The Purchase and Sale Agreement
I get a lot of questions about what should be in a purchase and sale agreement (the PSA, for those in the know!). You guys, really, it isn’t actually as simple as pushing a button and printing a standardized form. As the old story goes, knowing what button to push (in this case, what clauses to add, revise, or delete), means everything. That said, I am going to outline some of the most important sections of a PSA, since you keep asking - and I talk about all of them in more detail on the podcast.
1. Assets included in the sale
a. Everything should be included in the sale, unless it is specifically excluded.
b. Therefore, the excluded item/asset list needs to very detailed.
c. This doesn’t mean you shouldn’t have a complete inventory, just remember the that the agreement should be written so that everything is, by default, included - unless specifically excluded.
a. Names matter, and are very important. Bette Robin is not the same person as Betty Robin or Betty Robbin. Nor would Bette Robin, Inc. be the same “person” as Bette Robin, A Professional Corporation. Make sure you look at the Secretary of State website and get it correct, even if the tax return is different! A lender may require the tax return to be amended if there is a discrepancy.
b. Recitals tell the story, don’t skip them or make them unclear. In plain English, what’s this agreement about?
a. The purchase price allocation breaks the practice into different asset classes, which affects how the seller will be taxed and how the buyer will be able to write off things.
b. The allocation is almost always more important to a seller, because they are the ones that have to write a check to the IRS. However, the allocation determines the speed of the write off to a buyer and the time value of money is important– but most buyers have plenty of deductions for at least the number of years that their loan is still outstanding.
4. Retreatment Clause and Uncompleted
a. Retreatment clauses. Sellers are responsible for what they do. Sellers may want to transfer that to a buyer or get out of it – but if they did it, they are responsible. Buyers should generally look at patients’ treatment as though the patient was coming from another office and diagnose and treatment plan accordingly, without unduly putting down the seller – or any other dentist, for that matter. That never win patients!
b. Uncompleted clauses. Most buyers want sellers to finish what they’ve started. Not in terms of entire treatment plans – which a buyer certainly wouldn’t want – but in terms of cementing crowns they’ve prepped and finish removable units started.
a. There are a lot more covenants you should worry about in addition to covenants not to compete.
b. Some other covenants you should have – and it depends on the situation and whether the practice is specialty of not – include: a covenant not to solicit, a covenant not to treat, a covenant not to accept patients from referral sources (you need a lot of detail on this if it is a specialty practice), a covenant not to hire, a covenant not to accept income, and the list goes on.
c. Covenants need to be assignable to someone else, just in case the buyer sellers. This someone else is usually referred in documents as a “successor in interest.”
6. After sale plan
a. This can basically be written by the buyer and seller, and should be very detailed so both parties know what is expected. Does the buyer want the seller to show up on the first morning after the sale closes and show them around – then write it down. Write it all down in the contract.
7. Seller and buyer warranties
a. Sellers need to warrant a lot of things about the practice, what they are going to do after the sale (especially if a seller is younger and is going to continue to practice, and anything else that is important to a buyer or was a turning point in that buyer making a decision to buyer. If a buyer is particularly worried about a specific thing, the seller can be asked to sign that clause, in addition to the entire agreement – just to really emphasize the importance.
b. Buyer need to warrant that the seller cannot guarantee they will be successful, and that a buyer’s success largely depends on what they do or don’t do.
8. Employee language and info
a. Employees are an integral part of any practice, and there should be complete employee information included in a contract exhibit, and language in the body of the contract stating that the seller is solely responsible for anything involving the employees before the sale, whenever that matter should come up – even if after the close date of the sale.
9. Accounts Receivable
a. Most of the time, buyers do not buy seller’s accounts receivable, especially if they are able to get a working capital loan from their lender.
b. There needs to be specific language about what is expected from the buyer in collecting the seller’s accounts receivable. For example, how often are statement to be sent and to who. What reports should be given to the seller so they know what is going on, and generally the exact report names should be used.
10. Risk of loss
a. The risk of loss clause is important, and should set forth the exact close time, after all conditions to closing are met. For example, what happens if the money wires to the seller at 2:00 p.m. and we have a huge earthquake at 3:00 p.m. Who owns the practice? The risk of loss clause will the exact time of transfer, which is often 4 or 5:00 p.m. So, in the above example, the seller would still own the practice at 3:00 p.m., but at 5:01 p.m., the buyer would own the practice. You can see why this clause is important!
I hope this helps, and I think the more you know, the better to get the outcome you want!