A very large component of what we do at DMC LLP is assist sellers and buyers in transitioning. And we notice things. For example:
Buyers Are Getting More Sophisticated
Buyers – thanks to us educating them, no doubt! – are becoming more sophisticated. It typically takes 3 months from the time an LOI is signed up until the closing is finalized. But now, because buyers are paying more attention to the little things, it’s taking longer in some cases. Buyers are looking at the employee details, doing proper chart audits and equipment inspections, having a dental accountant review the financials, having their lawyer review the lease (to see if there’s a demo or relocation clause). And this sometimes leads buyers to ask for price reductions – for example, if equipment needs to be fixed / repaired or if the appraisal was wrong when it represented there being [x] number of patients who attended the practice.
Banks Are Scrutinizing More Too!
Banks are still financing the purchase and sale of dental practices for 100%+ at prime (currently 2.7%), BUT they are pushing back on a number of fronts. First, they’re calling B.S. on appraisals that are over the top. Certain appraisal companies are known for being very aggressive in their valuations. They do this by over-appraising equipment. Or not factoring in what the TRUE earnings before interest / taxes / depreciation will be (for example, because they don’t look at whether associate fees to a third person need to be paid out of that before the purchaser needs to pay the bank and themselves). At the same time, Banks are looking for nasty clauses in leases that could impact a dentist’s ability to repay the loan – like a demolition / relocation clause. And on top of that, they’re coming up with projections that may require that certain key team members (like hygienists and associates) sign new contracts on closing so that they show that they are both (1) staying and (2) promising not to compete / solicit patients or staff elsewhere. Finally, banks are definitely tightening up on consolidator dentists. If you own 2 practices for example and you want full financing on the next 3, the banks may consider this a bigger risk and ask you to throw in some of your own money.
Landlords Are Still Greedy
Landlords are still asking for money in one form or another. We’ve seen them (with absolutely no right to do so) ask for 5% of the purchase price PLUS the requirement to see the purchase and sale agreement as part of consenting to an assignment of the lease. If they don’t get that, then they’ll ask for $5k as their “reasonable” transfer fees (which may or may not include legal fees). Those in higher end areas are asking for rent AND security deposit which could amount to between $10-$20k! And, finally, to top it off, they’re still demanding that the sellers stay on to GUARANTEE the lease (in case the new tenant defaults) for the remainder of the term – however long that might be AND including renewal options.
Great practices with solid fundamentals (good location, hygiene program, lots of room for expansion, large + loyal patient base, great cashflow, etc.) are still selling for way over appraised and on the Seller’s terms. BUT we are witnessing something new for practices that are just average or below average: they are selling for LESS than appraised. It has a lot to do with more practices coming on the market, coupled with more sophisticated buyers and bankers who are scrutinizing practices more. We’re also seeing buyers and sellers ask for conditions that we’ve never seen before. For example, a buyer wanted to associate a few days AT a practice BEFORE buying it (which opens up a whole can of legal worms). Another buyer wanted the Vendor to do patient introductions for a set period of time (e.g. 3-6 months) before the Vendor can leave / retire. And some buyers ask for things like liquidated damages clauses, chart fees, and enhanced non-treatment of patients clauses. Just because these things are being asked for doesn’t mean they’re getting them. Now, for their part, sellers are afraid that things might not work out between themselves and the buyer and want to create exceptions to the restrictions (non compete, non solicit) that they’ve agreed to. They’re also insisting on things like being able to select their own assistant and getting certain hygiene or lab fees included in their compensation. Again, just because they’re asking for it doesn’t mean the buyer will accept.
We’ve just looked back at the last 50 transactions we’ve been involved with (for buyers and sellers) and here’s what we learned:
Please don’t rely upon the above if you’re looking to buy or sell a specific practice. This data came from transactions throughout Ontario over the past many months and things change over time. If you want specific insights into a particular practice, contact DMC LLP.
Here’s an article Jonathan, Ljubica and I wrote for Ontario Dentist article (which appears in this month’s publication) entitled “Selling Your Dental Practice? Beware of Staff Liability?” Note: you can see all of our published articles HERE.
I thought I would spend some time talking about some of the recent weird things happening in the dental industry when it comes to buying / selling a dental practice. Bottom line: you need to understand these things if you’re looking to buy a practice so that you don’t end up getting taken advantage of and losing money!
Letters of Intent?!?
A letter of intent is typically a 5 page document that spells out the key terms upon which a buyer / seller agree to buy / sell a dental practice. Interestingly enough, some real estate salespeople have decided to draft these important legal documents themselves under the guise that they are ‘saving the purchaser’ the legal fees involved. To put it in perspective, that’s 997 + HST – because that’s what we charge on DentistLegalForms.com to help dentists put together a letter of intent using our proprietary LOI Wizard.
So what do you get in exchange for not hiring a ‘legal gun’ to help you negotiate a proper letter of intent? Well, yes, you could save 997 + HST. But you also miss out on having the education and protection that comes along with it. So if you’re doing an asset sale, for example, will you think about whether HST is included or excluded on the sale? Or perhaps that will come up later – like at the end of the deal when you have to pay HST on the value of the leasehold improvements! Ouch!
Also, keep this in mind: real estate salespeople are not neutral. They get paid typically 10% commissions from the seller. They are not there to represent or protect your interests. And if you don’t deal with purchase and sale agreements on a daily basis (as we do), you’re bound to miss something critical or even get an unfair deal. We see incomplete, deficient, and one-sided letters of intent all the time prepared by real estate salespeople. Don’t sign important legal documents blindly!
Now, there’s also another issue with Letters of Intent: some real estate salespeople don’t want them at all. They say: we will (for “FREE”) prepare a formal agreement of purchase and sale which you can take back to your lawyers to finalize. We will save you lots of money. This approach is loaded with problems.
FIRST: why would anyone want to spend thousands of dollars on having their lawyer review a purchase and sale agreement (typically 40+ pages, excluding schedules, etc.) when the KEY TERMS of the deal have not been agreed upon (for example, in a Letter of Intent)!!! If it’s a competitive bid scenario, and you have less chances of actually getting the deal, it makes matters that much worse. SECOND: some real estate salespeople do a disservice to SELLERS by recommending offers that come in the form of simple letters of intent to be rejected automatically. This reduces the number of bids and scares prospective purchasers away. THIRD: the so-called formal agreement of purchase and sale we’ve seen are so deficient (remember that they are not being drafted by lawyers who spent 7+ years in university, articled, and are called to the bar in Ontario; they are prepared by real estate salespeople) that they sometimes have to be undone or drastically revised once lawyers actually get involved. FINALLY: keep in mind what is motivating the real estate salespeople throughout – namely, their 10% commissions. They need the deal to close as quickly as possible in order to recoup their initial investment on marketing. But this may create unnecessary pressures and problems of its own. Real estate salespeople may end up recommending non-dental professionals (accountants and lawyers) who push the paper to get the deal done but who may not spend the requisite time and energy to fully educate the dentist and protect them throughout. The fact that real estate salespeople both appraise and sell practice is an inherently flawed approach and rife with conflict (as I have discussed elsewhere).
When you purchase a house, you typically do a building inspection as a condition to purchasing. You would think that it makes sense to do the exact same thing when buying a dental practice, right? The problem is that some real estate salespeople are pushing back on equipment inspections; they are telling prospective purchasers that they have to do an equipment inspection BEFORE submitting their Letter of Intent. That’s weird. Trust me: I’ve never seen that before. And it puts purchasers at a disadvantage (who has time or money to spend on equipment inspections BEFORE submitting a letter of intent) particularly when there’s a time crunch?
It’s important for purchaser dentists to know the state of the equipment that they are purchasing. Does anything need to be repaired or replaced? Does everything work as intended?
More importantly, in all the past dealings I’ve done, the result of having an equipment inspection is that the seller is asked to fix or repair things (or reduce the purchase price accordingly) so that when the purchaser takes over, he or she does not feel like they’ve been taken advantage of. Typically we’re talking a few thousand dollars (e.g. $20k) that are required to be spent by the seller or purchaser to repair or replace equipment; in the grand scheme of things, this may not be a lot of money – particularly when a practice is selling for over $1-million. But fixing the equipment / bringing it up to par before a sale makes a world of difference in the eyes of a purchaser. Moral of the story: purchasers should NOT be restricted in doing equipment inspections after submitting a Letter of Intent (as a condition to completing the sale) and should be free to use whomever they want to complete that inspection.
THE GOOD NEWS…BUT…
Despite the oddities that purchasers are facing by real estate salespeople when submitting letters of intent or doing equipment inspections, they have a legal and ethical obligation to the selling dentist to present ALL offers AND they must follow the instructions of the dentists who engage them (and pay them 10% commissions, mind you). What this means is that they HAVE to show your offer to the seller. The only situation where a selling dentist will NEVER see a letter of intent is if the real estate salesperson convinces them to NOT accept a letter of intent. But this is like taking a shotgun, pointing it at your own feet, and pulling the trigger. Why would a selling dentist ever want to limit the number of offers they receive? Well, they are paying 10% commissions and perhaps they think they should go along with the advice from their real estate salesperson that comes with paying that amount of money to them. In my humble opinion: sucks to be them.
Some dentists call us because they’ve signed a listing agreement with a real estate salesperson (often called a “broker”), have a prospective buyer who has presented an offer (which they are negotiating or have accepted), but now want to back out of paying the typical 10% commissions (based on the sale price) to the real estate salesperson.
First, let me begin by saying that dentists are generally expected to be a smart group. They go to university for a long time, study / read a lot, etc. I would expect that they understand the terms and conditions of any agreement that they sign. If they don’t understand, they can and should always get independent legal advice from a dental lawyer or law firm.
Second, real estate salespeople require dentist sellers to sign a ‘listing agreement’ that gives them the exclusive right to sell their practice and collect commissions (typically 10% of the purchase price). Real estate salespeople invest a lot of time, money and effort up front in marketing a practice. They need to recoup their investment. And the ‘listing agreement’ typically gives them a time frame (e.g. 6 months) to sell a practice and get their fees paid.
SO… with these things being said, where does that leave the dentist who suddenly has a change in heart and no longer wants to pay the 10% commissions? Well, there’s a lot of ‘it depends’ going on in here.
For starters, if the ‘listing agreement’ says that the 10% commissions are only payable if the practice is sold within a certain time frame and that time frame expires, then no commissions would be payable, right? So the selling dentist would just need to run out the clock. But what if the ‘listing agreement’ says that, even if the time runs out, if the real estate salesperson introduced the ultimate purchaser to the seller through their marketing efforts, then they would still get their commissions. So this comes down to: how did the purchaser come to know about the practice and get introduced to the seller? Finally, the ‘listing agreement’ may say that if ANYONE becomes aware of the practice during the time frame but actually buys it later, then the selling dentist is still on the hook for the commissions. So you see: it all comes down to what the ‘listing agreement’ actually says.
Now, what if the seller has accepted an offer during the period of time for which the listing period applies, but then backs out to avoid paying the commission? Well, there was a case like this a few years back that went to court. In the 1991 / 1992 case of ROI Corp. v. Burnham, (1992), 1992 CarswellOnt 2562 (Ont. Gen. Div.), the selling dentist (Dr. William Lance Burnham of Aurora) refused to pay commissions sought by the real estate salesperson (Leroy Brown of ROI Corp.) in respect of the aborted sale of his practice.
Here are some key facts… During an initial conversation between Dr. Burnham and Mr. Brown, Dr. Burnham indicated that he wanted to sell because he did not like the administration involved in running his practice, that he wanted to be an associate, and that things would improve with his wife if he sold and moved out west. Mr. Brown appraised the practice for $211,670 and listed it for $250,000 (which Dr. Burnham had accepted as an acceptable sale figure). Dr. Burnham asked Mr. Brown what would happen if he withdrew his practice from the market; Mr. Brown responded that he would have to pay ROI Corp for its reasonable time and expenses as stated in the listing agreement (a sort of vague reply). Dr. Burnham and Mr. Brown then renegotiated the commission from 10% down to 9%. Dr. Burnham received an offer for $225,000; he decided to sign back the offer at $250,000, hoping that the prospective purchaser would reject the offer and that he would not be liable to pay ROI for an unspecified sum of money by taking his practice off the market. He generally hoped no one would buy the practice at the listed price, that the ‘listing agreement’ would expire and that he would retain his practice and not owe ROI Corp.
Unfortunately for him, the purchaser accepted his offer! Dr. Burnham ultimately confessed that he didn’t want to complete the transaction, saying he felt very pressured, was having marital problems and seeing a psychologist. So the deal never materialized. Dr. Burnham apparently paid the purchaser for breaching the offer to purchase. When Mr. Brown found out, he and Dr. Burnham initially spoke on the phone and seemed to reach a compromise for all the inconvenience caused by listing the practice: half of the commission was to be paid to ROI Corp. But to no avail. Dr. Burnham subsequently told Mr. Brown that he had been advised by his counsel to offer no payment and that was his position. Thereafter, Dr. Burnham stopped communicating with Mr. Brown and Mr. Brown ultimately sued Dr. Burnham for the full $22,500 commission (9% of the purchase price for the failed transaction).
The Ontario Court of Justice reviewed the legal jurisprudence concerning ‘listing agreements’ and when commissions become payable. The Court held that, where the purchaser is ready, able and willing to comply with the offer, the compensation to which a broker is entitled is the amount of the agreed fee. The Court wrote the following at paragraph 38:
38 Pursuant to the terms of the listing agreement, it is clear that Burnham is liable for the commission in that he agreed to accept an offer made by a purchaser ready, willing and able to purchase. He further agreed to complete the transaction and, failing this, agreed to pay Roi the commission in full.
The Court also referenced a seminal Supreme Court of Canada case on the matter (Leading Investments Ltd. v. New Forest Investments Ltd.,  38 R.P.R. 202,) concerning commissions and ‘listing agreements’. In that case, the Supreme Court held that, where commission is payable on a completed sale, and the sale is not completed, to collect their commission, the real estate agent must show that it was not through their fault or that of the purchaser that the sale was not completed.
Ultimately, in the case at bar, the Court found that ROI Corp. was entitled to judgment in the amount of $21,775 together with pre-judgment interest.
But that wasn’t the end of that case… In 1995, that case went to the Ontario Court of Appeal [the citing reference is (1995), 1995 CarswellOnt 3189 (Ont. C.A.)]. The Court of Appeal (the highest court in Ontario) had to determine whether the trial judge had made a mistake. The Court of Appeal noted that it was the actions of Dr. Burnham that caused the the transaction to fail and that he had never (at any material time) told ROI Corp. that he changed his mind and didn’t want to sell his practice. Bottom line: the Vendor just got cold feet and didn’t want to sell and took the position that no commission was payable because the sale was not completed.
The Ontario Court of Appeal agreed with the trial judge and held that Dr. Burnham “could not rely upon his own default as a basis for repudiating his obligation to the respondent broker who brought him a bona fide purchaser. Since that purchaser was ready, willing and able to close the transaction, the respondent broker was entitled to its commissions”. So the trial judge’s decision was upheld.
Now that was a long time ago… but this could still be the law today… In the more recent Alberta provincial court case of 4th Street Holdings Ltd. v. Lannon, 2009 ABPC 387, the Ontario trial decision and Ontario Court of Appeal decision involving ROI Corp. and Dr. Burnham was cited with approval. In that case, the Alberta provincial court cited the following principles to help courts determine whether a commission was payable in light of those cases and faced with a failed sale:
31 One may be able to infer some general principles from these decisions governing real estate brokers’ entitlement to commission where there had been no sale of the property listed for sale.
• The listing or commission agreement must provide for a commission even though there has been no sale; and such provisions must be clear, unequivocal, and brought to the attention of the vendor because, ordinarily, real estate commissions are payable only upon a completed sale.
• The event or contingency which triggers the commission must have taken place, which often means there must have been a binding purchase contract and a prospective purchaser ready, willing and able to complete the sale.
• Essential terms of the aborted sale agreement (e.g., price, possession, etc.) must either accord with the terms of the listing agreement or have been agreed to by the vendor.
• The agent must show that it was not through his fault or that of the purchaser that the sale was not completed.
32 If all of the above obtain, then the compensation the agent is entitled to is the amount of the agreed fee, whether the action is based in contract, as this one was, or in quantum meruit.
BOTTOM LINE: if you are a selling dentist looking to get out of paying commissions to a real estate salesperson, your best bet is to have a lawyer read your listing agreement and advise you on your obligations. And OBVIOUSLY BEFORE YOU SIGN a listing agreement, it is imperative to have a lawyer review and advise you on your obligations.
Please note that the following is not legal advice but is provided for educational purposes only. If you require legal advice, please contact me, David Mayzel, or Ljubica Durlovska.
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or email@example.com.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or firstname.lastname@example.org.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or email@example.com.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or firstname.lastname@example.org.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or email@example.com.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or firstname.lastname@example.org.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.