Oral Health Group
Feature

Legal Issues: Are You Ready to Retire?

December 1, 2001
by Symon Zucker and Lisa Borsook


There are dentists who will practice to the very end of their careers. Others will seek to cash in their chips by selling their practice. At some time most dentists who own their own practices will be faced with the prospect of selling. At that time they will encounter a host of issues, some of which will impact on the ultimate price obtained on a sale. Some things can be planned for to ensure that the value of the assets sold are maximized.

What Are You Selling?

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The value of a practice is determined by the goodwill of the practice. The number of active and loyal patients generate the gross, the quality of the location, and the staff all contribute to maintaining the goodwill. A problem with any one or more of these will certainly impact on the selling price achieved.

Goodwill

This is generally composed of the patients, their records, the telephone number and trade name associated with the practice. A purchaser, in conducting even a cursory due diligence, will examine the books and records to determine whether the revenues being generated comes from the principle dentist or the associate. If the associate is not staying, what protection is in place to ensure that the patient base will not be eroded.

Most practitioners will have a non-competition agreement in place with the associate that limits the area in which the associate is prohibited from opening an office as well as the duration of the restriction. While non-competition clauses have come under attack recently, they are still one of the most fundamental tools to ensure the integrity of a practice. While Courts have always been reluctant to enforce restrictions against free trade in the marketplace, they have attempted to strike a fair balance between an employer’s right to protect their assets against employees’ rights to freely market themselves. Non-competition clauses were normally upheld when the Court found that an employer had a legitimate business interest to protect. That interest would include trade secrets and confidential information (including patient lists or referring dentists).

Apart from the fact that non-competition clauses continue to be upheld when they are a part of the sale of a practice, the Courts will still review each case to determine whether the particular restrictions were necessary to protect a legitimate business interest or were overly broad. More than ever it is important to assess the most adequate way to protect those legitimate business interests. In a recent decision, which struck down a non-competition clause between two oral surgeons, the Court nevertheless stated that in a situation where the departing employee was an essential element of the business, and was a primary contact with patients then the non-competition would be upheld. While new contracts can be modified to address the concerns raised by the Court I would not toss out existing contracts.

Associates are not the only threat to a practice. While the issue of employees will be dealt with below, it is worthwhile to remember that your staff, especially those individuals who have been with a practice for a long time, will have developed their own base of loyalty. Hygienists, assistants and front desk staff become the face of a successful practice. While the latter two are not likely to inflict much damage should they leave a practice, hygienists can pose a threat. Some two years ago the College of Hygienists sent a letter to its membership which in effect took the position that patients being treated by a hygienist belong to that hygienist and in the event that the hygienist leaves the practice it is quite appropriate to take copies of charts and advise the patient base as to their new place of employment, ostensibly to take those patients. General practitioners were advised to enter into employment contracts with their hygienists which are similar in nature to associateship agreements.

Leasing Issues

If your practice occupies leased premises, then the assignment of your lease to a new practitioner will ordinarilly require the consent of your landlord. As a general rule, most leases require the landlord’s consent to be “not unreasonably withheld” but that still gives the landlord the opportunity to consider a number of issues before deciding whether or not to grant its consent, including the financial wherewithal of the proposed transferee and his or her practice experience. Many leases provide that, in lieu of consenting, the landlord has a right to cancel the lease altogether, which will obviously have significant implications to the sale of the practice. It is common to make the sale of a practice conditional on obtaining the landlord’s consent to the assignment. It should also be noted that the landlord’s consent may be conditional on payment of fees to the landlord, the entering into of an assignment agreement (prepared at the cost of the assignor and/or assignee) and that, as a general rule, landlords are loathe to release the transferor from his or her obligations under the lease. In the result, if the transferring practitioner wishes to be released from further obligations with respect to the leased premises, such release will either have to be negotiated with the landlord, or the transferor may have to insist on other security with respect to that continuing liability i.e. a letter of credit or an indemnity, which may be supported by collateral security. The transferee will usually ask for a confirmation from the landlord confirming that the lease is in good standing, which your landlord may or may not, be required to provide depending upon the terms of your lease.

Finally, in more limited circumstances the lease may provide that the landlord is entitled to increase the basic rent payable as a result of your request for consent to a transfer.

Equipment Leases, Software Licenses and Other Contracts

Many practitioners lease equipment and, like lease agreements for premises, they too should be reviewed in order to ascertain whether or not they are assumable by the transferee and under what circumstances. Alternatively, it may be that they are not assumable but that there is some penalty for an early termination by the practitioner as lessee. Generally speaking, all assumability, associated expenses, ongoing liability, and penalty provisions should be reviewed prior to entering into an agreement to sell one’s practice. In addition, to the extent that equipment is subject to a security interest, those security interests will have to be discharged in circumstances in which the purchaser has not agreed to assume any liabilities.

Tax Issues

The tax consequences of any sale must be considered before a transaction is entered into. Since the sale of a dental practice necessarily means the sale of assets by the vendor, consideration must be given to income tax (in particular capital gains), retail sales tax, and GST implications of the transaction. In particular, how the purchase price is allocated amongst the various assets, including goodwill, will have a significant impact upon the amount of tax payable. Also, if the sale of the practice includes the disposition of real property, there will also be land transfer tax implications.

Statutory Implications

Prior to the transaction being concluded, there must be compliance with the requirements of the Bulk Sales Act (unless, of course, the parties agree to waive compliance and proceed on the strength of an indemnity, as is sometimes the case). Compliance can be achieved in three ways, by exemption order, affidavit evidence, or payment of the purchase price to a trustee. The parties will determine how to proceed usually taking into consideration the number of creditors affected.

Documentation Issues

Most purchasers in an asset transaction will require various representations and warranties from the vendor with respect to the assets to be transferred. These representations and warranties need to be closely reviewed with legal counsel. A vendor must be careful not to warrant with respect to matters over which he or she has no control (i.e. the sustainability of the gross revenues
of the practice), and must carefully review warranties relating to the condition of the equipment to be transferred, the recoverability of any accounts receivable to be transferred (in the unlikely circumstances that accounts receivable are transferred to the purchaser) and the like. It is also important to consider confidentiality restrictions in the documentation, so that, if for any reason, the transaction is not completed, the purchaser cannot take advantage of information acquired during the due diligence process prior to closing.

Employment Issues

When a practice is sold the matter of the existing employees, especially long-standing ones become a potential problem for the vendor and the purchaser. Employees are entitled to common law or contractual notice of termination, which is usually substantially more than is provided for by provincial laws.

Many employment issues arise in the context of the purchase and sale of a business. While the purchaser is anxious to maintain continuity within the practice by keeping the existing staff, the selling dentist hopes to avoid costly termination packages. At the same time the purchasing dentist rarely wishes to assume this latter liability by blindly accepting the existing staff with their existing seniority.

The accommodation, which is usually reached in these circumstances, is an agreement between the parties that the seller will terminate all employees with the understanding that the purchaser intends to hire them. Should the purchaser then decide to terminate an employee within a reasonable period of time, then the selling dentist remains liable for the appropriate compensation.

Again, while not common in dental offices, employment contacts which stipulate not only the terms of employment but the terms of any payout on termination are extremely valuable. If you have to terminate an employee (not for cause) you are required to give them reasonable notice. The law does permit you to terminate an employee without cause with a few limited exceptions {such as — you cannot end an employment because they are pregnant or on parental leave}, but that aside you can buy your way out of the relationship. Not as expensive as a divorce but it can be costly. A rule of thumb for severance pay subject to minor variations is approximately one (1) month per year of employment. This can be modified by contract. In assessing an appropriate level of notice Courts will look at the character of the employment, how much responsibility does this person have, the length of service, the age of the employee and the availability of similar employment.

The scope of notice can, however, be increased if the manner in which the termination took place was particularly odious. For example, in one case, having dismissed the employee the employer then proceeded to accuse the employee of dishonesty and incompetence. Neither accusation was true (or could not be proven in Court) and the Courts awarded $25,000 in aggravated damages. It would also have been open to the Judge to increase the severance pay.

Conclusion

Numerous issues arise in the context of the purchase and sale of a business. A dentist who sells his business is selling more than bricks and mortar. He is selling his good name, the trust of his patients and the loyalty of his staff. To ensure that the package is sold as a cohesive whole requires some planning before a contemplated sale and the assistance of qualified counsel to ensure that the agreement of sale entered into protects you not only before the sale, but for years after it is completed.

Symon Zucker is a partner in the law firm of Danson Zucker &Connelly. He practices exclusively in the area of commercial, family and health litigation.

Lisa A. Borsook is the Chairperson of the Commercial Leasing Practice Group and a member of the Business Law Practice Group at WeirFoulds LLP. She has extensive experience advising large and small privately-held corporations and individuals on various business matters, including mergers and acquisitions.