Learning the Legal Side of Dentistry

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This is the podcast that teaches you what you never learned in dental school, the financial side of dentistry. We cover topics from planning for ownership, buying a practice, to student loans, taxes, and all things financial for the hungry.

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Welcome back everyone, to the Associates on Fire podcast. My My name is Drew Phillips and I'll be the host of today's episode. For those who haven't had a chance to check out our Associates on Fire program yet, I'm a CPA and CFO advisor at Practice CFO and one of the instructors in our Associates on Fire program. Be sure to check us out@asschoolsonfire.com today I'm excited to introduce the CEO and founder of Odgers Law Group, Matthew Odgers. Matt is a longtime friend and trusted business partner dating back to the early days of Practice cfo. Over that time, we have worked alongside Matt on numerous dental practice transitions, partnership formations, trust and estate plans, and corporation formations. You're not going to find many people like Matt in the dental legal landscape. One of the things that have always impressed me about Matt is his drive to innovate and modernize an industry that is older than accounting and dentistry combined. Our podcast was built to help educate dental associates during their journey of practice ownership and and one of Matt's biggest innovations, Acquired Dental Law, is launching today March 1st. Acquired dental law is a new way to think about legal services when buying a dental practice, and it's the only one out there that I know of that focuses entirely on dental associates and aspiring practice owners. So without further ado, let's jump in and hear from Matt Odgers. Welcome, Matt.

Hey Drew, thank you so much for having me. I'm excited to be doing this podcast today. I think it's going to be great.

Oh, we're excited to have you. So, Matt, give us an overview of Acquired Dental Law and how you see it changing the legal landscape in the dental industry.

So I started Acquired Dental Law to apply new legal technology to our experience in representing associate and buying dentists. I'd like to start by quickly talking about some of the problems that dentists face when working with attorneys.

The first and probably the biggest problem is that dental schools don't teach business law, and many dentists have not been business owners in the past. This makes understanding the structure in terms of contracts that much more important for a successful dental transaction that avoids litigation. To combat this, we've Developed an online virtual platform acquiredentallaw.com with short and easy to follow explainer videos geared towards legal issues faced by dentists. The videos are tied to our information gathering intake forms which help to give additional background information and context for common legal questions dentists face before speaking with their attorney. So in short, acquire Dental Law was built specifically for associates and aspiring practice owners dentists. Over the past eight years we strive to disrupt the current dental law model through transparent flat rates, technology education and limiting our focus to provide more value and higher quality legal services to all of our associate and buying dentists.

Man. So I'm envisioning something like Legal Zoom and turbotax from a technology and user experience perspective.

Yeah, that's exactly what our goal is, is the. With Legal Zoom, they've done a lot of things right. And what I, what I love about what they've done is that they brought in business advisors to bring technology to the consumers. You know, it's completely consumer based. What they've, what I don't think they've done right is that they don't provide legal advice. They've just got template forms that, that may work if it's the right scenario. But really when you work with an attorney, the real reason that you're, you're paying them is for their experience and then to be able to make sure that the documents that you're signing and the decisions that you're making are the right fit for your particular needs. So you're correct in that we're taking kind of the best of what LegalZoom did for consumers and making it user friendly. And we're translating that into, we're translating and combining that with our legal experience for newer dentists.

And LegalZoom is a much more generalized provider in the sense that they're catering to businesses across virtually all industries. It would be a pretty massive undertaking for LegalZoom to have every nuance of every industry captured in their logical programming. What I'm hearing from you though is that you're not necessarily trying to compete with companies like LegalZoom, but rather you've created a more robust and encompassing version of LegalZoom, at least as it relates to dental associates and other aspiring practice owners. Having this narrow focus allows you to provide a user friendly experience that doesn't sacrifice the quality and expertise that is necessary to create these unique and industry specific legal transaction documents, which is ultimately what you're trying to solve is to have quality and the automation and quickness that technology provides businesses today.

Yeah, and that's exactly Right. And we're not competing with LegalZoom for clients who want to use a service like Legal Zoom. They can go ahead and jump into that where we're kind of cherry picking some of the features that LegalZoom has offered that we found that consumers and clients like. And we're kind of putting them on steroids or making them a lot more secure by having it be under the supervision and with the advice of an experienced dental attorney.

One of our goals today for our listeners is to cut out all the legal jargon, the complicated rhetoric that comes along with practice purchase, sales agreements and other legal language. In general, most of our listeners aren't lawyers. Luckily we have Matt here. But one of the purposes of this podcast is distill information down to a level that makes sense and resonates with our community at large. If you can't explain it simply, then you don't know it well enough. With that goal in mind, we're going to segue into an overview of the practice purchase timeline and all the steps involved in the legal process. We'll leverage Matt's expertise to provide an in depth but digestible version of the process without sacrificing any of the value that these important topics need to convey. So, Matt, every practice purchase starts with some form of mutual interest from a prospective buyer and a seller. Through that mutual interest, the buyer and seller will agree to a few basic terms. The a signed letter of intent. Walk our listeners through the early steps of the transaction process through the lens of a legal representative.

Yeah, and quickly. I want to, I think you hit the nail on the head, Drew, and that we really strive to, to explain the legal, the illegal terms and the legal processes in the most simple way possible. And in doing so, it allows our clients to be able to make informed decisions and know exactly what they're deciding. And we'll be able to kind of explain the pros and cons of each one of those decisions. So I really like the way that you said that. Now, jumping into the letter of intent, after you've found a practice that you're interested in and you know, the general, kind of the general information on the practice, the amount of ops, the location.

Maybe the, the revenue, which usually you can get after submitting a non disclosure agreement, the first step is going to be by submitting a letter of intent to the seller. And a letter of intent is just, it's really think of it as the initial kickoff to starting to entertain.

Purchasing the practice. And within this letter of intent, you're going to want to Cover all of the biggest terms that you can agree upon from the beginning that hopefully shouldn't be changing, but if they do change in the future there, or if, if new facts do arise, then you're still able to change them.

In our space. What comes to mind in the letter of intent is price. But besides price, what else would be included in the letter of intent?

So the price is the biggest one outside of that would be whether there's a deposit required and whether an escrow is going to be used, a ballpark closing date. So how long the transaction should take, whether the seller is going to be required to work back in the practice afterwards during a transition period, and then also allowing your rights to be able to go in and conduct due diligence. So, so you know, you're going to want to make sure that you request access to the practice at reasonable times within the letter of intent.

And be able to access patient records to be able to do your clinical due diligence and things like that.

Got it. In your opinion, when it comes to the loi, what's better, more or less.

You want it to lay out as many terms as you can think of that you feel comfortable agreeing to from the beginning. The more detailed it is, the less negotiating you're going to have to do when you get to the next step. But you also want to balance that with actually getting the seller to accept it. So the terms that we discussed are really kind of the most general ones. And outside of those, if you have anything in particular that you want to make sure is a deal breaker, I would go ahead and talk with your attorney about putting that into the letter of intent.

So I'm glad you brought us back to that point. When putting these items you've listed here together, who should they be working with during that process?

Yeah, that's exactly right. And this, the scope of your letter of intent is really going to be dictated by how well you know the practice. If you're an associate that's going to be purchasing the practice that you're working in, your letter of intent may be a lot more detailed than one. If you're purchasing a practice on the other side of the country that you just saw an online ad for.

You'Re going to want to talk with the seller, and that's where you're going to get most of your information from. But you're also going to want to work closely with your dental CPA and with your dental lender to see if they have. For the dental lender to determine if they have any unique terms in order to. In order to write the loan. And then you're also going to want to chat with your dental attorney to see if there's any terms that you should try and agree upon early in the stage. If, if you're working with a practice consultant or a practice purchase consultant, you may want to talk with them to see if there's any unique insurance issues that should be addressed early on. But try not to get too caught up in the weeds, because you're going to have plenty of time to dive into all of that when you get to the purchase agreement, which will be the next stage.

The earlier the better is what I'm hearing from you in terms of when you should start putting your team together.

Yeah, absolutely. And, you know, the more that you have in there, the better. But if you're unsure, definitely leave it out. And if the, if the seller is insistent about putting certain terms in, just make sure you run those by your team. Because while the letter of intent is not binding, it's also an uphill battle to change some of those terms if they're included. So my recommendation generally is that if there's, if you don't have all the information, leave some of the terms out because it's going to be difficult to come back and get them to change that when you're negotiating the purchase agreement. And that leads me to another point, which is I generally recommend that the buyer draft their own letter of intent versus using one that's provided by the seller.

In doing so, anytime, the person who drafts the documents has a little bit more control, because they're going to have the starting point at which terms they want to include, and then.

The scope of the terms and what they're going to be offering. So, and depending on who you're working with, if there's a broker involved, sometimes the brokers will have their own template letter of intent. But the best case scenario is if you can have your attorney draft your own letter of intent. Or at the very.

At the very least, have your attorney review the buyer or the seller's or the broker's letter of intent prior to signing it.

Awesome. So after the LOI has been submitted, what's the next stage for our prospective buyers?

Yeah, so once the letter of intent's submitted and accepted, you're going to wait for the seller to sign that and return it to you. And once both parties have signed, then that really kicks off off the buyers. It kicks off the rest of the transaction, which includes working and getting all of your due diligence. Done, whether that be clinical due diligence, financial due diligence or legal due diligence. And then working on the legal documents, which include the lease agreement and the purchase agreement. So we can start by talking. I'll quickly jump into the lease because you want to have your attorney review that as early as possible just to make sure that it's not going to be a deal breaker. And what the attorney should look for is the amount of time left on the lease.

So and make sure that that coincides with the loan term. So usually you're going to want to see five years, a five year term left with options to renew that allows you as the dentist, when you take over, to at least be in the office for a minimum of 10 years if you were to exercise your options. And then the other big thing to look for is the assignability clause and whether there's any restrictions on assignment of the lease or whether there's any additional charges or legal expenses when it comes to, number one, the seller transferring the lease to you. But secondly, your ability to reassign that lease in the event that you decide to sell your practice.

And when you say assign in the spirit of demystifying common legal terms, what does assignment mean?

Absolutely. So assignment is just a fancy word for transferring. So the dentist who owns the practice holds the lease and when you purchase the practice, you're going to want them to transfer that lease to you so that now it's your lease and the terms of that will be within this assignability provision. So you want to make sure that that's clear. Because ultimately if you can't transfer the lease, then your practice doesn't have very much value. So it's really one of the most important things when reviewing the lease to make sure that in the future you're going to be able to transfer that le to a buyer when the time comes for you to sell.

Very good point. And the bankers will require that the buyer has at least 10 exercisable lease years signed into their lease agreement.

For the people listening who have prior experience in working with landlords and leases and things like that, keep in mind that especially in California, landlords have a lot of leverage and they can kind of call the shots on, on a lot of the terms that they put into leases. And they're usually pretty landlord favored documents. Now with that said for dentists, landlords really love renting to dentists and so they are more agreeable when it comes to negotiating these terms. It's just a good idea to get started as early as possible in negotiating those terms so that you don't throw it all on the, you know, on the landlords feed, you know, the day before you're supposed to close the transaction, you want to give them plenty of time because they do drag their feet and making decisions and getting back to you and things like that throughout the process. So the earlier you can kick that off, the better. You want to have as much of a Runway to get all that information and get them to agree to everything as early as possible so it doesn't slow down the transaction.

Absolutely. And our listeners were educated on that topic. In our recent podcast with Car Healthcare Realty, Colin Carr went into great detail around everything that goes into the lease negotiation process and how important it is to add someone in that profession to your transaction team from the onset.

Absolutely. Oh, that's great.

So once after, after you've gotten started on the lease and we're discussing these things like they're in a. You finish one and move on to the next.

You know, in a linear timeline, when the reality is is that all of these things are going to be happening kind of at the same time after the letter of intent signed. So while you're in the process of figuring out the lease and making all those decisions, having it reviewed and going back and forth with the landlord, you're also going to want to be working with your attorney on the purchase agreement. Now, the technical term for the purchase agreements that most dental practices use as an asset purchase agreement, and there's different words that attorneys use, some call it an asset purchase agreement, some just call it the purchase agreement. Do you have any other terms you've seen, Drew, PSA for short. Yeah, yeah, psa, which is the purchase and sale agreement, they all refer to the same document. And what that document is is it's the contract that lays out exactly what you're buying and what promises that the seller is going to be making related to what you're purchasing. So, and then the promises that you're making as the buyer and your primary promise that you're making within this contract is that you're going to pay the purchase price for the what you're purchasing.

Got it. So at a high level, it lays out everything that the buyer is purchasing and the conditions for that purchase. To expand upon that a little bit further, Matt, why is an asset purchase agreement the most common method in the dental industry?

Yes. So the reason your other option would be to purchase a business or a dental practice through what's called a stock purchase agreement, where you're purchasing the stock of the seller's corporation.

I'll let Drew dive in and talk about some of the tax implications and the tax benefits of not doing the stock purchase. But from a legal standpoint, you're gonna. If you were to purchase the stock of the seller's business, you would be assuming all of their liabilities and debts as if you were the. From the seller's practice. And so by doing an asset purchase, we're able to cut off all those liabilities on the close date. So in simple terms, by doing an asset purchase, you're buying all of the things of the dental practice, including the intangible things like the name, the website, patient records.

But you're not buying the actual corporation. So as of the close date, if somebody were to come back and sue the dental practice for something that happened two years before you purchased it, they would have to sue the seller's corporation, which you don't own, the seller continues to own. And if something happens after the close date, they would be suing your new entity and not the seller's corporation. So it really protects both parties based on who's at fault for any causes of action that come up.

Okay, let's use that as a segue. In the purchase to sales agreement, it covers a number of items that are unique to the dental industry. I'll start with one that I see regularly, and hopefully that will prompt you, Matt, to cover the other important ones. But one that I see commonly is covering the buying doctor from any prior employee benefits, such as accrued PTO bonuses, reimbursable employee expenses, or any other accrued staff benefit that should be paid out before the transaction is finalized.

Yeah, exactly. And that is one that comes up quite a bit. And so you want to make sure in the purchase agreement that, number one, that on the closing date.

All of the employees are paid out any past compensation, and that the seller makes a. Makes a promise or a warranty saying that there's been no past litigation or no pending litigation, or that they haven't violated any laws. But on top of that, one of the other protections you have in doing the asset purchase agreement is that all of those employees were employed by the seller's corporation or the seller's entity. So on the closing date, the seller is going to actually terminate all of those employees, and then the buyer is going to step in and rehire all of those employees underneath their own corporation. So if there were any issues.

Those issues would be with the business entity that was owned by the seller from before the close date. Which will help protect you. But from a practical standpoint, if an employee's unhappy or if an employee hasn't been paid, they don't really care about the legal implications. They just know that you're their new boss. And so you want to make sure that you can kind of keep that goodwill going and that employees are all paid up to date and everything so that you're not stuck with unhappy employees.

A lot of it is educating the seller because this is probably the first time they've ever sold a dental practice and they're likely unaware of the major pitfalls that can arise from accrued staff benefits. So identifying all of the areas where there could be accrued benefits and then quantifying those by utilizing supporting documents from outside providers like Payroll providers or third party 401k administrators, or even potentially employer health insurance providers, highlighting how much of these accrued liabilities exist at the transaction close date and how much of those accrued liabilities belong to the seller and the buyer respectively is an important aspect of the purchase of sales agreement.

Yeah, that's exactly right. And then also working with someone like you Drew or their dental CPA to get an idea to what their prior compensation was and what their prior benefits were and seeing how that cash flows when you take over in the practice to make sure that that people are compensated adequately and also not overcompensated to the point where it's going to impact the cash flow of the practice.

And this is real life stuff, guys. We literally just had a client sign up a few weeks ago at practice CFO that came to us after the transaction process. The seller had a unique type of 401k plan in that practice that didn't require a record keeper, which a record keeper in 401k talk is the checks and balances person on the plan that keeps track of all the employee benefits and other financial information. The buyer agreed to continue the seller's existing 401 plan, unknowing that there were past due employer 401 liabilities owed to the plan for the previous three years. The attorney that they worked with didn't identify these issues. It wasn't written in the purchase and sales agreement. And ultimately our new client had to come out of pocket for 401k benefits that they weren't responsible for. All in they came out of pocket for over $25,000 to bring the plan current. And this served as a lesson for not only us, but for every one of our listeners out there that due diligence in the Buying process is in a very important and critical step before the close date.

Yeah, absolutely. And even outside of the liability, which that sounds like a terrible scenario for your buyer, Drew, but even outside of the liability is just your employees happiness and not having them be disgruntled. And so if they feel that they're owed money, you know, regardless of whether they, whether it's you who owes them or the prior seller that's going to fall on you or if they're overpaid and you need to readjust their compensation, that's something that you need to figure out early on and determine whether that's going to, you know, be enough harm in your practice to maybe look for another practice or whether it's something you can overcome or something that you need to offset the purchase price by outside.

Of, outside of, you know, staff and potential labor liabilities. You also have rework liabilities, right? This, the, the seller has been, maybe even I have even seen it where they lifetime guarantee on, on, on work. And a lot of the time, most of the time it's in a specialty type practice where they're doing all on four or some type of high end implant work and they're guaranteeing that work over the life of, of that patient. And buyer comes in and you know, maybe they're aware, maybe they're not of this lifetime guarantee and we, they. And then you know, a month, two months or even a year into the practice ownership, they've got patients coming through their door who aren't paying patients, their patients coming to claim their, their guaranteed lifetime value of the, of the seller's work. So how do you protect our buyers, Matt, in this type of situation and maybe give us some use cases of what, what you've seen in action?

Yeah, absolutely. So part of the legal due diligence and the clinical due diligence is to go through and look at the patient charts and then also talk with the seller about any sort of guarantees or warranties they've done on any of their work and get all of those in writing. Make sure that you've got a complete understanding of what they are outside of guarantees and warranties on work product. There's always going to be defective or faulty work even if it's a very small amount. But work that needs to come in that we call redos or retreatment. So within the purchase agreement you want to map out a plan for how those are going to be handled. And each plan is unique. There's not one size fits all. And it's really going to be based on the, the type of, the quality of work of the selling dentist and the amount and the types of procedures that the selling dentist did. But generally what you want to look for is if a, if a patient comes back and needs something, needs something reworked or even in the event of a warranty.

You want to determine within the purchase agreement, number one, who's going to conduct that work, whether you as the buyer are going to take it on, or whether you'll have the seller come back and finish the work or correct the work at their own expense. And then secondly, who's going to pay for that? And if you're taking on the rework.

Then you want to negotiate what fee the buyer will be compensating you for doing that rework if you're not able to charge the patient, or if the seller is going to come back in and do the rework and not pay you, whether they're going to cover the expenses of your assistance or lab fees or any other expenses that occur from that, and then the schedule in which the buyer can come in and fix that work.

Matt, give us a few other important topics to cover in the purchase and sales agreement.

Yeah, so very big picture is that you want to make sure that the purchase agreement specifically lists the, the assets that you're purchasing. And we usually use a blanket statement that says all assets included in the production of income. But we also request that there be an itemized list of all of the assets within the practice. And we operate under, we can operate under the assumption that if it's not specifically listed that it may not be included. And it likely when you show up in the office on the first day and get the keys that whatever's not listed may not be there. So usually we'll have the seller go through with their office manager and, and list out the items in each room of the practice. So in the reception room, you know, maybe the, the couch and the two chairs, and then the reception computer, the copy machine, a water cooler, and then do that for each op. And then if there's an in house lab or any other spaces. So you want to list all the assets that are specifically included. Then in addition, you also want to list anything that's specifically not included. And these are the assets that are not included are usually limited to the contents of the seller's desk. And if the seller has a personal computer that's not used for work stuff, the seller's computer and then diplomas and sometimes the artwork that's on the wall, and if that stuff's taken down. You just want to make sure that you. That you're aware of that and that you're able to replace it with something.

Yeah, I mean, sometimes there's some heirlooms in the office that belong to the seller that they don't want to include the transaction, and that's perfectly okay. They just need to be listed on the onset that they're going to be keeping those and make sure that it's agreed upon totally.

And that's you. You hit the nail on the head. You just want to make sure everything's agreed upon, that there's, there's no, there's nothing that is kind of not described either as something that's included or something that's excluded. You want to make sure that every asset is somewhere on that list, one of those lists, so that there's no conflict going forward. One of the other assets that, you know, when we say the word asset, that's a total legal jargon term. But an asset is just a thing. And usually there's physical assets, things like chairs, desks, specific equipment, but there's also intangible assets. And what that means is things that you can't touch, which are things like goodwill, which is kind of the spirit of the practice, and things like the domain name and any trademarks and.

Reviews and things like that. So you do want to make sure those are listed in the purchase agreement as well as assets that are included so that you get the benefit of those.

And arguably the most important assets in a dental practice are the intangible assets. Understanding the value of that goodwill and what the trademarks and everything else that that selling dentist has created in the community that you'll be now working in is very important to the lifeblood of your practice when you take over.

Absolutely. So the, the next thing in the purchase agreement that you're going to want to look for is the purchase price and how to allocate the purchase price.

Among the different assets that are. That are within the. Within the practice. And Drew, I'd imagine that you can dive in, do a little deeper dive on the purchase price allocation. This is something on the legal side that we rely heavily on the dental CPA to take the lead on everyone.

Be sure to check out our video on the purchase price allocation, which can be found in FuelCell2 on associatesonfire.com the video does a great job of breaking that down simply. And I'll defer to that video for now so we can continue learning as much from Matt today as possible.

So we, we touched on the what happens with retreatment or if the seller had any warranties or anything like that. But outside of that, you also want to make sure that, that you cover the patient credits work in progress and what to do with any accounts receivable that are coming in. And the patient credits are just any time that a patient comes in and prepays for work that hasn't been done, you want to make sure that you have a strategy for either having the seller reimburse that patient prior to the close or to cut you as the buyer a check for that credit. And then also having a blanket statement that says something like anything that hasn't been, you know, if, if any of these were missed, that the buyer, that the seller remains responsible for those patient credits.

Patient credits, AKA prepaid dental fees by the patient. When it comes to patient credits, I would have a practice management consultant help you identify these amounts. Every practice enters in their production insurance adjustments. Patient credits a little bit differently. Being able to parse that out and know what you're looking at on the reports that you're utilizing to base your decisions is important. Patient credits can sometimes just be buried in accounts receivable. And we want to know that. And that's where the practice management consultant that has a ton of experience working with all the various practice management software systems will provide a ton of value.

That's absolutely right. And even outside of the seller who's trying, maybe not trying to hide something like that, but some sellers just aren't terribly organized or they personally don't know what's going on on the, on the financial front. And so you, you also want to bring this to their attention as early as possible, because there's been a few times where we've negotiated a deal and gotten right to the finish line and the seller realizes that they have $30,000 in patient credits that they need to write a check for, and we've been able to get them through, but it can really catch the seller off guard if they're not aware that that's a requirement for them prior to close to be cutting that check. And you don't. And sellers usually will pitch to have them repay those as they come up. But on the buyer side, we strongly advocate against that. You don't want to have this ongoing relationship where patients are coming in and asking for treatment. Then you have to reach out and get the, the seller to reimburse you for that. We want to have it all figured out on the close date.

Okay, so you're offering one suggestion here, which is to have the seller pay for the entire amount up front. What other alternatives do they have to solve the patient credit issues at the time of sale?

Yeah, so it's either pay it all up front, so pay that all to the buyer, or alternatively, they can refund all of the patients their money directly. The third option, which I mentioned a second ago, which we don't recommend, is to keep a running tally that the seller stays responsible for as they come in. That just complicates things and there's a much higher potential for disputes between the buyer and the seller.

One other thing that comes to my mind, which you alluded to this a bit when you mentioned paying it all up front. But if the buyer's purchasing the accounts receivable, another option would be to offset the AR with the patient credit amount.

That's exactly right. And I like what you did there, Drew the. The big picture is, is that we look at this transaction as a whole and there's a lot of different levers that we can manipulate to get a fair deal. So if the buyer doesn't want to cut you a check, then maybe we could start looking other places, whether it be to accounts receivable to cover that, or whether it be possibly reducing the purchase price by the credits. So there's a million different variables. The walkaway point is that you want to make sure that those patient credits are addressed and that there's a pathway that you as the buyer are not having to, you know, come out of pocket and reimburse patients or work for free.

Your time is valuable, and the key takeaway here is to find a solution for patient credits that ensures your future time isn't spent working for free. Let's take a look at accounts receivable for a moment. What are the factors our listeners should consider when it comes to accounts receivable?

Yeah, so accounts receivable is something that you should talk with a practice management company in your CPA and really look to see what their collection rate has been and you know, how, how much of their past receivables they collect and how much are outstanding. And look at the aging reports on those and you'll need to make a decision. And if you can do it pre loi that's beneficial. But it doesn't always work that way. Sometimes the accounts receivable are purchased after you agree to purchase them after you get in and do your due diligence. But most of the time the accounts receivable are not included in the purchase price for the practice. So you'll negotiate the Buying of accounts receivable in addition to what you're paying for the practice. And depending on the health of the accounts receivable, meaning how, how much of the outstanding balances owed or paid by patients will dictate how much you pay for them. And so if it's a practice where you know they're collecting 50% of.

Of their accounts receivable, then you obviously wouldn't pay full value for that. We'd ask for a huge discount on those or not purchase them at all. Whereas if they have a 99% of collecting all receivables within 30 days, then you know, you might pay close to full value. But that's one of the negotiating points, is what you're going to pay for the accounts receivable should you want to purchase them. And in the event that you choose not to purchase them, then in the purchase agreement, we want to work out what the procedure is for your office collecting those accounts receivable and submitting the payments to the seller. And then outside of that, whether you will charge a fee for doing that extra work. And that fee usually looks like 3 to 5% of of the collections for the administrative energy and effort that you guys put into collecting the seller's receivables and handing them over to the seller.

Okay, let's summarize. First, what is accounts receivable? Accounts receivable is money owed to the practice for work that's already been provided. The next question is, do we buy the accounts receivable? And a lot of the time that's up to the seller. They already did the work and inherently have a higher claim on those reimbursements during negotiations. If we do decide to buy it, what price are we going to pay? As Matt mentioned, the price for the accounts receivable is based on how effective that practice has been at collecting the money in the past. If we're not buying the accounts receivable, how do we get the future accounts receivable collections to the selling doctor? One of the most common practices is for the buying doctor to separate collections based on the batch reporting documents provided by the insurance company, tie that reporting back to the procedures performed and the providing doctor that performed the procedures. Any collections that tie back to the seller's production reduces the accounts receivable balance and the buyer sends that money to the seller minus a 5 to 7% collection fee, which the collection fee is just for the time involved to collect the money on their behalf. So we really have two options here, right? We either buy or don't buy the accounts receivable. If we're buying it, how much are we going to pay? If we're not buying it, how much do we charge to collect it? Matt, is there anything else on accounts receivable that you find relevant for our listeners?

So this isn't directly related to accounts. I mean this isn't usually doesn't go under accounts receivable, but it's related because it has to do with the amount of money coming in. But another area that you want to make sure you dive deep into throughout, within the purchase agreement and throughout your due diligence is, is the insurance that's collected by the practice prior to purchasing it and whether you're going to be able to be credentialed. So that's something that especially with Delta Premier and Drew might be able to dive a little deeper into the Delta Premier talking with insurance credentialing consultant. But you want to make sure that with all receivables you're able to bill at the same rate at which the selling dentist was billing at so that your cash flow is good.

Absolutely. You can tell a lot about a practices about a practice from their, from their AR report. If you see a lot of money sitting out in that 90 day plus bucket, meaning that it's been over 90 days since they provided the work and the money still hasn't been received, that could tell you a lot about their front desk and their operational processes around billing and collections and, and really gives you some foresight into what complications you'll be walking into as the new owner and areas that you're gonna have to focus time and energy on correcting so that your practice is much more efficient and effective in the way that it's run.

A.B. absolutely. And, and that's a nightmare. If you step into a practice that has been very part of what you're buying is the goodwill in the patient base and if the prior dentist hasn't been billing the way that they should and you step in as the new owner and start billing like a regular profitable dental practice would, there's a good chance that a lot of those patients are going to be upset about that. So you want to know about that coming in.

You mentioned work in progress. I believe I know what you mean here. I think it applies more to orthodontists or even general dentists who have invisalign as part of their practice where they're collecting service fees in stages over the course of treatment. Maybe you can give our listeners a bit more insight around work in progress.

Absolutely. You hit the nail on the head with the kind of the orthodontic procedures, but also on some of the more complex implant procedures. But the big picture is that anytime that a procedure takes multiple visits to complete, we try and have the seller take that into account and finish everything prior to the close date. But if they don't, or if there's additional treatments that need to be happened hap that need to take place in the purchase agreement, we map out what the procedure will be for that and the options there are having the selling dentist come in and complete the work that they've started or prorating the fees paid and having the buying dentist take over the remainder of the treatment and be paid for the portion that they're.

Treating.

Got it. So if I'm the selling doctor and I'm tired of working, as soon as the practice closes, I'm headed to the beach to sit my Mai tais and embrace retirement. If there's any work in progress, I want the buying dentist to do it for me. I'm going to pay the buyer and associate rate something similar to what they're earning, right? Maybe 30% of production, subtract the buyer's direct expenses to finish the procedure and any resulting profit will be included in the accounts receivable balance that will be returned to me, the seller. Post close.

Yeah, that's exactly right. And, and also with, with all of these terms, there's a million ways to skin a cat. And that's, that's where working with the dental professionals is going to be a huge benefit because we've seen all of these different ways based on what the parties want. So the. My goal today is that all of your listeners just understand that this is something that needs to be addressed and the solution and the route in which it's addressed works with them and you know it's going to be feasible. So however you want to work it out with the patient credits, retreatment and work in progress, just as long as you guys have a process for that and it's not something that's excluded from your agreements.

As we're talking through all of these topics that are included in the purchase and sales agreement, you can get an idea how every topic has its own decision tree. And that decision tree logic has been programmed into Matt's new technology driven product acquired in a law. And while you're going through his platform, each step of every decision tree will be mapped out with helpful Q and A and videos so that your unique situation can be addressed at each step of the process.

Yeah, that's exactly right. And internally, we organized it in that every single contract that's out there has a portion of it that's boilerplate and templated, which.

Which we're going to have the clients go through the intake form to get the information that we need for that. But ultimately, there's no decisions that need to be made. It's just things that should be in there to cover the bases and make sure that the client's protected.

Yep, standard operating procedure.

That's exactly right. But the second half is things that do require an attorney to kind of map out something that makes sense while still protecting the clients. So our goal, in the way that we've. That we're becoming more efficient is traditionally the attorney would sit down and for all the boilerplate stuff, spend their time going over the boilerplate stuff, which we can still do if the client would like, and then also trying to juggle that with all of the unique parts of this specific transaction, where our goal is to streamline the boilerplate stuff so that the attorney can focus all their time and energy on mapping out the. The best case scenario and the best outcome for the clients on the more variable terms like the patient credits, retreatment, work in progress, accounts receivable, all of those sorts of things. And to give you an example of some of the more boilerplate provisions that we cover and that need to be included in your purchase agreement is something that's called the representations and warranties. And put simply, representations and warranties just mean promises that each party's making. And so each party is going to have kind of a list of paragraphs of promises they're making, and you want to run through those, but they're all standardized. And usually what they include is the sellers promising that they're licensed to practice dentistry in the state where they are. They're promising that they don't have any outstanding litigation or, or knowledge of any litigation or lawsuits that are going to come against them. They're promising that all of their employees have. That they've paid all of their employees wages and any bonuses and paid time off or all of that stuff. So all of their employee liabilities taken care of.

They're promising that.

There'S. Yeah, there's a handful of other ones. But the big picture is that they're making all these promises with the idea that it's. It's the things that you don't necessarily need to ask the. Ask the seller that this is true. You know, do you have your dental license? You assume they do. If they've been running a practice, but we need in writing that they actually do so on the outside chance that they've just been skating or that they're, you know, they've got a issue with it. They've, they've affirmatively made that promise.

The last one that we haven't mentioned, which is a very common one, is covetous not to compete, AKA the seller is not allowed to work near me for a long time because otherwise the patients we just paid for would go to their practice. Walk us through what our listeners need to be aware of when it comes to covenants not to compete and touch a bit on how enforceable covenants not to compete are when contested in court.

Absolutely. So the big picture, if you're working as an associate and you're and your employer had you sign a covenant not to compete, those are generally not enforceable in California. It depends on the state that you're in. But those are a lot harder to enforce in the role of employee employer relationship. Now when you're purchasing a practice, they are more enforced, they are enforceable. And the courts do side with the buyer on these covenants not to compare or these covenants that are included. And covenant, like the representation and warranties is again another fancy word for a promise. And the common covenants that we put into the purchase agreement or that are, are included when buying a practice is the covenant not to compete, which means that you're promising not to take, that you're requiring the seller to promise not to treat patients or compete with the business that they just sold you.

Covenant not to hire employees, meaning that the seller's promising not to hire employees of the practice. So they can't just open up shop and, and hire kind of some of the secret sauce that made the practice great, which might be the front office manager or a rock star hygienist or something like that. They're not allowed to undermine you and take those away from you. And then a covenant not to solicit patients, meaning that they can't actively go after the patients that the patient list that they sold you within the practice. Now with all of these covenants, in order for them to be enforceable, they need to be limited in scope, meaning that you can't just say this dentist can never treat another patient ever anywhere in the United States or anywhere in the world. So we have to limit the covenants to a radius around the practice. So it's usually a geographical radius and what we commonly see is a 15 mile radius, meaning that they're not allowed to treat patients of the practice or they're not allowed to hire employees or they're not allowed to compete within 15 miles around the practice. And the idea behind that is that outside of that most patients probably wouldn't go outside of that for their dental treatment. And then it also has to be limited in duration. So the covenants can't be forever. The courts won't uphold it if you say the selling dentist will never treat one of his old patients for the rest of his life or never hire an employee. So we have to limit the time frame on that. And what's common is a five year.

Time frame meaning that the seller can't interfere with your business for a five year period within that 15 mile radius. And again the, the logic behind that is that after five years as the, that that gives the buyer ample time to build his relationships and build the trust and.

And kind of win over everybody so they don't jump ship and go with the seller to compete against them.

Thanks Matt, that was very helpful. Now we're at the juncture where the purchases sales agreement has been created. You've gone back and forth to the seller's attorney and agreed upon all of the important aspects of the purchases sales agreement. The lease negotiation has been finalized. What's the next step? Of course we're hopefully going to sign all these documents at the close date. But what is your role at this stage in the process?

Yeah, so there's a few documents that need to be updated on the close date but a lot of times the, all of the legal terms can be finalized prior to the close date. And our, the, the way that we like to see it happen is that on the close date the, the final exhibits are put into the contracts and those are things like the accounts receivable lists and any other information that you need that gives information right up until the closing date that, that it wouldn't make sense to provide you prior to that.

So once you have all those together, the buyer will do, both parties will do a review to make sure that there's nothing, you know, that that changes any of the terms, which usually isn't, isn't a problem. And the closing day usually looks like the parties meet and sign the documents in the morning and then prior to 2 o' clock all of those documents are sent to the bank for, for the underwriters to fund the loan. And if you get those signed documents in prior to 2 o', clock then it'll be able to fund that same day. And after the funding occurs generally at 5, 30 or whatever the closing time of the practice is, the parties will meet and the seller will hand you the keys and you'll kick off the start to ownership and finalize any.

Any processes that you have in place for that transition. So hiring and firing of staff and then sending out transition letters.

And starting to transfer over any vendor contracts and things like that.

If the buyer that you are working with on the legal side of this process has any issues post close with legal items that you help them complete, what can the buyer do at that point to resolve those issues? Can they reach back out to you? Is there a new contract? Walk us through how that would work.

Yeah, absolutely. So the way that our fees are set up is that we charge flat rates for our services and we do them based on the amount of time. So it may be a 90 day.

It may be a 90 day agreement, which means that for 90 days will be available for unlimited.

Consultations and unlimited advice on anything related to the service. And then after that 90 days, the clients can either sign up and work with us hourly for one off questions or enroll in one of our subscription models, which is a small flat rate that they'd pay monthly for.

For information or for consultations and things like that related to the practice purchase. So in other words, we, we set out the time frame based on what we anticipate the closing date be and, and if the, when the closing occurs prior to that 90 days, they would have up until the 90 day mark to get information and, and we'd be able to give them as much as they need.

Got it. That is very helpful. Well, Matt, I appreciate you coming on the show today and providing our listeners with a solid foundation around the legal aspects of purchasing a practice. It's always a pleasure to talk shop with you and I look forward to having you back on the show again soon.

I really appreciate it.

Okay, that wraps up another episode of the Associates on Fire podcast. Don't forget to check us out online@asspectsonfire.com that's Associatesonfire.com until next.

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