Bette Robin, DDS, JD 877 DrRobin
SELECT PRACTICE SERVICES, INC. / DENTAL PRACTICE SALES
SELECT PRACTICE SERVICES, INC. / DENTAL PRACTICE SALES
From the Eyes of the Selling Doctor
Sometimes a Selling Doctor can be in such a hurry to sell his practice
that plain common sense is overlooked. A San Diego Superior Court
case in which the names of the Plaintiff and Defendant were sealed
tells a story you wouldn’t want to happen to you. (San Diego Superior
Court, Hon. Sheridan E. Reed, Dept. 40, June 28, 1996, case facts and
award reported, case I.D. confidential). I’ll substitute Mr. Smith and Mr.
Jones for the unknown party names.
Mr. Smith bought a small business from Mr. Jones on September 20,
1991. Shortly after Mr. Smith took possession of the business, he found
that the business was not producing as much money as Mr. Jones had
represented to him in the pre-sale negotiations. The patrons were not
as numerous as Mr. Smith had been led to believe, nor were the
patrons spending as much at the business as Mr. Jones had said.
Fortunately for Mr. Smith, Mr. Jones had personally ‘carried’ the
majority of the promissory note on the business. So, after just 7
payments, Mr. Smith stopped his payments to Mr. Jones. At the time of
discontinuing the payments, $109,000 was still owed to Mr. Jones. Mr.
Jones sued on a breach of contract theory in that he was not receiving
his payments and Mr. Smith cross complained of fraud and negligent
misrepresentation tort theories. The Honorable Judge Reed in San
Diego Superior Court sent the case to arbitration where the arbitrator
found for Mr. Jones in the amount of $18,138.00 on the fraud and
negligent misrepresentation theories.
This case was decided contrary to the normal ‘rule’ of sales of small
businesses. Rarely will a court interfere with the terms or conditions of a
contract between two professionals. The court usually believes that two
professionals have the education, resources, and access to others to
investigate and advise them as to the benefits of the bargain.
However, this case illustrates the importance of a Seller obtaining
secure financing for his business upon sale. Many practice transition
consultants and brokers would disagree with me when I assert that a
Seller should always obtain adequate security for their loan when
carrying the promissory note, or be willing to walk away from the money.
But, then, I’m a lawyer and went to school to learn to be pessimistic, get
paid to keep people out of trouble, and make the same amount of
money on a sale regardless of the terms and conditions of that sale.
I know, I know, many say it is the only way a new young dentist can buy
a practice is if an older retiring doctor will carry the paper. And, the
retiring dentist brags about the interest he will receive, the tax benefits
of periodic payments, the lack of significant transaction costs, as well
as what a good deed he is doing. The problem comes when the deal
goes sour.
Why not plan to protect your interests up front and cover all your bases
instead of just hoping everything will come out O.K.? Consider these
steps:
1. Insist on a credit check from a major credit reporting firm before you
even think about carrying the paper. The past is, and always has been,
the best predictor of the future.
2. After you receive evidence of favorable credit, go ahead and
consider carrying the paper if you want. BUT - Secure that paper on
something in addition to the practice! If your buyer is a new graduate
with the incredible debt that means nowadays, find someone,
somewhere, in the family that owns a house you can put a second
mortgage on. Even if the equity in the house is not worth the entire
amount of your loan, you at least have some security and a great deal of
family concern about the success of the practice. If your Buyer is
unwilling to do this, I’d take a deep breath, pick up your drill and keep
drilling a while longer as you look for another Buyer.
3. Do not be shy about demanding a full buy out of your practice, if that
is what you want. Remember, a bird in the hand may be worth more
than one in the bush despite the tax consequences. There are many
sources of practice purchase money, some of which do not even
require a down payment. Your retirement may be at stake and you
certainly know by now that no one will take care of you if you don’t take
care of yourself. Should your Buyers not be able to obtain any financing
- take this as a RED FLAG. Banks and financial institutions are in the
lending business. You are not and probably never have been. (Check
your past due accounts receivable to be sure of this fact if you have any
doubts.) If lending institutions won’t finance your Buyer, you probably
shouldn’t either.
4. No matter how you set up the financing, be sure your sales contract
contains a take-over and/or buy-back clause. In the worst possible
scenario that you have to take over your practice again, your contract
must specify exactly what happens next. Consider the dilemma when
the Buyer defaults after 4 or 5 years. Who owns the practice? What is
the practice worth and to whom?
5. If, despite these warnings to the contrary, you decide to chance it and
finance your practice unsecured - STAY IN YOUR PRACTICE. Work a
couple of half days a week. Visit frequently. Stay in touch with your
patients and your employees. Heaven forbid, they may be yours again.
This is not the time to take a 6 month cruise around the world. Practice
golf at your local course until you have your money.
© Bette Robin, DDS, JD 3/97
that plain common sense is overlooked. A San Diego Superior Court
case in which the names of the Plaintiff and Defendant were sealed
tells a story you wouldn’t want to happen to you. (San Diego Superior
Court, Hon. Sheridan E. Reed, Dept. 40, June 28, 1996, case facts and
award reported, case I.D. confidential). I’ll substitute Mr. Smith and Mr.
Jones for the unknown party names.
Mr. Smith bought a small business from Mr. Jones on September 20,
1991. Shortly after Mr. Smith took possession of the business, he found
that the business was not producing as much money as Mr. Jones had
represented to him in the pre-sale negotiations. The patrons were not
as numerous as Mr. Smith had been led to believe, nor were the
patrons spending as much at the business as Mr. Jones had said.
Fortunately for Mr. Smith, Mr. Jones had personally ‘carried’ the
majority of the promissory note on the business. So, after just 7
payments, Mr. Smith stopped his payments to Mr. Jones. At the time of
discontinuing the payments, $109,000 was still owed to Mr. Jones. Mr.
Jones sued on a breach of contract theory in that he was not receiving
his payments and Mr. Smith cross complained of fraud and negligent
misrepresentation tort theories. The Honorable Judge Reed in San
Diego Superior Court sent the case to arbitration where the arbitrator
found for Mr. Jones in the amount of $18,138.00 on the fraud and
negligent misrepresentation theories.
This case was decided contrary to the normal ‘rule’ of sales of small
businesses. Rarely will a court interfere with the terms or conditions of a
contract between two professionals. The court usually believes that two
professionals have the education, resources, and access to others to
investigate and advise them as to the benefits of the bargain.
However, this case illustrates the importance of a Seller obtaining
secure financing for his business upon sale. Many practice transition
consultants and brokers would disagree with me when I assert that a
Seller should always obtain adequate security for their loan when
carrying the promissory note, or be willing to walk away from the money.
But, then, I’m a lawyer and went to school to learn to be pessimistic, get
paid to keep people out of trouble, and make the same amount of
money on a sale regardless of the terms and conditions of that sale.
I know, I know, many say it is the only way a new young dentist can buy
a practice is if an older retiring doctor will carry the paper. And, the
retiring dentist brags about the interest he will receive, the tax benefits
of periodic payments, the lack of significant transaction costs, as well
as what a good deed he is doing. The problem comes when the deal
goes sour.
Why not plan to protect your interests up front and cover all your bases
instead of just hoping everything will come out O.K.? Consider these
steps:
1. Insist on a credit check from a major credit reporting firm before you
even think about carrying the paper. The past is, and always has been,
the best predictor of the future.
2. After you receive evidence of favorable credit, go ahead and
consider carrying the paper if you want. BUT - Secure that paper on
something in addition to the practice! If your buyer is a new graduate
with the incredible debt that means nowadays, find someone,
somewhere, in the family that owns a house you can put a second
mortgage on. Even if the equity in the house is not worth the entire
amount of your loan, you at least have some security and a great deal of
family concern about the success of the practice. If your Buyer is
unwilling to do this, I’d take a deep breath, pick up your drill and keep
drilling a while longer as you look for another Buyer.
3. Do not be shy about demanding a full buy out of your practice, if that
is what you want. Remember, a bird in the hand may be worth more
than one in the bush despite the tax consequences. There are many
sources of practice purchase money, some of which do not even
require a down payment. Your retirement may be at stake and you
certainly know by now that no one will take care of you if you don’t take
care of yourself. Should your Buyers not be able to obtain any financing
- take this as a RED FLAG. Banks and financial institutions are in the
lending business. You are not and probably never have been. (Check
your past due accounts receivable to be sure of this fact if you have any
doubts.) If lending institutions won’t finance your Buyer, you probably
shouldn’t either.
4. No matter how you set up the financing, be sure your sales contract
contains a take-over and/or buy-back clause. In the worst possible
scenario that you have to take over your practice again, your contract
must specify exactly what happens next. Consider the dilemma when
the Buyer defaults after 4 or 5 years. Who owns the practice? What is
the practice worth and to whom?
5. If, despite these warnings to the contrary, you decide to chance it and
finance your practice unsecured - STAY IN YOUR PRACTICE. Work a
couple of half days a week. Visit frequently. Stay in touch with your
patients and your employees. Heaven forbid, they may be yours again.
This is not the time to take a 6 month cruise around the world. Practice
golf at your local course until you have your money.
© Bette Robin, DDS, JD 3/97
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DrRobin@BetteRobin.com
17482 Irvine Blvd., Suite E
Tustin, CA 92780
Tustin, CA 92780
877 DrRobin
Tele:
714.421.4407
Fax:
714.398.8808