Dental and Medical Counsel Blog

How to Handle Disputes with the Previous Owner of a Dental Practice

February 3, 2021
Dental Practice Transitions

When you purchase a dental practice and transition into the role of an owner, there is a lot on your plate. You not only have to keep up with patient demands as they adjust to a new dentist, but you also need to keep up with the administrative requirements of running a business. Adding a dispute with the prior owner or the seller of the practice only makes matters worse.

With everything going on, it can be tempting to simply ignore the problem or give the prior owner what they want, even if you do not think that is the right solution. Do not give in to this type of pressure! Instead, planning ahead and having the right advice will help you avoid and deal with common disputes.  

The Importance of Your Asset Purchase Agreement

The dental asset purchase agreement that you entered to purchase the dental practice is your go-to document if there is a dispute. If the asset purchase agreement was prepared properly, most issues that crop up after a purchase should be addressed within this document. However, sometimes reading and understanding the legalese set out in these contracts can be difficult.

A well-drafted asset purchase agreement should include the following terms, at a minimum.

  • The purchase price and any unique aspects of the payment structure.
  • Methods to address aspects unique to the dental practice such as uncompleted treatment, patient complaints, etc.
  • Restrictive covenants regarding the seller’s future activities in and out of the practice.
  • Limitations on liability.
  • How accounts receivable and payable will be addressed.

It is important to rely on a qualified dental attorney to assist with contract interpretation if there is a dispute. You may be surprised just how comprehensive your asset purchase agreement actually is if you did not take the time to review every minor detail before you signed it.

The documents that you use before a dispute arises are absolutely vital to protect your legal interests—which means that they must be drafted well, with your best interests in mind.

All of these potential problem areas should be addressed in some way in your asset purchase agreement. Considering them at the outset of the purchase will help you avoid disputes in the future.

Potential Liability Between the Parties

If either party violates the asset purchase agreement, it can lead to legal liability. That might mean that the seller will have to pay you for any money damages caused by their violation of the asset purchase agreement. The same can be said if you violate the asset purchase agreement and it causes damage for the seller.

The asset purchase agreement should also address what will happen if there is a violation of the agreement. It may require certain steps for informal dispute resolution, such as arbitration or mediation, for example. It might also dictate where you can start a lawsuit if that becomes necessary.  

Common Disputes and Problem Areas

When conflicts arise because of a dental practice sale, they are often about a few of the same issues. While every case is unique, some themes tend to repeat themselves.

All of these items should be addressed upfront as part of your asset purchase agreement. Covering these common areas of dispute as part of the initial asset purchase agreement will help prevent costly litigation down the road.

Accounts Receivable

There are several ways that parties deal with accounts receivable in their asset purchase agreement, including:

  • The seller keeps their rights to the receivables, but the buyer collects them as a courtesy, often for a fee
  • The seller keeps the receivables and collects them separately from the rest of the practice
  • The buyer pays a higher purchase price to have rights to the accounts receivable

How you resolve disputes will depend on how you both decided to treat these issues when you agreed upon the purchase. For example, the transaction is essentially complete when it comes to accounts receivable if the purchaser already bought them. In that situation, very few conflicts are likely to arise after the transaction is complete.

On the other hand, if you are obligated to collect on receivables, conflicts can arise if the seller does not think you are making enough efforts to collect. Turning over collection efforts to the seller can be a simple solution to that type of problem, but that may not always be an option.

Debt and Accounts Payable

In an asset sale, you often will not purchase the debt from the dental practice. You only purchase the physical and intangible assets of the practice. If you go through an outright stock sale or full purchase, the debt obligations may transfer to you.

Disputes can arise if debt obligations that are supposed to be paid by the seller are not paid. The creditor may attempt to collect from your new business in some circumstances. In those cases, you can likely lean on an indemnity clause against the prior owner so that they still have to pay the value of the debt back to you if you are forced to pay it.

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Restrictive Covenants

A restrictive covenant is a term in your asset purchase agreement that requires that the seller not take a specific action. In most cases, they function as a form of non-compete agreement between the new buyer and the former owner. These agreements set out that the seller cannot compete with the practice that was just purchased, either on an individual basis or by setting up another dental practice.

These covenants can lead to disputes if the seller plans to practice in a limited capacity after the sale. They can also become a point of contention if the restriction is too aggressive. For example, if the non-compete agreement does not allow the seller to practice dentistry at all in the future, that may be too restrictive to be enforceable. Having the right balance of protection and freedom is a critical consideration to avoid disputes over these clauses in the future.

Warranties

A warranty in a dental practice sale is not a traditional warranty as you would find on a product. Instead, it is a representation from the seller that certain representations about the practice are accurate. The seller may want a warranty on certain historical practices within the business, such as critical legal, financial, or operating aspects. For example, the seller might warrant that they had a certain number of patients who visit at least annually over a period of years. The seller might also warrant that all taxes are paid or that the physical location is zoned properly.

The seller provides warranties as an extra layer of assurance to the buyer. The buyer relies on those warranties as part of the decision to purchase. If the warranties turn out to be untrue or unreliable, it can lead to a dispute that triggers money damages. In some cases, if the warranty was falsely represented, it can lead to the buyer’s decision to revoke the purchase altogether.

Legal Liabilities from Errors or Omissions

Lawsuits that crop up after the sale can be a huge point of contention. The buyer may not expect that they could be liable for those legal obligations if there is no clear disclaimer of legal responsibility for errors or omissions as part of the asset purchase agreement.

Keep in mind that legal liabilities may not just be personal injury lawsuits. They could also appear from breaches of contract or other related issues—those legal concerns have a longer statute of limitations, which means that they might not arise until years after the initial purchase.

Having language in the asset purchase agreement to address this potential issue is critical. You may also need to incorporate certain types of insurance coverage to ensure that these issues will be covered by insurance, no matter when they appear.Contract_Dental_Image

Employment Contracts and Independent Contractor Agreements

In some cases, the seller may want to stay on as an independent contractor as they transition out of the practice. You might also have other similar contracts with dentists who practiced with the seller. If so, you need to be very careful to set expectations about how these agreements will continue or discontinue in the future. If you acquire the contract, for example, keep in mind that you will have limited rights to alter the agreement until it is renewed.

There can be some internal conflict when the seller stays on as an independent contractor but has no further say in the administration of the practice. Taking a step back from the business aspects of the practice can work very well for some dentists, but it is a much harder transition for others. Be sure that any independent contractor agreement that you have with the previous seller allows you to take action to terminate the agreement without (or with minimal) penalty if things just are not working out.

Considerations for Your Team

When you purchase a practice, you might have the unrealistic expectation that all of the team members will happily stay on with your new practice. In many cases, the team has some loyalty to the previous owner, and they may leave as soon as the previous owner steps away. In most situations, you cannot prevent the team from doing this.

While dealing with staff transitions can be challenging, it is an aspect of the sale you need to address. When there are no employment contracts involved, you must often deal with these potential issues through more personal means instead of using formal legal methods. For example, being upfront and honest about day-to-day expectations after the transition can go a long way toward keeping seasoned team members.

It is important that you contact an HR company like HR for Health to make sure that you are performing all of your obligations when hiring your team members.

Contractual Disputes with the Landlord

Although this particular dispute is actually with the landlord, it can have a direct connection with the seller. For example, in many lease agreements, the seller must get permission from the landlord to assign their lease to someone else. If the seller does not speak with the landlord about the sale, as they represented before the sale, then that can cause a huge problem. The landlord may not like their new tenant and force you to vacate because of the seller’s breach of the lease agreement.

You should address any lease issues directly with the landlord before the purchase is finalized. An assignment of the lease may be appropriate, but you might also want to renegotiate the lease so that it better fits your practice’s needs.

Re-Do Work and Patient Credits

The seller often does not want to have to deal with re-do work once they sell their practice. Instead, they may want to pass the obligation along to the new buyer to deal with any required re-do work. They might also want to narrow the window of time in which they would have to do re-do work as an alternative to passing along all of the work.

The buyer will often want the seller to do as much re-do work as possible. They want to start fresh with new, paying patients who are not expecting free re-do work. These two goals are completely opposite of one another, which can cause disputes. However, if you work through this particular issue as part of the purchase agreement negotiations, each party should have clear expectations about how long the seller will complete re-do work.

Patient credits are a similar concern. You may not realize just how much the seller has promised to patients in the form of credits. Getting a handle on this type of information is critical.

For example, Dental & Medical Counsel worked with a dental practice buyer who was in the middle of a transaction. The buyer brought the asset purchase agreement to our team to review. Upon review, we noticed that the asset purchase agreement did not address patient credits at all. After getting additional information, we found $175,000 in patient credits that the buyer would have to pay if the asset purchase agreement was executed as drafted.

How Dental & Medical Counsel Can Help

Don’t overpay when buying a dental practice because you are missing information. Our team will review the dental asset purchase agreement, or create a comprehensive asset purchase agreement for you, and a lot more. Contact Dental & Medical Counsel today for more information about how we can help or to schedule a complimentary consultation with dental attorney Ali Oromchian.

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