Acquiring an existing dental practice can be an exciting and financially rewarding opportunity. It allows for immediate access to a patient base, established reputation, and operational infrastructure. However, acquiring a dental practice is not without its challenges. Dental practice acquisitions involve specific legal and regulatory considerations that must be thoroughly understood to avoid costly mistakes and potential liabilities.
If you are considering acquiring a dental practice, it is essential to navigate the legal complexities carefully. Below are the key legal considerations to keep in mind during the acquisition process.
Deal Structure: Asset Purchase vs. Stock/Share Purchase
The first decision to make when acquiring a dental practice is determining the structure of the transaction. There are two primary options:
- Asset Purchase: In this structure, the buyer acquires the individual assets of the dental practice (e.g., equipment, patient records, lease agreements, and goodwill), while liabilities are typically excluded. This option is often preferred by buyers, as it allows them to avoid inheriting any unwanted liabilities. However, the buyer will need to transfer contracts (e.g., vendor agreements) and may need to renegotiate the lease or employee agreements.
- Stock/Share Purchase: In this structure, the buyer acquires the ownership interests (shares or stock) of the dental practice entity. As a result, the buyer assumes all assets, liabilities, and contractual obligations of the practice. This option may be more advantageous to sellers but is generally riskier for buyers, as they inherit all legal and financial responsibilities.
Due Diligence: Thorough Investigation is Essential
Due diligence is a critical part of any acquisition. It ensures that the buyer has a clear understanding of the practice’s financial health, operational risks, and compliance with relevant laws and regulations. Key areas of due diligence include:
- Financial Records: Review the practice’s profit and loss statements, tax returns, accounts receivable, and accounts payable. Ensure that the practice is financially stable and that there are no hidden financial liabilities.
- Patient Records: Ensure that patient records are up-to-date, accurate, and legally compliant with privacy laws such as HIPAA (Health Insurance Portability and Accountability Act). Determine whether the patient records are transferable and what steps need to be taken to ensure compliance.
- Employee Contracts and Benefits: Review all employee agreements, including compensation, benefits, and non-compete clauses. Make sure you understand the current workforce, including whether any employees are key to the success of the practice.
- Leases and Contracts: Examine the lease agreement for the practice’s office space, as well as any contracts with suppliers, vendors, or insurance companies. Check for any clauses that might pose challenges or need to be renegotiated.
- Licensing and Certifications: Ensure that the practice has all necessary licenses and certifications to operate in its jurisdiction. Verify that the practice complies with state and federal regulations governing healthcare providers.
Patient and Insurance Contracts
Acquiring a dental practice involves taking on a relationship with its patient base, and this requires careful handling of patient records and insurance contracts.
- Patient Consent: In most cases, patient consent is required to transfer their records to the new practice owner. Make sure you understand the legal requirements for obtaining this consent and whether patients have the option to opt out.
- Insurance Participation: Many dental practices have contracts with insurance providers. Review these insurance agreements to ensure they are transferable. The terms of these contracts can significantly impact revenue, so it’s important to ensure that the practice’s insurance network participation remains intact after the acquisition.
Regulatory Compliance and Licensing
Dental practices are heavily regulated, and compliance with both state and federal laws is essential. Key regulatory considerations include:
- State Dental Board Requirements: Ensure that the practice is compliant with all state regulations governing dental practices, including licensing and continuing education requirements. Be sure that the dentist(s) in the practice hold valid licenses and are in good standing with the state dental board.
- HIPAA Compliance: The Health Insurance Portability and Accountability Act (HIPAA) mandates the secure management and confidentiality of patient health information. Ensure that the practice has the necessary systems in place to protect patient privacy and that patient records are transferred in compliance with HIPAA regulations.
- OSHA Compliance: Ensure that the practice is compliant with the Occupational Safety and Health Administration (OSHA) standards, which include workplace safety, infection control, and employee health protocols. Non-compliance with OSHA standards can result in significant fines and liabilities.
Contracts and Lease Assignments
A major component of a dental practice acquisition is reviewing and, in some cases, renegotiating existing contracts and leases. Here are some key considerations:
- Real Estate Lease: Review the terms of the office lease carefully, especially the duration, renewal options, and rent escalation clauses. You will need to determine whether the lease is transferable and whether any changes are necessary.
- Vendor and Supplier Contracts: Ensure that all vendor and supply agreements can be transferred to the new owner. These contracts should be thoroughly reviewed to ensure favorable terms for the buyer.
- Employee Agreements: As part of your due diligence, review any employee agreements, especially those with dentists, hygienists, and office staff. You may need to renegotiate certain terms or offer new agreements to retain key employees.
Employee and Staff Transition
Employees are an integral part of any dental practice. Retaining a skilled and experienced team is critical to maintaining the practice’s operations and patient satisfaction. Key issues to address include:
- Employee Retention: Consider offering retention bonuses or incentives to key staff members to ensure continuity and minimize disruptions during the transition. Having a clear communication plan in place can help reassure employees about the future of the practice under new ownership.
- Non-Compete Agreements: If the practice’s previous owner or any of the staff members have non-compete clauses in their contracts, these should be reviewed carefully. These agreements may restrict the ability to practice dentistry in certain geographical areas or with specific patient groups.
Tax Implications
The tax implications of acquiring a dental practice can be complex and will vary based on the transaction structure (asset vs. equity purchase). Key considerations include:
- Depreciation of Assets: In an asset purchase, the buyer can depreciate purchased assets such as dental equipment and office furniture. Work with tax professionals to ensure you maximize tax benefits.
- Sales Tax: Some assets (e.g., equipment, supplies, or inventory) may be subject to sales tax, depending on the jurisdiction.
- Capital Gains Tax: In an equity purchase, the seller may face capital gains taxes on the sale of the practice. Understanding the potential tax burden is important for both the buyer and the seller.
- Financing Considerations: Consider how you will finance the acquisition (e.g., through loans, seller financing, or a combination). Each financing method can have different tax implications and risks.
Post-Acquisition Transition and Branding
The transition period after acquiring a dental practice is crucial to ensure a smooth handover and retain patients. Consider the following:
- Communication with Patients: It is important to communicate effectively with patients about the change in ownership. A well-crafted letter or announcement explaining the transition can help retain patient trust and ensure continued loyalty.
- Branding and Marketing: The practice may have an established brand. Determine if you want to continue with the same brand or implement a rebranding strategy. Either approach should be done thoughtfully to ensure a seamless transition and retain patient confidence.
Conclusion
Acquiring a dental practice can be a lucrative opportunity, but it requires thorough legal and financial planning. By conducting thorough due diligence, reviewing all contracts and regulatory compliance issues, and understanding the tax and employee implications, you can ensure that the acquisition is a success and that your new practice is positioned for growth.
At Oberman Law Firm our attorneys have experience in guiding clients through the complex legal landscape of dental practice acquisitions. Whether you are a first-time buyer or an experienced practitioner looking to expand, we are here to help ensure that your acquisition process goes smoothly.
Author(s)
