How To Make An Offer To Purchase A Dental Practice
Bankers, attorneys, accountants and yes, even practice brokers can get a little fussy with prospective buyers and the offer to purchase process. Let me remind everyone that while the process seems simple to those who have had some experience with practice sales, this is new territory for most buyers and perhaps a little explanation is in order.
An Offer to Purchase is exactly that; a good faith proposal to the seller based on the information the buyer has been given about the opportunity and their chance to set the basic terms of the transaction. Before we get to the numbers though, let’s take a closer look at what that last sentence says. First, “Good Faith” means that there is a sincere desire and plan in place to proceed to closing. This is not intended to be a fishing expedition nor should the seller assume it is the opening bid at an auction. By this time the buyer should have consulted with a lender and show evidence they can borrow the money for the purchase of the practice along with any needed operating capital. They have been given the asking price and, in response, propose a purchase price, closing date and escrow amount. All of these items are subject to negotiation.
Escrow, sometimes referred to as earnest money, is the buyer’s proof to the seller that they are serious about the offer and intend to purchase the practice. An attorney once told me that an offer without escrow is not really an offer but rather, a conversation. The amount is not necessarily a set dollar figure but needs to be enough that the seller is comfortable taking the practice off of the market. In our world, one to three percent, dependent upon the asking price, is typical. The buyer should understand that in most cases, the bank will fund the full amount of the sale and the escrow funds will be returned to them at closing.
While the offer may include a few provisions of a future purchase agreement (restrictive covenant terms for example), there are also a number of contingencies to closing that should be mentioned. Financing must be secured, a market rate lease or purchase agreement on the real estate must be in place and, of vital importance in a merger or acquisition, suitable due diligence must be performed by the buyer. Due diligence, a term not often discussed in the dental school curriculum, is the buyer’s right and obligation to review all pertinent documents, reports and claims made by the seller in order to be satisfied that the buyer is getting what they think they are getting. While the seller makes an honest effort to provide current and accurate data about the practice, the buyer would be foolish to not verify that information. Please be aware that as the broker for the seller, we have NOT counted, verified or sanitized the information we received from the client. If any significant discrepancies are found during this process, the buyer can decide whether or not to go through with the sale or if, at the very least, an adjustment must be made to the purchase price.
I’ll address a few FAQs;
1. Due to issues of confidentiality, there is a limit as to how much information you will receive in the Buyer’s Prospectus.
2. You are entitled to all documents relevant to the practice during the due diligence process. If you don’t do the work, you get what you get.
3. Don’t insult the seller with a ridiculous lowball offer. If they are clients of ours, the asking price is not an accident.
4. If the Seller does not accept your offer, you will get your escrow money back.
5. If you can’t borrow the money from any legitimate lender, you will get your escrow money back.
6. If you cannot get a lease or some suitable deal on the building, you will get your escrow money back.
7. If in the course of due diligence you find discrepancies of merit between what you were presented and the facts, you will get your escrow money back.
8. If you are unable to get a license in the state in which the practice is located, you will get your escrow money back.
9. If the money is in place and the contract is awaiting your signature and you decide the day before closing to pursue an opportunity in another state, you might not get your escrow money back.
10. The closing date could get adjusted by circumstances outside of your control but all parties should move forward in good faith to hit the target date.
11. Closing 45 days after the offer is made is a good target. 30 days is pushing it and at over 60 days, things start getting wonky.
One last thought; another type of offer is referred to as a Letter of Intent. The premise is the same as an Offer to Purchase but in a narrative form. If all of the terms, conditions and contingencies are addressed then I have no problem with this form of offer but I often find them to be a little less complete. Given the nature of dentist to dentist deals, I would stick with the Offer to Purchase form.
To read more of our articles, check out our Transition Thoughts.
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Chad Barth, DDS – Kansas City, MO
Michael LeSage, DDS – Kansas City, MO
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