Sometimes even the best-intentioned transitions fall apart. All too often, this happens because both parties overlooked the basics: clear communication and putting everything in writing. A few key actions can minimize the back and forth while keeping your transition on schedule.
Read on for one scenario in which a buyer and seller just couldn’t make it work, then learn how you can avoid similar problems.
Dr. Steve: An associate for the last eight years, he was ready to buy a practice
I found the perfect practice…I thought.
Late last summer, I found a great practice with a doc who was ready to retire and sell. An attorney friend helped me draft a Letter of Intent (LOI), which I delivered to the seller. She quickly accepted the LOI and I was thrilled with the purchase price in our mutually signed document.
I began looking for financing and found a lender recommended by a friend. When I first approached the lender with my LOI, they were very positive and did not anticipate any problems. The lender recommended an accountant to help me through the due diligence process. Between the lender and the accountant, I began the process of requesting the required information from the seller.
Every time I asked the owner for financials and other documentation to support the sale, it was like …don’t snicker…pulling teeth! The owner did all her own payroll and accounting and did not have the required documents readily available. She couldn’t locate the valuation she had previously mentioned. Then she started indicating that we would need to discuss the purchase price once she delivered the valuation. When I finally received the valuation (four months after we initiated talks!), the owner wanted the purchase price to be the same as the valuation. I was not comfortable with that, as it was significantly higher than what we had agreed to in the LOI.
After some back and forth, we ended up in the middle and the owner agreed to some seller-assisted financing. I thought we had finally agreed to a price and terms, so the loan went into underwriting.
Then COVID hit. The financing ground to a screeching halt and the bank started requesting even MORE information to support the purchase price. The seller was clearly unhappy. It seemed like each time I asked for documentation, she would say, “The bank doesn’t need that.” It took forever to get anything from her. But she complained the process was taking too long!
The owner finally got a lawyer involved, and that’s when things went south really fast. She had agreed to do some seller financing, but now she wanted to make the terms much more stringent. This was the last straw for me. I ran the new numbers and it looked like I would not be able to pay myself a reasonable salary for at least four years. When I also started getting bad vibes from the staff, I knew I needed to cut my losses and find something else.
Dr. Sonia: Owner of a solo practice who has served the community for 35 years
I wanted to retire and get out of practicing clinical dentistry and sell both the practice and the building. My husband and I hoped to spend more time with our grandchildren – they’re growing so fast! – and just generally slow down. It was way past time.
Through mutual connections, I found a dentist looking for a practice in my area. We connected and I was really excited because it seemed like a perfect fit. I thought this would be pretty simple because the practice is mostly fee for service and in a very attractive location.
I had a valuation done about a year ago. And since the buyer had been out of school for several years, I assumed the financing would be a piece of cake. He handed me a LOI that seemed ok, so I signed it. We talked about a late winter/early spring closing date, so I figured I would bring in a lawyer once things got closer.
Meanwhile, my husband broke his leg and needed more help at home, just as the office got extra busy. During this time, there was very little communication between the buyer and me. It took me a while to find the valuation – it had been misfiled – but I assumed things were moving forward.
Then out of the blue, the buyer started asking for all kinds of information that I was surprised was required. His accountant was asking for the last 10 years of expenses and payroll records, a broker’s opinion of value on the real estate… The list went on and on. It seemed like every couple of weeks they needed something else.
I still had not seen a final contract – all we had was the LOI – and I assumed we still had things to negotiate (especially the purchase price since it was lower than I ever planned on selling for). It seemed like the ball was in the buyer’s court to come up with the purchase/sale agreements.
This went on for months, even after I gave the buyer the valuation. During this time, I even went so far as to try and have him come in and work as an associate. He presented me a very one-sided contract, which I really didn’t think we needed since this was just to get him in the office and working prior to the final sale.
Then COVID hit…and things went even further off the rails. The loan was in underwriting and guess what…now the bank required even more documentation. I don’t see why this was all necessary – they even wanted a full list of EVERY instrument in the office. Even my staff was getting fed up with all the back and forth.
I was frustrated and decided it was time to engage a lawyer to represent my interests. The lawyer made me see how one-sided his proposed employment contract was, then told me I needed some guarantees if I was going to help finance the sale. I presented these terms and after about a week, the buyer decided to remove the offer.
Now I have to start over…
What went wrong? How could this transition have succeeded?
At each stage of the game here something went wrong – and it all began with the Letter of Intent.
Put things in writing with a Letter of Intent
A Letter of Intent (LOI) lays out all the terms of a sale and details each side’s responsibilities throughout the process. A well-written LOI would have clearly defined the sale’s terms and timeline, as well as the expected communication cadence. Instead, Dr. Steve’s LOI was light on specifics, and Dr. Sonia did not understand that by signing it, she was essentially agreeing to the purchase price.
An attorney who is familiar with practice transitions can guide you through the process, answer your questions, and make sure you understand what you are signing.
An LOI should:
- Clearly define all the terms, including purchase price, financing, closing dates, handling of the accounts receivable, and so on
- Detail which party is responsible for what throughout the transaction, including who pays which associated legal fees
- Be drafted or carefully reviewed by attorneys from both sides to ensure everything has been captured correctly and both parties understand what they are agreeing to
The ADA Center for Professional Success has LOI resources, including this webinar and chapter 6 of Joining and Leaving the Dental Practice. (Both resources are free for ADA members.) While some might consider holding off on hiring a lawyer to minimize legal fees, in reality, having a lawyer draft and/or review a LOI upfront can save you significant time when it comes to the actual contract.
The recent ADAPT Coffee Talk, Taking the Legal Pain Out of Buying and Selling a Dental Practice, also has tips on developing an LOI and preparing for the legal aspects of a transition.
If both docs had clearly understood what they were individually responsible for from the beginning, this sale may have gone through.
Prepare all the required documents
Meanwhile, Dr. Sonia should have been compiling a list of important documents to validate the sale price and had those ready to hand off to the potential buyer. Several of these documents were the same she needed for her practice valuation. (See a list of common requests.)
Like it or not, the current economic situation means that many lenders now require extra documentation. (Watch our recent webinar: Selling Your Practice in the COVID-19 Era: Advice from Accounting Experts.)
Communicate, communicate, communicate!
After the initial LOI, both parties failed to communicate – especially as trouble began brewing. Some straightforward conversations about the challenges both were facing would have ensured they both knew what to expect. These conversations could have translated into clear next steps, which would have given them better guardrails throughout the process.
There is no way anyone could have predicted or prepared for the pandemic. But since the loan was in underwriting just as offices closed, the two should have had an open conversation about what was transpiring. An already-tense situation got worse when the bank was suddenly non-responsive to Dr. Steve, just as Dr. Sonia’s lawyer began presenting new terms they had not previously discussed.
With no communication between the two dentists and nothing solid in writing, this transition was in trouble.
If you’re approaching your own practice transition, make sure to put things in writing, work with an attorney, and communicate clearly with the other party. ADA Practice Transitions can guide you through every step, with helpful resources (like a contracting toolkit) that can ensure you’re discussing the right things. Start your profile today.