Transitions Roundtable

We ask two experts the same question on a complex issue.

Question: The doctor-seller of the practice is also the landlord. I cannot afford to buy the building yet. But I’m worried that if I ask the seller not to practice anymore after a period of time that things will become awkward, and it will become costly to keep him as my landlord. What should I do?

RANDON JENSEN

You need to define expectations in advance and memorialize the agreement with the landlord in writing with a sound legal document. This relates to both an office lease with the seller and a seller work-back/associate agreement.

It is important for the seller to know up front that you may not be able to keep him on as an associate in the practice after the sale. You will have the responsibility of covering overhead and servicing the practice acquisition debt. If the practice lacks the initial capacity to support both you and the seller financially, if the schedule thins, or if production drops for any reason, you may risk insolvency if you continue to pay the seller to do dentistry you should be doing. You cannot honor your commitment to keep him on if you do not have the financial capacity to do so. The option to terminate his postsale employment should be built into his employment agreement. More importantly, you should have a frank discussion with the seller about this before buying the practice. If he cannot live with it, it’s better to know this in advance.

Spend the money in legal fees to have a well-drafted lease agreement that outlines both parties’ obligations and responsibilities, including but not limited to a clause addressing the option to renew the lease at a predefined lease rate. You may also consider the inclusion of a unilateral option to purchase the building if the seller is willing to grant it to you. If not, a “right of first refusal” to acquire the office, if and when the seller decides to sell it, is advisable. It may also be prudent to include a clause that prohibits the seller, as landlord, from entering the premises without your permission after he discontinues working as your associate.

STEPHEN H. KAUFMAN

I have two suggestions. First, as part of your practice purchase, negotiate an option to buy the building in the future. Second, have a written employment contract with the seller specifying in advance how long he will work after the sale.

A real estate option contract will enable you to buy the building even if you acrimoniously separate from the seller. An option works like this: You pay the seller a fee. In exchange, you get the exclusive right for a set length of time to buy the building for a set price. For example, you might pay the seller $5,000, and in return, for two years (or however long you need to gather your money) the seller cannot sell to anyone but you. You can buy anytime you want during the two years at the agreed-upon price. If you don’t want to buy, you don’t have to, but when the two years are up, you lose the right to buy and the seller keeps your option payment.

An option will protect you if the seller becomes upset that you fired him, but it would be better if you could lower the odds of conflict. That can be accomplished with an employment agreement that specifically addresses the seller’s postsale length of employment. A good agreement should set out any guaranteed length of time the seller will work for you, the reasons for termination, and the amount of notice required to terminate employment. For example, you might want the seller to stay for three months after the sale to help transition patients, but after that you want flexibility. So, the agreement would give you the right to terminate employment on some short notice after three months. If the rules are agreed upon in advance, the chances of argument will be reduced, which is a good idea even for sales that don’t involve real estate options.

Randon Jensen has been specializing in the appraisal, sale, and transition of dental and dental specialty practices since 1999 when he joined Larry Chatterley as a co-broker in CTC Associates LLC, Practice Transition Specialists. Together they have facilitated the transition of more than 1,800 practices. He can be reached at [email protected].

Stephen H. Kaufman is the head of his law firm’s health-care department. He helps doctors with all aspects of their professional and personal legal needs. He lectures on a wide variety of business, employment, and health-care subjects. Contact him at (410) 659-1385 or [email protected].