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Economic Outlook and Branding Your Practice

Posted by on February 21, 2013 · Leave a Comment 

Michael Carabash and David Mayzel discuss the November 2012 economic report to the dental industry issued by R.K. House and Associates (sponsored by ODA) and how dentists should brand their practice to survive and thrive in a hyper competitive industry.

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Incorporating dental practice | Dentistry Professional Corporation: What you need to know!

Posted by on May 19, 2011 · Leave a Comment 

Dentistry Professional Corporations (Part 1)

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.

Incorporate a Dental Practice

While there are about 8,500 dentists in Ontario, only about 4,500 of them have dentistry professional corporations.  Why do dentists incorporate?  And what’s the holdup for other dentists?

Incorporating a dental practice is done mainly for tax purposes.  You can defer paying taxes by having the corporation only pay 15.5% on the first $500,000 of active business income and then leaving the after tax dollars inside the corporation.  You can income split by using your immediate family (e.g. spouse, children).   You can also sell the shares of your dentistry professional corporation and pay little or no taxes by using and multiplying your lifetime capital gains exemption (currently $750k).

But what else should you know about when it comes to incorporating?  Well, lets look at the not-so-often discussed points.

Liability

When someone creates a corporation, they are essentially creating another person.  That person can own their own assets, take on their own debt, be sued and sue others, etc.  Importantly, they are owned by people who hold shares in the corporation (i.e. certificates evidencing ownership).  Now, when it comes to the liability of the shareholders for the debts and obligations of the corporation, the liability of shareholders is said to be “limited”.  In other words, their personal assets are not exposed to the debts and obligations of the corporation.  It’s the corporation’s assets that are exposed to being used to pay off creditors and others.

To reiterate, under the Business Corporations Act, the shareholders are generally not liable for any act, default, obligation or liability of the corporation: section 92(1).  There are certain exceptions to this general rule.  For example, courts have lifted the corporate veil to impose personal liability on shareholders in certain cases, which I have previously blogged about (e.g. fraud, lack of respect for corporate form, alter ego, thin capitalization, etc.).  Furthermore, there may be statutory impositions of liability on shareholders under the Business Corporations Act.

So what about dentistry professional corporations?  Does the same general rule of limited liability apply?  Well, when it comes to professional liability, the answer is “dentist’ liability is UNLIMITED”. Section 3.4(1) of the Business Corporations Act says very clearly that section 92(1) does not limit the professional liability of a shareholder of a professional corporation.  The Act even goes on to say that the shareholder’s acts (and the acts of the employees, officers, and directors) are deemed to be the professional corporation’s for the purposes of professional liability (section 3.4(2)).  No doubt, these provisions were put in place to protect the public from bad dentists who incorporated their practice to avoid liability for malpractice.  Heck, even if the dentistry professional corporation is a member of a partnership, the shareholder of that corporation cannot escape professional liability.

Now, what about liability for things that are unrelated to the professional liability?  Well, the Act doesn’t address those matters directly.  But if you take section 3.4(1) and 92(1) together, it would appear that dentist shareholders have limited liability for things unrelated to professional liability.  This could include entering into a commercial lease and defaulting on the lease, taking out and then defaulting on a bank loan, hiring or terminating staff inappropriately, and leasing equipment and then defaulting on that lease.  Basically, anything that the dentist would do in the context of running a business and not necessarily providing professional dentistry services COULD essentially give the dentist limited liability as a shareholder of the corporation.  In any event, dentists should take caution when entering into these types of legal agreements (e.g. leases, loans, employment agreements, etc.) and should also have insurance in place if things go awry.

Small Business Tax Rate

Not every dentist should be incorporating his or her practice.  Only if they make a certain amount of income each year, have family members to split their income with, or are thinking about selling their practice should they then think about doing it.  Not only are there many procedural hurdles to cross along the way to getting incorporated, but it also costs money: legal and accounting fees.  It also takes time to set up the corporation, get a bank account, roll over existing assets to the corporation, have the corporation assume the obligations of the practice (e.g. lease, loans, employees, etc.), etc.

One thing worth mentioning is the small business tax rate for small business corporations.  With a corporation, the first $500,000 of active business income is taxed at a much lower rate than for individuals: it was (combined federal and provincial) only 15.5% for 2011 .  So what does this mean for dentist shareholders?  Well, instead of having to claim all their practice’s income in a given fiscal year, they can leave it in the corporation, pay less tax, and then either reinvest it or dividend it out to shareholders – particularly those who are in lower income tax brackets.  This all ends up deferring or saving taxes altogether!

Personal Services Business Problem: AVOID THIS ONE!

So how could a dentist lose out on this 15.5% tax rate and end up getting charged the much higher (the regular) tax rate for a corporation?  Well, the Income Tax Act has a whole bunch of rules related to denying Personal Services Business corporations the tax advantages of incorporating.  The idea is that if an employee associate of a dentist simply incorporates and continues to provide services to the dentist through their corporation, then the corporation will not benefit from the small business tax rate of 15.5%.

So what’s a Personal Services Business corporation? It gets complicated, so just follow me for a second.

Incorporated Employee

First, a Personal Services Business corporation carries on business where an individual (i.e. human being) performs services on behalf of the corporation.  In the typical situation, an associate dentist would incorporate their practice and their dentistry professional corporation would in turn be hired by a dentist to provide dental services.  For its part, the dentistry professional corporation would engage the associate to provide those services to the dentist on its behalf (the associate is called an INCORPORATED EMPLOYEE).  Remember: there are 3 persons involved at this point: (1) a dentist (who hires the dentistry professional corporation), (2) a dentistry professional corporation that is hired to provide services and which in turn engages the associate to perform those services and (3) an associate (i.e. the INCORPORATED EMPLOYEE) who provides services to the dentist on behalf of or for the dentistry professional corporation (because a corporation cannot do anything without human actors!).

Specified Shareholder

Now, we’re just getting started with the tax rules, so pay attention.   A Personal Services Business Corporation is a business who has one of these INCORPORATED EMPLOYEES performing services to a dentist through the corporation.  But the INCORPORATED EMPLOYEE must also be a SPECIFIED SHAREHOLDER of the Corporation.  What does that mean?  Well, a SPECIFIED SHAREHOLDER is someone who owns at last 10% (directly or indirectly) at any time in the given year, of the issued shares of any class of the capital of the corporation.

Employee of the Dentist

Now, just when you thought we were done with these tax rules which deny Personal Services Business Corporations from qualifying for the small business income tax rate for corporations (15.5%), there’s one more requirement that applies: the Incorporated Employee would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided (i.e. the dentist who needs the associate) but for the existence of the corporation.  What does this mean?  Basically, if the Incorporated Employee – had he or she not incorporated a dentistry professional corporation – reasonably been regarded as an employee, then their dentistry professional corporation will not qualify for the small business tax rate of 15.5%.

UNLESS…

Now, even though we have to look at a number of things to determine whether the dentistry professional corporation of the associate would qualify for the small business tax rate of 15.5%, there is an exemption: if the dentistry professional corporation employs throughout the year more than 5 full time employees, then it will not be considered a Professional Services Business Corporation!  Sounds good, but that means you have to fork over a lot of money to full time employees to qualify! Ouch!  I guess the government figured that, if you’re employing at least 5 full time employees (plus yourself, so it’s actually 6), then you’re more legitimate as an independent business and not just an employee in disguise.

RATIONALE

So what is the rationale for limiting the small business tax rate by saying that Personal Services Business Corporations aren’t entitled to it?  Well, it has to do with fairness: Personal Services Business Corporations are merely a way of disguising an employment relationship but allowing the dentistry professional corporation to take advantage of favourable income tax rates.  That’s why they are not allowed to benefit if the above rules are true.  What does this mean for dentist associates?  BE CAREFUL when you’re asked to incorporate as an associate independent contractor.  You might not get to take advantage of the favourable tax rates and rules that go hand in hand with typically having a corporation!

SUMMARY:

If you are an associate dentist who has been asked to incorporate their practice as an independent contractor to provide services to one dentist, then you may be considered a personal service business (and not entitled to favourable income tax rates and rules) if:

  1. You perform the services to the dentist on behalf of your corporation;
  2. You owns 10% or more of any class of shares of your corporation;
  3. Without the use of your corporation, you would be considered an employee of the dentist; AND
  4. Your corporation has fewer than 6 full-time employees.

There are other, more complicated and intricate tax rules, but you can get the gist of it by reading the above.  In the next blog, I’ll discuss what factors the Canada Revenue Agency considers relevant when trying to determine whether an associate would reasonably be regarded as an employee of a dentist instead of as an independent contractor.

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Appraisals of Dental Practices: What all dentists should know!

Posted by on May 6, 2011 · Leave a Comment 

Dentist Appraisals: Legal Issues

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.

What is an appraisal?

A dental appraisal involves a person giving a monetary value to a dental practice. That person is typically a professional valuator (e.g. ROI Corp, or Professional Practice Sales) or an accountant. They examine the assets of the dental practice (irrespective of whether the owner of the dental practice is a sole practitioner, a partnership, or a dentistry professional corporation). They will specifically look at things like:

  • goodwill (e.g. trademarks, proprietary systems, dental records, patient lists, etc.);
  • leasehold improvements;
  • equipment and furniture; and
  • inventory and supplies.

When are appraisals needed?

Buying and Selling a Dental Practice

Appraisals are needed in order for parties to buy and sell a practice. The buyer wants to know what exactly they’re getting themselves into. The seller typically engages a professional valuator to review the practice and come up with the price. Purchasers, however, should be cautious about relying upon what the appraisal says: it was paid for by the Seller and for the Seller’s benefit (i.e. to get the best possible price). In fact, if the appraisers are also brokers, then they will have an incentive t put down the highest possible price. Purchasers should conduct their own diligence about the appraisal and get a chance to review the practice, its assets, and particularly its goodwill (i.e. dental records and patient charts).

Transferring assets to a Dentistry Professional Corporation

If you are a dentist and you want to transfer dental assets (e.g. lease, inventory, equipment, tools, supplies, leasehold improvements, etc.) which you owned personally into a dentistry professional corporation, you may want to get an appraisal done. You can’t just assign any old number for the asset purchase agreement when doing these kinds of deals. The Income Tax Act allows you to elect to transfer assets from your personal to your corporation on a tax-free basis (although there may be HST payable), but only if the price paid for the assets is FAIR MARKET VALUE. If the Canada Revenue Agency ever reviews the transaction, they may say that the value of the assets being transferred into the corporation and the shares taken back were below or above what the fair market value should have been. Hence, an appraisal (coupled with a price adjustment clause in the Agreement of Purchaser and Sale) may make sense here.

Adding Partners / Shareholders

An appraisal will be needed when a new dentist partner or shareholder is being admitted into the dental practice. How much should they contribute? How many units or shares should they take back? This all depends on what the dental practice is worth. Hence, the appraisal.

Family Law

Appraisals could also be required when a dentist is going through a divorce. Absent a marriage contract, prenuptial agreement, or separation agreement to the contrary, the dentist will be required to calculate their net family property (i.e. generally the increase in wealth of a married spouse during the course of the marriage) in order to ultimately get to an equalization payment. I’ve blogged extensively about net family property and equalization payments here.

Once again, it is worth mentioning that the appraisal will be made by a professional for their client’s benefit. If the husband, for example, wants to reduce the value of their net family property (so they end up paying a lower equalization payment), then there will be an incentive for the appraisal to be on the lower-end of scale.

The case of David v. David, [2004] O.J. No. 5022 is illustrative of how different appraisers can arrive at different figures. In that case, a wife sought an equalization of net family property. The wife was a homemaker and the husband was a dentist. When it came time to value the dental practice on the date of separation, both the wife and the husband had their own expert appraisers (the husband used Graham Tuck of Professional Practice Sales and the wife used Timothy Brown from ROI Corp.).

For his part, Mr. Tuck (the husband’s expert) examined the husband’s dental practice in detail. His 23 page report (excluding appendices) included the following information:

  • description of the practice
  • treatment policy of the practice
  • patient flow
  • appointment and recall system
  • demographics
  • market data
  • personnel and professional services
  • office hours
  • facilities design and use
  • fees, payments, collections and prepayment plans
  • systems and records
  • income, expenses and earnings
  • basis of valuation and valuation analysis
  • summary of current market values.

The appendix to the report included a list of dental equipment, practice financial statements, copy of lease agreement, photographs, information on area and demographics. Mr. Tuck had personally attended the practice, interviewed the husband dentist and his staff, reviewed patient charts, and conducted a patient chart count. He also compared the value of the husband’s practice with 8 similar practices sold that had an ethnic composition in the same geographic vicinity. He ultimately found that the dental practice was worth $212,000 – which included $65,000 of goodwill.

For his part, Mr. Brown (the wife’s expert) provided a 2 page limited scope forensic letter of opinion only and relied solely on the appraisal prepared by Mr. Tuck. Mr. Brown concluded that the goodwill could have been about $139,500 for the dental practice – much higher than Mr. Tuck’s opinion.

Now, just keep in mind that the wife (a homemaker) had been accusing her dentist husband of diverting income. Clearly, the wife wanted the value of the dental practice to be relatively high, while the husband wanted it to be relatively low.

The Ontario Superior Court of Justice ultimately fixed a midpoint value between the two opinions at $102,500 for the goodwill and a total value of the dental practice at $249,000 at the date of separation. In coming to that conclusion, the court took into consideration: the age and location of the dental practice, the patient base, the management style and office protocols of the dental practice, data from another similar practice which the dentist had previously sold, a commonsense and market comparison capitalization rate (i.e. the yield of income to capital).

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Hiring Associates, Staff, or Dental Hygienists as Independent Contractors vs. Employees (Part 3)

Posted by on February 17, 2011 · Leave a Comment 

Dentists hiring staff as Independent Contractors or Employees

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice, contact me (Michael Carabash) or David Mayzel.

This is the third of a series of blogs I’m writing for dentists about hiring staff (e.g. associates, dental hygienists, etc.).  In my first blog, I briefly examined the case of Bradford v. Canada (Minister of National Revenue – M.N.R.), [1988] T.C.J. No. 818, where the court found that a dental hygienist was an independent contractor and, as such, entitled to deduct certain business expenses.  In my second blog on this topic, I reviewed Carovar Ltd. v. Canada (Minister of National Revenue – M.N.R.), [1989] T.C.J. No. 405, where the court came to the opposite conclusion: the orthodontists and a dentist associates were actually employees for the purpose of the their employer paying employment insurance.  So lets keep going with the caselaw, shall we?

Witherell v. Canada

In Witherell v. Canada (Minister of National Revenue – M.N.R.) [2000] T.C.J. No. 782, the issue before the court was whether a Newfoundland dentist (Dr. Witherell) was required to pay employment insurance premiums on behalf of a dental hygienist.  The dentist claimed that the hygienist was an independent contractor and not an employee; hence, no employment insurance premiums were owed.  The court agreed: the dental hygienist was an independent contractor.

Here’s how the court came to that conclusion.  To begin, there was no written contract originally presented to the dental hygienist.  That said, the agreement between the dentist and the hygienist would such that the hygienist was her own boss.  Although she could be instructed on what to do, she was not instructed on how to do it.  The business was hers, was not integral to the success of the dentist’s practice, and only accessory to it.  Furthermore, there was nothing preventing her from working with another clinic while engaged with the dentist.

Now, even though these factors of control and integration pointed to the hygienist being an independent contractor, there were other factors that made it appear as though the hygienist was an employee.  These factors included: the hygienist did not bring a clientele to the dentist’s practice; the dentist owned the tools used by the hygienist to do the work in her duties; the hygienist was paid by the piece on the basis of 50% of the net billing fee; and the clients did not pay the hygienist directly for her services.

Notwithstanding these things, the court found that the hygienist was an independent contractor.  In addition to the reasons already discussed above, the court found that the hygienist actually LOST money because she was reluctant to challenge the dentist when promises were broken.  Furthermore, at some point (when another dental hygienist left), the dental hygienist was able to realize more income, be less obstructed in her work, and her client base was clearly established as hers.

Conclusion

So, to sum up, although the hygienist didn’t own her tools of production and didn’t bring a client base to the dentist, she was essentially her own boss, was able to earn more profit, risked losing money, her business was not integral to the dentist’s practice, and there was nothing preventing her from doing work for others.  On a balance of probabilities, the court found that she was an independent contractor and not an employee.

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Asset Purchase Agreement template

Posted by on February 17, 2011 · Leave a Comment 

 

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice, contact me (Michael Carabash) or David Mayzel.

This is the second of a series of blogs I’ll be writing about buying and selling the ASSETS of a dental practices (as opposed to the shares of a dental practice).

In my last blog, I talked about the letter of intent that is typically entered into before the asset purchase agreement. It outlines the basic terms of the deal. In this blog, I’ll be discussing some things to think about before getting into the nuts and bolts of the asset purchase agreement.

Things to Think About

Be diligent

Before discussing the terms of the asset purchase agreement, I think it’s worthwhile to lay out some basic ground rules when drafting, negotiating, and concluding an asset purchase agreement. First things first: when you involve lawyers, they act as your champions or hired guns. They are there to protect your rights and advance your interests. That’s why it may take a bit longer and cost a bit more than what would otherwise be the case if you tried to do this without them. As a dentist seller or purchaser, you may have a very good relationship with the other dentist purchaser or seller. You may want to keep things cordial and amicable throughout your dealings. You may want to be accommodating. Just remember this: because of the one-off nature of the transaction, you must protect yourself as much as possible. Sure, you may continue working alongside the other dentist after the transition. But, at the end of the day, the buck stops with you. So just make sure you and your lawyer cross the t’s and dot the i’s before signing.

Negotiating

Can you negotiate a term of the agreement? Sure you can. Just remember one thing: you’ll be better off by listing and prioritizing your requirements (do this with your lawyer) so that you are prepared to give in to the other side if they want something which isn’t high up on your list. You’ll also want to try to resolve any minor issues first before tackling the major ones. This will keep the negotiations moving along at a quicker speed; most of the time can then be spent addressing the larger issues. You should also tell your lawyer what your threshold for pain is: is this term or condition going to be a dealbreaker? What if you don’t get it? Is there a reasonable alternative that you can use to get around it? Case in point, I was working with a dentist who wanted a certain condition in an agreement with the Landlord. The Landlord refused to put it into the agreement because of accounting issues. So, instead, we asked the Landlord to agree to remove the “entire agreement clause” in the lease (which would have prohibited other agreements from being a part of the lease) and then drafted a second much smaller agreement with the Landlord which the Landlord was OK with. Problem averted!

Risk

There’s always going to be an issue of risk. Is the dentist purchase willing to accept the assets ‘as-is’, or will there be certain representations about the assets (i.e. statements of fact about the past or present condition of the asset). Will there be an indemnification as well from the seller in case the asset purchase agreement is breached? What if hidden liabilities associated with the assets are found (e.g. liens, no clear title to the assets, etc.)? Will the seller be required to indemnify the purchaser for these hidden liabilities as well? Remember that, in a typical asset purchase and sale, the liabilities of the dental practice aren’t included. But the assets themselves need to be free and clear of title. And things like the Bulk Sales Act need to be complied with in order to avoid having the transaction undone.

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Asset Purchase Agreement terms and conditions

Posted by on February 17, 2011 · Leave a Comment 

Toronto Dental Lawyer

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice, contact me (Michael Carabash) or David Mayzel.

This is the third in a series of blog posts about purchasing or selling dental assets.  In my first blog, I talked briefly about the letter of intent that parties to these agreement usually enter into prior to negotiating an asset purchase agreement.  In my second blog, I talked about some of the things to keep in mind when negotiating an asset purchase agreements – such as risks, due diligence, and negotiating.  In this blog, I’ll start off with some of the typical terms that you’ll find in a general asset purchase agreement.

Introductory Clause

We start off with the introductory clause.  This will tell you the type of agreement being entered into (i.e. asset purchase agreement), the date that the agreement is being entered into, and the parties to the agreement.  You don’t need to use archaic language such as “on the first part”.  Nor do you need to include as much information here about the parties.  For example, you can put the contact information for the parties in the “notice” section.  You can also put the background information about the parties in the “background” section.  You don’t need to clutter up the introductory clause.  Just keep it nice and simple.

Background Section

This is where you want to give some context about the transaction.  You can describe the parties.  You can mention the lease.  You can say that the dentists assets as herein defined are going to be bought and sold.  This information doesn’t really form part of body of the agreement, but rather gives some background or context or purpose for which the parties are entering into the agreement.  It’s used to help guide an interpreter (i.e. a judge or arbitrator in case of a dispute) about why the parties entered the agreement.  You don’t want to insert definitions here (leave that to the definitions section), nor do you want to include significant terms – like representations and warranties.

Definitions

The first part of the body of the agreement deals with the definitions that will be used throughout the dental asset purchase agreement.  Things that are typically defined here include: relevant legislation, the parties, the assets being purchased, etc.  The defined terms are generally put into quotes, made bold, and underlined to make them distinguishable.  Also, the first letter of the words are usually capitalized.  This is how you can tell that the word is a defined term throughout the rest of the agreement.  For example, if you see the words Purchased Assets appear like that in the middle of the agreement, you can always refer to the definitions section to see what those words mean.  In the definitions section, it’ll typically say something like “Purchased Assets” includes…  You get the idea.

The Assets being Purchased

When you’re dealing with buying assets (instead of shares), there’s a real challenge with properly identifying what you’re buying.  You see, when you’re buying shares of a corporation, you’re just buying the shares.  You take a look at the corporate minute book.  You can see the shares.  You can see the articles, by laws, shareholder registry, etc.  So you know exactly what you’re buying.   But,  like I said, when you’re buying assets, you need to take your time to properly identify what you’re buying.  Sometimes, if an evaluation has been done of the dental practice, it will include a list of all the assets that were included in the appraisal.  This should cover most – if not all – of the assets that are being acquired.  Sometimes there will be specific assets that are excluded from the general list and these should be mentioned in the asset purchase agreement.  Also, after the letter of intent has been entered into, but before the agreement of purchase and sale has been entered into and before the transaction has closed, the selling dentist may have changed their assets.  For example, they may have stopped ordering inventory.  They may have sold some assets.  They may have removed other assets.  In any event, you want to make it clear that the selling dentist is not to touch the assets – as described in the letter of intent and asset purchase agreement – in a way that materially affects the asset purchase agreement.  This is where representations (i.e. statements of past or present facts which the selling dentist says are true) and covenants (promises to do or refrain from doing something during a relevant time period) come into play.

The Purchase Price

After describing the assets to be purchased, another essential term of the asset purchase agreement is the purchase price.  This will have been negotiated by the parties in light of relevant appraisals, a review of the financial statements, and good old fashion back and forth discussions.  Now, when it comes to the agreement of purchase and sale, the purchase price is not just a number that needs to get paid.  First, there may have been a deposit initially paid along with the letter of intent.  This amount is to be credited towards the purchase price upon closing.  Second, how the purchase price is to be paid is also an important consideration: certified cheques or bank drafts are acceptable, while personal cheques will not be.  Third, there will generally be adjustments that need to be made to the purchase price.  For example, if things latter pop up which affect the purchase price (in a positive or negative way), then those adjustments will need to be addressed. Fourth, the allocation of the purchase price is an important consideration – especially for accounting and tax purposes.  Finally, although somewhat complicated, the purchase price may be paid out over the course of a series of milestones being reached.  The idea is that part of the purchase price will be earned out after certain things have been achieved (e.g. revenues achieved).  These types of earn out clauses can be very complex.

Representations and Warranties

As previously mentioned, a representation is a true statement about a past or present set of facts.  The idea is that a party giving a representation will need to assert that something is true.  Now, it can’t be an opinion; nor can it be about a future statement; nor can it be a mere expression or sales puffery.  It’s gotta be about the past or present and it must be a fact.   A breach of a representation may give rise to a claim of misrepresentation and either undoing the agreement or damages – depending on whether the misrepresentation was fraudulently made, negligently made, or innocently made.

So what kinds of things will the selling dentist be required to represent?  Well, typically, they’ll need to represent that:

  • they have the ability, authority, and capacity to enter into the agreement;
  • entering into the agreement won’t break a statute, contract, or any other law;
  • they own the assets (i.e. they have good title to the assets);
  • the assets are free and clear of any encumbrances;
  • they can sell the assets; and
  • there are no consents, authorizations, etc. required in to obtain in order to sell the assets.

There will no doubt be more representations, but these are the basic ones.  The purchase will be relying upon these representations in order to enter into and complete the asset purchase.

Now, it’s important to point out that the selling dentist can try to reduce the risk of being in breach of a representation by doing a few things.  First, the selling dentist can qualify representations by appealing to “materiality”.   What does that mean?  Well, instead of a selling dentist being required to disclose ALL contracts, consents, licenses, etc. in respect of its assets, it can choose to disclose ALL MATERIAL contracts!  This helps reduce the risk that the selling dentist will be found to be in breach in case it has disclosed immaterial or trivial contracts.  The second way in which the selling dentist can try to protect him or  herself is by stating that it will only make representations of facts which it has knowledge of.  The idea here is that the selling dentist will only make statements as to what it knows, which is a subjective standard.  If there were problems with the assets which the selling dentist did not know, but which it OUGHT to have known based on a reasonable standard, then the dentist may not have been in breach of a representation or warranty.  In other words, the selling dentist won’t get in trouble for things that it didn’t know about.  Just bear in mind that the term “knowledge” should be clearly defined.

So that’s it for now…in my next blog, I’ll be discussing covenants, indemnifications, closing conditions, closing, and general terms.

 

 

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Asset Purchases (Part 1)

Posted by on February 13, 2011 · Leave a Comment 

Thinking of buying / selling dental assets?

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.

Purchasing Dental Assets

This is the first of a series of blogs I’ll be writing about buying and selling the ASSETS of a dental practices (as opposed to the shares of a dental practice).  I’ll be discussing a lot of the terms and conditions that you would typically find in an asset purchase agreement, so you may become inundated with a lot of legal mumbo-jumbo (but I’ll try to make it as clear as possible).

Letter of Intent

Before you even start to prepare the asset purchase agreement, you should generally have a letter of intent.  This is generally a non-binding letter, but it may have certain binding provisions (e.g. relating to things like deposits, or exclusivity, etc.).  The idea behind the letter of intent is to outline the nuts and bolts of the asset purchase agreement which is to come.  It will cover things like:

  • Assets to be purchased (i.e. which assets are included in the sale);
  • Purchase Price (i.e. how much is being paid for the assets; this may be determined based on an independent valuation / appraisal);
  • Closing Date (i.e. when the transaction is set to close);
  • Due Diligence (i.e. the parties will need to take some time to review the other party and the assets that are being sold to ensure that they are as legitimate as possible)
  • Confidentiality (i.e. the parties are to keep the negotiations and agreements confidential);
  • Restrictive covenants like non-compete, non-solicit clauses (i.e. to restrict or prevent the seller from competing in the business or soliciting the employees and / or customers of its old practice);
  • Lease (i.e. the landlord’s consent may be needed in order to assign the lease to the Purchaser; certain terms of the lease may need to be renegotiated);
  • Conditions (i.e. in order for the deal to go through, certain conditions must first be met – such as financing, a review of documentation concerning the seller and the assets, a consent from the landlord, entering into a confidentiality, non-compete, non-disclosure agreement, etc.);
  • Deposit (i.e. will there be a deposit paid with the letter of intent and will it be returned or forfeit under certain circumstances if the transaction does not close on time?)
  • Termination (if the agreement of purchase and sale is not completed on time, then how can the parties terminate the agreement and what are the consequences of doing so?)

Now, even though letters of intent are non-binding in nature, there are certain provisions which may be binding.  These may include confidentiality clauses, provisions dealing with the deposit (i.e. it will be forfeit in certain circumstances if the purchase and sale agreement doesn’t close on time because of X), or clauses dealing with exclusivity.  The latter basically means that, during this period of due diligence, and as the parties work towards an agreement of purchase and sale, the seller will not approach other parties to do a deal with them at the same time.

In the next blog, I’ll start getting into the actual asset purchase agreement.

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