Abandoned Dental Practice Issue

I was approached by a distant relative to buy his practice. He owns two practices one that has been established for a long time and is doing great and the other not so much, and that is the one that I am getting.

So here is the story:

He bought the practice in 2004 with his associate 75/25, the partnership did not work out so they sold it in 2006. The new dentist took over and then he abandoned the practice in 2009. The landlord then approached my relative for 3 months of lease delinquency which he paid including penalties. He then changed the practice name and created a new business entity for the practice, remodeled the practice and wants to get rid of it.

It sounds like your relative is still on a lease and therefore, has fixed the place up in an effort to get off the lease by "selling" something. Not quite sure what it is he actually "owns" to sell as the previous dentist who walked away "owned" the F&E. I suspect the landlord now owns it, unless part of the deal your relative worked out was to acquire the F&E in exchange for stepping back in. I'm also assuming your relative has already "profited" from the 2006 sale, correct?

How many more years left on the lease and what's the monthly payment?


He is selling it to me as leasehold improvements but all the patients will stay, he is not taking any.

How many patients were there before the prior owner walked? How many are there now? You don't have to answer that, in my opinion it really doesn't matter. What you're buying is the opportunity to start from scratch without the 120 day wait to build-out and furnish. Any patients that comeback are simply icing on the cake. How are the demographics for the area? Maybe that's why this practice hasn't been successful, maybe bad location, bad (read no growth) area? This gets to Jason’s point about your due diligence effort being MUCH more intense than other deals.

He also cannot sell the patients because he cannot provide previous tax returns to show for practice profitability.

...and because he really doesn't "own" them, does he?

Here is my question:


What should I be worried about?

I’d be concerned about the demographics of the area. Why hasn't this location been successful? What if the owner that walked shows up again?

Is it possible to transfer ownership of practice with an absentee owner?

If the "owner" isn't around, how can they transfer it to you? You're (or any buyer is) simply picking up the pieces. That's why I'd be looking at this as a scratch start type issue and I'd be approaching it that way.

Can the old owner come back in 5 years or so and say this is my practice and I am screwed at that point?

I doubt it. Besides, I'd be less concerned about 5 yrs. What if the previous owner comes back to town in one year? They don’t have to "re-claim" this location. All they have to do is advertise that they're back in town, as any new dentist could. I'd be thinking about how that might impact my start-up. It gets back to the demographics of the area and the location of this particular practice.

Please help if anyone was in a similar situation?

Our friend Jason Patrick Wood:

The bad news is that to properly protect yourself, you are going to have to spend a lot more than normal on due diligence. The reason: you are going to need to review all of the past documents between your relative and the associate you need to inquire into liens since there is a very, very good chance that these liens will not be satisfied by the purchase price if they are there.

This needs to be treated as a dental practice purchase, regardless of what he is intending on selling to you.

Tim Lott asks:

Jason,


While I agree that the due diligence needs to be approached as though they're buying a practice, are all the other patient issues you mentioned really relevant if all they're doing is agreeing to occupy the space, signing a lease, and buying out the relative of their lease obligation?


Jason Patrick Wood responds:

Protecting yourself from the "old owner" is going to be the hardest and most time consuming part, and without knowing more of that previous relationship it may be easy or extremely difficult to get past. Let us know more if you can.

Tim Lott replies:

Yes. The previous owner is a complete unknown at the moment and can really mess everything up, especially if they re-enter the picture sooner rather than later.



This first appeared on Dentaltown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

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