If you’re considering buying a dental practice like one of our many clients in the St. Louis region, you’ve probably heard of “contingencies” but do you fully understand how they apply to your situation?
If you are buying a dental practice, there will be a sale contract, often called an “Asset Purchase Agreement” or APA. Among the many sections in the APA, there will usually be one that spells out that the closing on the sale of the practice is “contingent” on several items.
Here are the Typical Contingencies
Most often the closing of the sale is contingent on you as the Buyer being able to do additional “due diligence” in the form of a chart audit, a deeper review of the books and records, etc. Usually the “due diligence” period will be required to be completed by a certain date prior to closing. Once that date has passed, you can no longer ask for additional information or time unless the seller agrees.
Also, the closing will be contingent on you being able to arrange “suitable financing.” This makes sense because you can’t buy the practice unless you have the funds to do so. You can shorten the time to fulfill this contingency by having some preliminary bank approval before you enter negotiations for a particular practice. Again, a date for this requirement to be met is usually specified in the contract.
It does take banks some time to get approval for financing and you need to be able to provide the bank with all they need from you (tax returns, net worth statement, personal budget among other things) on a timely basis. Failure to do so can put the closing date in jeopardy.
And the closing will be contingent on you being able to secure an acceptable lease, and this can be a real obstacle to completing the deal. Landlords vary greatly in how they will treat the buyer of a dental practice. Many times, it depends on the status of the lease already in force for the Seller.
Lease Questions Loom Large
If that lease has only a year or so left, the landlord will usually be open to giving you with a new lease. Generally, lenders will want you to have a lease that covers all or most of the repayment time for your loan – if you have a 7 year amortization schedule, you will probably need a 7 year lease or maybe a 5 year lease with a 2 year option to renew.
Since the landlord only has a short time to expiration of the seller’s lease, he or she will usually be interested in getting a new tenant with a longer lease obligation. Sometimes the landlord will suggest that you assume the remaining term of the present lease and then “negotiate” a new lease when the present one expires. This will not be acceptable to the bank.
If the Seller’s lease has significantly longer than a year to go, the reaction of the landlord may be different. They may want you to “assume” the present lease. Again, this may or may not be acceptable to your bank, and it may not be acceptable to the Seller since he or she could remain responsible for the remaining term of the lease if you should default.
We will cover more about leases in a future post. But, suffice it to say that even when you have agreement with the landlord on the lease, it may take his or her office several weeks or more to get the lease drawn up for you and your attorney to review and you and the Seller to sign.
All of this can make it difficult to decide on an actual date for the closing of the sale.
The Bottom Line
The main point here is to emphasize the fact that you will have contingencies in the sale contract that will allow you to cancel the contract if the contingencies are not fulfilled. That means that the Seller cannot be certain that there is a valid contract until your contingencies have been resolved.
This uncertainty may keep the Seller from introducing you to his or her staff and can keep you from being able to get credentialed by the various PPO’s being accepted in the Seller’s office prior to closing. This will complicate you getting paid for work done for a while after closing.
Remember the Asset Purchase Agreement may be signed and a closing date may be specified, but the actual Closing will be “contingent” on financing, acceptable lease and additional due diligence. Until those “Contingencies” have been met, the Seller cannot be sure the practice has been sold.
If you’re looking for a trusted advisor to help you not only find the right practice to buy in the St. Louis area, but guide you through the purchasing process, please contact us.