Protect Yourself & Your Practice with a Dental Attorney—with Cecilia Chen

Welcome back, everyone, to another episode of the Dental Boardroom podcast. My name is Drew Phillips and I'll be the host of today's episode. I'm so excited to introduce our guest today, Ms. Cecilia Chen. She's a veteran in the dental space, has been an attorney and an ally for many clinicians during their transition period. Whether it's into private practice or into retirement, she's been a viable resource for them. And I'm excited to have her on the show today to share her stories and get to know her just a little bit more. So welcome, Cecilia.

Thank you. Thank you for having me.

So let's get started with a brief background on just who you are and how you found yourself into the dental space. So we can get. We all have a little bit better understanding of how you arrived here.

Sure, sure. So, again, my name is Cecilia Chen. I am an attorney. I specialize in representing dentists in transition transactions. When a dentist is looking to purchase or sell their dental practice, I review leases, set up partnerships, especially for startups, associate contracts, as well as setting up dental service organizations, DSOs. I have been practicing since 2004. My background is in merger and acquisitions, and I work for a large firm and doing kind of a lot of those large transactions. I started my own firm in 2009 and I have been focusing in the healthcare dental niche since 2011. So for the past 12 years, I guess, if I'm doing the math correctly. Yeah, you know, I have been focusing and a lot, you know, transition transactions. About 90% of my clients are dentists. The other 10% are veterinarians and optometrists. So I also help those professionals when they're looking to transition or purchase a practice. And majority of those transactions are selling to corporate and also startups as well. So that's kind of a brief background about who I am. And I'm located here in San Diego, but I work with clients over the state and many out of the state as well.

Thanks for sharing that background. And Cecilia and I have had the pleasure of working together on numerous transactions during our shared experiences in the dental space. And something that's emerged not necessarily as a novel new topic, but something that recently has occurred and I thought would be a great topic to kind of share just in case someone else goes through a similar experience during their time. And that's when an unfortunate passing of a doctor happens before they exit their practice. And so they are leaving their loved ones with the responsibility of figuring out how to mitigate that piece of the process. So, Cecilia, why don't you just kind of walk through this particular case study and give us your experiences and things that people should be looking out for and how families can prepare for any situation. And, you know, obviously this one as well.

Yeah, definitely. You know, when somebody owns their own practice or, you know, owns their own business, it really is important to have a plan in place on how to transition that business, that practice, to protect its value and protect the family that they're leaving behind. Now, none of us really ever think, at almost any age, really think that, that, oh, you know, there might not be a tomorrow, right. Especially those who are younger. But anything can happen. You can go into a routine surgery and not come back out. You can go on vacation and something happens. And I'm not trying to be morbid, but it really is a topic that's not just for older dentists to think about and to prepare. It really should be for all of us.

I mean, if we're watching the news, right. Bronnie James just recently had a cardiac arrest at 18 years old in a basketball practice. So, yeah, it can happen, right?

It can happen to anybody. You know, the. The clients that I have worked with who pass unexpectedly, many of them are in their 30s, 40s, you know, accidents happen. And, you know, and you go into a routine surgery that you think nothing is going to go wrong, something goes wrong, you know, and so the important part is that, okay, what. What does that involve? What steps do I need to take? So a lot of people are like, okay, well, I will have a trust set up. That. That's a great, important step. Have a trust set up so that your business, your practice, doesn't have to go through the incredibly expensive and time consuming process, process of probate. You know, when. When you go through the probate process, it can take 6 months, 12 months, or even even longer than that because of COVID And, and by that time, there's not going to be much value left, right? There's not going to be much patience left for the practice to have any value to sell.

Cecilia, I want to. I want to just expand upon that part really quick. So if there is no trust set up and the practice does need to go through the probate process, what actions can the family take to potentially mitigate practice revenue declines during that interim period while they're waiting for the probate process to be finished and then being able to actually sell, it's going to be.

A long, long process. I mean, that's a process that everybody should do everything they can to avoid. And if it can't be avoided. You know, see if there is an associate they can hire, but in the interim period, but know that non dentists cannot continue to own a dental practice in California without the owner being a dentist. So there is a very finite limited period where you can keep the practice going with an associate. And typically, usually the associate is not going to be working, be able to work full time. And if they are working full time, then they're going to start questioning, you know, well, if I'm doing all this, why am I just an associate? Why am I not buying the practice? You know, so the therapy practice is not like any other practice where, where somebody can, can potentially continue to own and receive passive income on it has to be owned by, by a licensed dentist.

Do you know how long that finite period is for them to offload that practice?

I believe I would need to double check. I believe it's 12 months.

Gotcha. Gotcha. So that's really running some, some tight windows there with probate potentially lasting 12 months or maybe even a little longer.

Right, exactly, exactly. So, you know, the family cannot, you know, a lot of people are like, well, I have, I have my spouse, so if I pass away, of course my, my spouse can take over. Not necessarily because the court has to appoint, give your spouse legal authority to sign documents, to hire a broker to, to have the authority to sell the practice. So it's not as simple as, oh, I have, I have a spouse that can just step in.

So are there ever situations where the court potentially wouldn't appoint the spouse in these situations?

There could be situations where the couple is going through a separation or divorce or if the spouse is, you know, not has, has health issues or, or in a, in a not competent state because the spouse has Alzheimer's or dementia, whatever that the case might be.

That makes sense.

So you know, setting up a trust is, is an important first step. And that really should, I mean, I can't stress that enough about how important it is to set up a trust to not just protect the practice, but also to protect the family and kids involved. But beyond that, there is an additional important step to take which is not every spouse is capable of stepping into the role of taking care of the business matters. Right. Because they're going to be going through the grieving process, they're going to be going through the shock and they might not have ever had any experience.

Involved in like selling a business or running a business. So that person might not be the right person to step in the role of, you know, selling and managing the practice right after your passing. So who should be that person? Well, who in your life do you believe is the right person to step into that role while your immediate family is, you know, going through the grieving process and that's going to be different for everybody. You know, some people are like, well, my brother is going to be the best person, my sister might be the best person, my best friend, my college buddy, you know, whoever that might be, or my, or the person that I went to dental school with. Whoever that person is, you need to have a conversation with that person and have legal documents drawn up. And in some cases it could very well be the spouse. I'm not saying to discount the spouse. I'm just saying that the spouse might not be the default, the right person for everyone. And whoever that person is, there should be legal documents drawn up saying, okay, I have a trust. And then in that trust, this is the person I'm going to appoint to take care of managing and selling my practice.

So it sounds to me like based on that, you would almost recommend that as part of your post close process to get a trust in place really early on. Is that fair?

Definitely, absolutely.

Is there a specific kind of trust that you would recommend over others?

Not at all. I mean, everybody will benefit having a trust. Even single persons, they can have a simple trust set up to protect their assets, to protect, you know, their, their family members. Right. But especially those that are married, that have kids and whether young kids, adult kids. Regardless, you know, having a trust is really important. But beyond having a trust, you know, that's something that most people don't think about and even a non dental trust attorney wouldn't think about is to make sure that it's addressed in your trust. Who you are going to appoint to have as the person to manage and take care of your, take care of your practice, the selling of your practice.

Are creating trust a part of services that you provide to doctors?

Yeah, definitely. But it's not, it's not, it's not a main, you know, it's not a main area of service that I do. It's not what I do day in and day out, but it's definitely something I can do. And my associate, I have a associate in my office that also takes care of that for my clients.

Wonderful. When you're in a transaction, whether or not you're on the other side or representing the party that has a deceased doctor, what are some challenges when you're actually out of probate, you're actually in the deal process that you run across some of it, I'm assuming is probably due to lack of experience and know how. But just kind of curious, what, what other sort of pitfalls do you see in those transactions when we're in this type of scenario?

Well, for one, I can't stress enough that the person who is, you know, appointed to manage and sell their practice has the emotional ability and the business ability to, to do that, you know, to make decisions to hire the right broker and then not be overwhelmed with every single decision and also be able to make a very quick decision regarding what is the most important thing to preserve. Right. If you also own the real estate, what can you do to, you know, what should be expected? Because if you also own the real estate besides just the practice, you have to expect that whoever is buying the practice is going to want to own that real estate at some point. So the idea of, no, I never ever want to sell the real estate or, you know, I don't want to provide even a right of first refusal or an option to purchase at a later time because it might potentially, you know, impact the attractiveness of this property. You know, those are things that, you know, should be considered. Then how are you going to preserve? I just think it's, it's important to know, you know, which is, which is more important, you know, preserve the value for the real estate or preserve the value for the practice. But I, but I truly think, I truly believe there is a way to do both by being open minded, by being in an emotional state, not just emotional, but, but also have the business knowledge to understand how a transaction is negotiated, that it's a give and take process, that you're going to give a little and the other party is going to give a little and make compromises. And that's how a deal can come together in a way that the person will be able to purchase the practice and then hopefully the real estate at a later time. And that will be a win, win situation for everybody involved. But instead, you know, if a person is absolutely not in a mental state to make decisions and constantly going back and forth and not have the knowledge or business knowledge, then it becomes very difficult. And all of a sudden everything is going to fall apart very, very quickly. All of a sudden, you know, there's no one working in the practice. The value is declining every single day. Right, right. Patients are leaving and so, okay, well, we don't care about selling the practice anymore. We're going to focusing on the real estate. Okay, well, real estate with a practice, in theory should be easier to Sell, but that necessarily isn't true either. A lot of people, you know, if, if the family is in disagreement about when to sell and who wants to, you know, some somebody might want to keep the real estate for a long time for investment purposes. And the other person say, well, I think this is the right time to sell. You know, especially, you know, when there are a lot number of adult kids involved, everybody is going to. And spouses. So adult kids and their spouses. All of a sudden there are 6, 8, 10 people involved that have different opinions and things can fall apart very, very, very quickly.

I couldn't, couldn't agree more. And you know, we've kind of. Our industry is conditioned to expect that when the current practice owner is the also the real estate holder, that that is going to be a part of that transaction, whether or not it's, you know, formally sold to them at the time of selling the practice or at some later date. As you mentioned, through the use of our first right of refusal. We just, this industry just kind of expects that to be a. And if you're coming in from the outside and maybe you have real estate background or whatever, and real estate's part of your portfolio holdings, you kind of expected that asset to potentially be available for continued growth and cash flow value. And then they come in the transaction and get to meet real dental professionals and realize that that may not be always possible. It's also, I think, something that other practice owners should think about when they consider the real estate holdings as this long term investment asset. While it is typically a good option for increasing their path towards financial independence, they have to keep in mind what this industry kind of expects during that deal process.

Totally.

So when we think about the building and the practice and the cash flows of that practice, and knowing that ultimately if the buyer is going to get financing for that building at the time of sale, there's got to be a certain level of cash flows available from the practice operations to support the financing of that building. I would say especially in markets like California and New York, you really run into situations quite frequently where even in decently run and operated practices, the cash flows are just not enough to support such high purchase prices on these real estate assets that have accumulated over the past decade or more. Also another thing to consider when we think about the emergence of DSOs. Switching gears here just a little bit, Cecilia. I know that with the emergence and the consolidation, you're taking a pretty big role in helping not only buyers, but probably more often sellers enter these transactions with these larger DSOs. Or even middle market DSOs for that matter. And just maybe give us a little bit of background on your experience there so far and what you're seeing in that space.

Yeah, so typically a DSO is going to offer, you know, a much higher price than a private, private buyer buy than a private doctor buyer. So that is very attractive to a lot of people until you realize what that much higher price is based on. You know, I think that for somebody who is interested in going that route and to potentially, you know, sell to a dso, they kind of do need to expect to work back for a period of time. For somebody who is looking to get out and not work at all for, you know, after the sale is complete, the DSO is not, is not the right buyer for you. The DSO model, their profitability, their model for buying practices and the value and profitability that's built in on offering those much higher price is largely dependent upon the selling doctor being able to work back at the practice for, for about three to five years.

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It's a really good point that you just made, Cecilia, and I was just at a large DSO conference last week in Denver and you know there's two private equity models in the DSO space that are been predominant up until this point. And one is the sort of the asset accumulation model and the second is what colloquially they call the Evergreen model. The asset model is really a dying model. That model was accumulate as many practices as possible regardless of the legacy Dr. Continuing in the practice or not, then try to package that up and sell it as quickly as possible to the next larger buyer. What they are focusing on more, at least based on my experience in that conference indirectly, is that they really want longer term partners. The three to five year workback periods while they set those minimums. And this is kind of opening you up, Cecilia, to this next point, is that they set these provisions in place on how you can exit your retained equity in that transaction and based on if you're still working or if you're not working. And they do that, right, to sort of incentivize you to continue being a longer term partner past that sort of required three to five year workback period. So what type of terms do you see that impact that future value for that doctor that really does need to be considered on the front end?

Well, usually there are two different portions of the purchase price. One is what you're going to receive immediately at closing, that's the cash portion. And then the other portion of the purchase price is typically a deferred deferred amount, meaning that it's going to be contingent upon you still working at the practice. And it's going to be contingent upon certain revenue goals that the DSO is going to set out that should be met, that they expect those revenue goals to be met in order to pay those deferred compensation. You know, deferred purchase price. I will argue that in a lot of cases it's not as simple as people might think. People might think, oh, it's not a big deal, I'm fine working there and I'm fine. And I don't see any problem meeting those revenue goals because that's the historical amount of what's being generated. And my practice, I mean, you know, my practice has been generating that amount for the past 10, 20 years. I have, I see no issues and I, I'm not concerned. And the problem with that, that is a very simple, simple way of, you know, viewing things because it's going to be very, very different.

For how you going to manage and produce that revenue when you no longer own the practice, when you are no longer the owner and that the DSO is the one that has the final decision making power on all the major decisions of the practice staff, insurance, operating hours, what type of insurance to take, how your schedule so many different things that is going to be no longer within the control of the, you know, of the owner, the object. Now I don't mean that all these things means that DSO is bad and they, you know, you should run as, you know, as soon as you get an offer from dso. No, not at all. I mean some, when done correctly it can be very mutually beneficial for both parties but you do need to understand what they're offering and have a realistic expectation and also make sure that you are properly protected in a way that you do have a say on certain decisions related to the practice because it's going to impact your ability to stay employed working there at the practice and it's going to impact the ability to practice meeting the revenue goals.

All great points. And you know, there's so many different DSO philosophies and operational structures and depending on what their inclination is, they may take a more hands on approach and try to come in and really replicate their operating model within your practice. And some take a more of a hands off approach. And hey, if you continue to maintain the revenue and the EBITDA that we purchased you, then we're going to let you continue to be your own sort of boss and we'll have some shared services. But and there's obviously a middle ground in there as well. It's a spectrum. Just on the legal side specifically, what are some, maybe some case studies of some really important deal points that impacted your clients and what those outcomes ended up being as a result?

Well, I think the most important part that most people are concerned about is how much of the purchase price is going to be received at closing. Right. Because that's the only for sure thing that can really be counted on. And then.

It'Ll be a matter of negotiation to make sure that.

You can continue to stay employed and have a say in certain decisions that impact the revenue goals, impact your happiness to continue to operate. And specifically, you know, related to staff, you don't want the DSO to have the ability to take your very experienced staff and put them in another office. Right. Because that's going to really create a hardship for your office and the role that the selling doctor is expected to take on after the closing. And a lot of times, a lot of the transactions, what I have seen is that a certain portion of their purchase price is investment in return for equity interest in the dso. So that model allows, you know, ensures that both parties are going to benefit mutually benefit from the upside, the practice, right. Doing for the practice, doing well. But then you need to understand, does the legal documents actually reflect what, you know, people are telling you over fancy dinners and over the phone about, you know, this is going to be mutually beneficial and how you are going to, if our, you know, if we sell in the future to a bigger, you know, private equity group at like 10 times EBITDA, imagine the amount of, you know, money you, you're going to receive for that 20% equity in our DSO company. Right. But then there is the flip side. How, you know, how well funded is your company to begin with? You need to understand their finance, you need to understand their, their, you know, future objective and how are their existing practices run and what is the once your time in working there is over the three to five years when you're no longer working there, who's going to be there working and what is their long term outlook for the practice. So the legal documents have to match what people are telling you over excited phone calls, excited dinners and drinks.

That's, yeah, that's. Those are such good points. You know, I think that in these particular transactions, right, it's almost like you've got this dual sided investigation process going on. Whereas in private market transactions it's really just, you know, buyer interviewing seller. But really in these transactions, both parties need to do their own due diligence on each other because they're formulating, you know, a business marriage, so to speak. I think that you would agree with this, Cecilia. You know, we always recommend to people the earlier that you can get in contact with your future transaction advisors, whether it's your financial due diligence, your legal with Cecilia, the earlier we can start before the transaction process to help coach and guide you to set up that transaction to be successful as possible is a good thing. But what I realized and what I want you to speak to a little bit here is that the preliminary stages that go into formulating a letter of intent, there tends to be a lot more groundwork in being more methodical in how you're crafting that letter of intent and in these DSO transactions compared to a private practice sale, where honestly you probably would agree to some extent that the LOI and a private practice sale is more or less just like, hey, let's, let's just, let's try to get to know each other a little bit better. But we're not necessarily sold 100% on the deal. So just maybe a little bit of like the differences in that pre LOI stage and between private and DSO transactions and what your experience is there.

Yeah. So in a private transaction, I would argue the LOI is still important.

Agreed, agreed, agreed.

And I really think even in that stage it should be reviewed by an attorney because there have been many transactions where things have not been addressed and it should have been addressed in the LOI or it was addressed and the person who's reviewing it didn't really understand the impact of what they're signing and agreeing to. And people hear all the time, oh, especially from brokers, they hear all the time, oh, it's non binding, it's not a big deal. Just sign here so we can proceed with the transaction. Non binding doesn't mean this document is meaningless. Because if it's completely meaningless, then why even bother signing it? Right. So the document, the only, I think people don't really understand what non binding means. What non binding means is that just because you sign an offer to purchase a practice doesn't mean you are bound to still purchase the practice. Because there are contingencies involved in that letter of intent, such as getting a loan, such as getting an acceptable lease, such as completing due diligence. So if those contingencies are not met and they're not satisfied, then you're not bound to purchase the practice and you can walk away, get your deposit back, et cetera, et cetera. But if you are going to proceed with the transaction, the things that have been agreed to, the terms that have been agreed to in the loi, they do make a difference. They expect, you know, the parties do expect those terms to be honored as you proceed with the transaction. And that's when a lot of times people were like, oh crap, you know, I didn't realize this, it means this. Oh, I didn't realize if I Told the seller, I want to buy the real estate. I didn't realize that needed to be included in, in the, in the loi. And now a week away from closing, turns out I'm now finding out the seller doesn't want to sell the real estate to me ever in the future. So, you know, a lot of things that really should be addressed in the loi, sometimes, you know, are not and sometimes they are addressed, but the person reviewing it don't, don't really necessarily understand the impact of what it means to be agreeing to those certain terms and what the impact is going to be when you, when you actually proceed with the transaction. But I do recognize probably, I would say 50, 60% of the transaction, even if the LOI is not reviewed by an attorney, they still go through just fine at the end. But it's the other, you know, 40, 40 to 50% of the transaction that don't go smoothly because LOI wasn't reviewed. You're just not going to know which camp you're going to fall in. Right. And to me, I think it's important to take the time, invest a little bit of time and effort to really know what is important for this transaction, why are you buying this practice and what should be addressed in the LoI. Even if people are telling you it's non binding, do you really even understand what non binding means? But more importantly, if you are selling to a dso, those, Lois, are extremely, extremely complicated. And I would say if you don't have an attorney to review the LOI from a DSO buying your practice, you already making a huge mistake. Couldn't agree more from that very, very initial step because there are so many things buried. I mean usually those LOI from, from a DSO are like 6 to 10 pages long, right? And they, you know, and they are throwing in a lot of things in there that you don't, you might not necessarily understand or you might think, oh yeah, this sounds okay, they want me to work for three years, I'm okay with that. They want me to agree to a non compete, I'm okay with that. But there are so many other things that go into what it means to, you know, meet the deferred revenue goal. What are the conditions that have to be satisfied to get the deferred, you know, purchase price and the terms of employment. So many things. And especially if you also own the real estate, that's another level of complexity. I can't say enough that like I would say if you are selling to a DSO and you're not having that Letter of intent carefully reviewed by a dental attorney that has the experience of, you know, representing clients, selling to dso, selling to corporate, you're already, you know, starting off on the transaction on the wrong footing and against your own interest.

Couldn't agree more. And the loi, generally speaking, it's supposed to guide the entire transaction, right? It's supposed to be that, that blueprint. And you know, and I just think that when on the DSO side, that blueprint going into it, they, they spend so much time making sure that each fine detail is formalized on the front end. So before we go into that more expensive transaction and due diligence process, which is a lot more expensive and a lot more involved than it is on the, on the private market side. And so before you ever even get into that financial commitment and that, and it's a lot, it's a lot of work, right? They, they, they request probably three times as much information. They review it a lot more thoroughly. And so it's, it can, it can be a lengthy process that if you don't get the right deal terms up front, you're kind of spinning your wheels there. And you know, on the Los LOI side, on the private market side, you know, it's probably 50, 50 for me, where I've got a client or a prospect that comes in and they have already submitted the loi, right. Without anybody reviewing, as you mentioned, and if it's a good practice, as you mentioned, which is maybe 50 to 60% of the time, no, no issue. But it's when, then when they bring in the advisors on the back end, like, they open their eyes to all these things that they should have been aware of on the front end. And then it's like, oh, wow, I really got myself into something that I wasn't fully understanding. And that's when friction starts to, starts to present itself. Well, before we switch topics, is there anything else on the transaction space as it relates to DSOs that you want our listeners to be aware of?

You know, just, just kind of have a better idea. Just know that what is presented and during conversations over dinner and over phone calls might not necessarily match the legal documents that are presented. And it's your job to make sure that everything matches. Right. And so I just think that that's an important step that a lot of people are not aware of when you're.

Looking at it now we're kind of moving into the actual transaction itself. So we're past the LOI stage in this next, next piece of our conversation. When we look at like patient credits or and you know, prepaid work and treatment plans that had already been committed to these items that, you know, quite frankly are often overlooked. And I know working with you directly, those are things that you certainly don't overlook. Right, exactly. And so maybe just give a little bit of background on what these items are and educate our listeners a bit on those pieces.

Sure. So patient credits are overpayments from either third parties or patients on treatments that have already been rendered. So a lot of times those credits should be refunded to patients or those third parties. But if they are still on the record at the time of the sale of your process, you should either at that time make the effort to refund them directly or be, or expect to transfer them to the buyer but do nothing. Or in some cases, I have had sellers feel that they're entitled to keep those credits as an asset is just mind boggling because it's not an asset, it's a liability. It's credits that are owed to the patients. They're not earned, they are not earned revenue by the seller. So to have the mentality of, you know, I'm not going to do anything, my expectation is to keep those credits after the sale. It's just simply not a reasonable one because it's going to a, it's, it's not, it's not legally compliant. You know, they have to be returned to the patients or the third party, whoever that made the overpayments. And if you don't want to be bothered with that, then they need to be transferred to the buyer. And from a buyer's perspective, you know, if a buyer, you know, they might think that, oh, it might not be a big deal. I don't, it's fine. I'm not, you know, I can just tell the patients that, you know, I'm the new owner of the practice. And I don't, you know, I don't know anything about these credits. So, you know, not, not worry about it. And that is, oh, you know, naive and overly simple way of looking at things because when a patient comes into the office, everything's the same. Right. The name is the same and the, the staff is the same. The only thing that is different is the owner doctor and they are aware there are credits on the book that they should, you know, that should be honored. And when the owner doctor tells them, oh, I'm the new owner, I don't know anything about these credits, you should talk to the selling, selling doctor, they are not going to be happy about here, you know, Hearing about that, you know, that the result is, from what I have seen in, what I have seen in other cases where that hasn't been addressed, is that they lose patients or worse, the patients post a very, very strong negative review about the practice not honoring what they're entitled to. And so that's really an issue that really should be addressed because, you know, preferably at the LOI stage, because it turns out, you know, sellers and buyers have very, very different ideas about how that should be handled. And even, even among attorneys, there are very, you know, different school of thoughts on how that should be handled. So if it's already agreed to and addressed in the stage, it'll help make.

The transaction a lot more smooth on patient credit specifically. Cecilia, really quick. Probably what. Maybe you could probably speak to this better than I could, but maybe 90 to 95% of private market transactions are done under an asset purchase agreement, as opposed to a stock purchase agreement. In an asset purchase agreement, they are purchasing that practice free and clear of contingencies, loans and liabilities, by its very nature. And so to clarify, in the circumstance where the buyer has inherited seller credits, maybe unknowingly, are they truly liable for those credits or is it more out of patient retention that they should care?

Depends on how it's addressed in the purchase agreement.

What about if it's not addressed in.

The purchase agreement at all, then that's really terrible. Yeah, I mean, a lot of times people, people think they, you know, people think that, oh, the purchase agreement is just a template. Everybody uses the same, same document. Or I can even download a template from, from the Internet and we can just kind of write out our own, own ideas, sign it. It's a really bad idea. Even, even if it's a document that was from your previous transaction. You were the buyer in the previous transaction, now you're the seller. So your interest and the language in this new document is going to be very different. So as far as the liability is concerned. Yeah. From a legal standpoint, most likely you can argue that the buyer is not responsible for these credits. But from a practical patient retention standpoint, that's going to be a hard argument to make to a patient.

Completely agree, and I'm glad we cleared that up. It's just good to know the facts around the situation, regardless of whether or not it impacts what you decide to do in those situations. But I agree, patient retention is incredibly important, especially for a new practice owner.

Right. And the last thing you want is to have, you know, lots of irate and angry patients writing Negative reviews on this new practice that you just purchased.

There are legit in my experience. There are legitimate reasons. When there are patient credits listed on the practice management books that aren't actually real, and it usually comes down to.

Then the seller needs to. Needs to address that prior to the closing. Why is it not real? So if, because the patient has passed away, then zero it out and write an explanation or.

Well, even when the patient passes away. I mean, this is a state law. This is state by state. Right. But like in California, I don't know exactly what the rules are, but there's a time limit. If someone passed away, they have to return that money to the state as unclaimed property. Right. So even in those situations, it's. You can't just write the balance off. But, but more legitimate reasons. When you enter a new patient into your practice management software and that patient comes with their family, and then you create a family within that practice management software, and one family member may have a credit because you expensed it under the leading family members ledger. That is a real reason why it's an artificially created credit. But I just was in a transaction where the patient credit balance, the real patient credit balance was in over $100,000. Right. Very material stuff. And it's practice by practice. It just kind of depends on what that practice is. Legacy doctors process was around credits and how quickly they returned them. But yeah, I mean, some of these credits were, you know, five years old. Right. So a lot of cleanup work that had to go into that deal. What about some of these other pieces too? Patients will prepay and a lot, especially in a lot of fee for service offices. Right. You'll prepay for treatment. Treatment still needs to be completed. How do you handle those and how do you identify those that should absolutely.

Be transferred to the buyer. That shouldn't be even an issue. But it can become an issue when sometimes the seller feels that they should be entitled to the prepayment because they sold the case, they sold a large case, they spent the money on marketing, but at the same time, this is what the buyer is paying for. Right. So again, I just think that.

The fall to me for prepayments really should absolutely be transferred to the buyer at the time of the closing and instead of. And they shouldn't be returned to the patients because to preserve the goodwill, to take advantage of the cases and treatment that are already on the books, you know, for the buyer that have, you know, paid a significant amount of purchase price for, they should be able to benefit from those cases. Being able to render their treatment and get the, get the prepayments. But in rare cases, I mean, so I don't want to say, you know, everything is just, should be the same how in every transaction. So in some specific cases there might be legitimate reasons that this particular case should continue to stay with the seller and the seller should finish the treatment even though it hasn't even been started before the closing for a variety of reasons because the seller's specific technique or the relationship with that patient or whatever the case might be, that is something that is a perfect example of something that really should be addressed in the letter of intent so that it doesn't become a problem at the 11th hour in the transaction if both people, both parties are on the same page about certain things. And the whole ideally is for the letter of intent to kind of make, minimize potential disputes that can come up during the transaction to make the transaction as smooth as possible. So if there is anything, you know, and, and, and how, how would somebody know like how, how from a dentist standpoint, like how would I know that this should be addressed in the loi like how, how would I know that? And that's where working with experience, knowledgeable advisor and attorney becomes extremely valuable. Because I am speaking from experience. I have handled thousands of these transactions. I have seen all things that have gone wrong that cause a transaction to fall apart at the 11th hour. So I will know I have the experience and knowledge to know. Oh, this is important to you. Let's get that address at the beginning instead of at the 11th hour of the closing.

Absolutely.

This particular topic around prepaids is especially important when the selling doctor isn't going to be participating active member in the practice post close, whether they're working back to some degree.

And it becomes even a bigger issue in ortho practices. Right. Because you know, many of the treatments.

Are paid ahead which in the ortho space we call that sort of contracts receivable.

Contract receivable. Right, right, right. So they're usually, you know, there usually should be a minimum amount established at the time of the letter of intent that the offer price is based on. Because most of the time that the offer price is on, based based on the specific amount of contracts receivable that the buyer is expecting. So if the amount is very different at closing, that can be problematic. But if it's never addressed the base minimum amount at the letter of intent stage, then it becomes really hard to address. Then it becomes he said, she said.

You know something that's. I also find this rarely addressed @loi is what the selling doctors preferences are in being a continuing member in that practice. And that's, I feel like you kind of discover that so often like in the middle of due diligence, like, oh, I actually want to still work here like three days a week. And then so how do you navigate those and what are some elements when those conversations come up that you're looking for to see if there is room to make that happen or not?

Yeah, first of all, I mean, then, you know, that's a financial matter that I typically defer to, you know, the consultant to advise the buyer. Is there enough cash flow to support two doctors working there? And in most cases there isn't. But you know, and in cases there are, then that's great. If we can make that happen, we can accommodate the seller. That's great. But you know, again, and I, and I hate to keep repeating myself, but if this is an important issue for the seller, then that's something that should be addressed in the. But on the other hand, you know, as we go through the transaction, there are ways that can still make it work. But to make, you know, but you got to make sure that the contract, the associate agreement, the work back associate agreement for the seller have language in it to protect the buyer, to allow the buyer to terminate that agreement. You know, if things change, if there isn't enough work to support both doctors.

Yeah, so sort of like a unilateral ability to pull out of that working relationship.

Exactly, exactly, exactly. And a lot of times I think that especially in a transaction where the associate is buying the practice and then the roles switch, the associate becomes the owner, the older doctor is now the associate. And I find that relationship is still kind of hard to navigate because that older doctor still wants to be the one in charge and have a hard time being told what to do.

That is a very interesting dynamic that poses plenty of room for friction in the future, without a doubt. Well, as we come to a close here, Cecilia, just curious if there are any parting words that you would like to share here with our listeners.

Well, I mean, I think definitely, I would say have a very optimistic view for. I don't want any of your listeners to think, oh my gosh, like this sounds like an impossible venture to buy a practice to sell to a DSO or whatever it might be. You know, things done correctly, when things done correctly, it can work out very, very well and it can even work out better than you expected. So, you know, I would say approach every potential opportunity with optism, but at the same time to make sure you are doing the work to protect yourself and address issues that need to be addressed and make sure that what's being discussed aligns with what's reflected in the legal documents.

Very well said. And couldn't thank you enough for coming on the show, imparting your wisdom for us today. Very, very helpful. And we would love to have you back on the show at some point in the future. There's plenty more topics for us to discuss, as we all know. Again, thank you so much, Cecilia, for joining us today.

Of course. Thank you for having me.

Sat.