dual representation brokers, whether for sellers or buyers. Although dual representation brokerage is allowed under many states’ laws, commission-based payments (payment is due only if the sale closes) creates a conflict of interest for the broker, a conflict that does not exist with joint legal representation (payment is due whether or not the sale closes). For further details, see my Note on Dual Representation Brokers.

Corporation; Names

Should I incorporate before or after buying a dental practice?

There are reasons to form a corporation either before and after buying (into) a dental practice. Reasons to do so beforehand include preventing personal liability from the practice while you are unincorporated and on contracts signed in your personal name, and avoiding cost and delay of completing the name change on letterhead, signage, bank accounts and insurance panels. Reasons to incorporate after the transition could include the lack of significant or immediate limited liability or tax benefits from incorporating at the time of purchase, or to obtain your acquisition loan personally in order to treat the loan as “basis” in a future S corporation. The right answer may even be to incorporate before the purchase, but purchase the practice in your individual name and immediately assign the practice to your new corporation. Your individual circumstances should be discussed with your attorney and CPA before making this final decision.

What can I name my Professional Corporation?

The rules vary state to state. In California, you must use the last name(s) of one or more of the owners, plus some corporate designation, as part of the corporate name. I strongly recommend that a one or two person corporation use the full professionally licensed name(s) followed by “Inc.” to avoid confusion with the dental board and dental insurance carriers. If you want to use a fictitious business name for the practice, you can request a permit to do so from the California Dental Board after the corporation has been formed. See California Business & Professions Code §1701, §1701.5 and §1804.

Can a dental practice use a fictitious business name or DBA?

Incorporated practices, or unincorporated practices of three or more dentists, may apply to the California Dental Board for a permit to use and operate under a fictitious business name. However, that fictitious business name (and the corporation’s name, if incorporated) must contain the last name of at least one of the dentists in the corporation AND the phrase “dental group,” “dental practice” or “dental office.” Unfortunately, these restrictions do not allow for an easily marketable name. Get the application by clicking HERE or by calling 916.263.2300. See California Business & Professions Code §1701.

IMPORTANT: Before spending money on your proposed fictitious business name, confirm that the name is protectable and available: please see my Avvo® Legal Guide: Safely Choosing a Tradename for your Business. In general, the first to actually use a name in the relevant locale has rights in that locale. Federal trademark is a major exception: once the filing is made, no new use of the name in the same business classification may be made anywhere in the United States.

Why do some dentists use dental practice names that break the rules?

A general fictitious business name application can be filed by ANY business in the county where the business operates, without California Dental Board review. This is probably what most of these dentists have done. However, it is certain that they have not attempted to register that exact name with the California Dental Board. I have spoken to the California Dental Board directly on this issue, and was told that while the Board does not go out looking for fictitious name violations (due to staffing shortfalls), it will take action against the dentist if a complaint is made and an illegal name is discovered during that investigation. I have also heard second hand that the Board may consider these restrictions to be unenforceable.

Legal Compliance

Can a non-dentist or DSO own part of my dental practice?

The answer here is very state-specific. In California, except under very limited circumstances, non-dentists are not allowed to own any part of a dental practice. See California Corporations Code §13401.5. One exception allows the dentist to hire an DSO to provide professional support services. These can include such services as office space and equipment rentals, accounts payable and billing services, scheduling, traditional marketing (but see below about patient referrals), and staffing of non-licensed personnel, SO LONG AS the compensation arrangement is not calculated, directly or indirectly, to the profitability of the professional practice. For example, a DSO that charges a dentist for such services with (a) a flat monthly rate, or (b) a set percentage of expenses regardless of income, is perfectly legitimate. A dentist may also hire a DSO if payment “is based on a percentage of gross revenue or similar type of contractual arrangement; if the consideration is commensurate with the value of the services furnished or with the fair rental value of any premises or equipment leased or provided by the recipient to the payer.” See California Business & Professions Code §650.

It is my opinion that any payment arrangement based on gross revenues almost certainly does not meet this standard, particularly when the practice is profitable. Regardless of legality, I strongly disapprove of non-dental ownership in dental practices, since the dentist will be the one subject to discipline for the DSO’s professional decisions. While DSO contracts specify that only the dentist makes professional/clinical decisions, the DSO does make professional/clinical decisions when it chooses vendors for supplies, equipment and lab services, determines insurance coding, engages in hiring and supervision of licensed personnel, and claims control over patient charts. While I am aware that the “gross receipts” approach is legal in specific circumstances, and although other attorneys may disagree with my position, I am not willing to do any legal work setting up or representing DSOs with non-dentist members on a “gross receipts” basis, since I believe DSOs with non-dentist members almost certainly put the dentist’s professional license at risk.

Can dentists pay for patient referrals in California?

A dentist may not pay anyone for patient referrals. The intent of this rule is to prevent “cappers” (pardon the expression) from drumming up business and being paid a fee for bringing in a patient. It is my opinion that traditional marketing services (print, radio or TV advertisements, mass mailings, publicly available coupons) are not prohibited by this rule, but I have found no legal authority addressing these matters. I am of the opinion that paying referral-based coupon fees (such as Groupon) are in violation of California law. See California Business & Professions Code §650.