|From the Eyes of the Selling Doctor
Sometimes a Selling Doctor can be in such a hurry to sell his practice that plain common sense is
overlooked. A San Diego Superior Court case in which the names of the Plaintiff and Defendant were
sealed tells a story you wouldn’t want to happen to you. (San Diego Superior Court, Hon. Sheridan E.
Reed, Dept. 40, June 28, 1996, case facts and award reported, case I.D. confidential). I’ll substitute Mr.
Smith and Mr. Jones for the unknown party names.
Mr. Smith bought a small business from Mr. Jones on September 20, 1991. Shortly after Mr. Smith took
possession of the business, he found that the business was not producing as much money as Mr. Jones
had represented to him in the pre-sale negotiations. The patrons were not as numerous as Mr. Smith had
been led to believe, nor were the patrons spending as much at the business as Mr. Jones had said.
Fortunately for Mr. Smith, Mr. Jones had personally ‘carried’ the majority of the promissory note on the
business. So, after just 7 payments, Mr. Smith stopped his payments to Mr. Jones. At the time of
discontinuing the payments, $109,000 was still owed to Mr. Jones. Mr. Jones sued on a breach of
contract theory in that he was not receiving his payments and Mr. Smith cross complained of fraud and
negligent misrepresentation tort theories. The Honorable Judge Reed in San Diego Superior Court sent
the case to arbitration where the arbitrator found for Mr. Jones in the amount of $18,138.00 on the fraud
and negligent misrepresentation theories.
This case was decided contrary to the normal ‘rule’ of sales of small businesses. Rarely will a court
interfere with the terms or conditions of a contract between two professionals. The court usually believes
that two professionals have the education, resources, and access to others to investigate and advise
them as to the benefits of the bargain.
However, this case illustrates the importance of a Seller obtaining secure financing for his business upon
sale. Many practice transition consultants and brokers would disagree with me when I assert that a Seller
should always obtain adequate security for their loan when carrying the promissory note, or be willing to
walk away from the money. But, then, I’m a lawyer and went to school to learn to be pessimistic, get paid
to keep people out of trouble, and make the same amount of money on a sale regardless of the terms
and conditions of that sale.
I know, I know, many say it is the only way a new young dentist can buy a practice is if an older retiring
doctor will carry the paper. And, the retiring dentist brags about the interest he will receive, the tax
benefits of periodic payments, the lack of significant transaction costs, as well as what a good deed he
is doing. The problem comes when the deal goes sour.
Why not plan to protect your interests up front and cover all your bases instead of just hoping everything
will come out O.K.? Consider these steps:
1. Insist on a credit check from a major credit reporting firm before you even think about carrying the
paper. The past is, and always has been, the best predictor of the future.
2. After you receive evidence of favorable credit, go ahead and consider carrying the paper if you want.
BUT - Secure that paper on something in addition to the practice! If your buyer is a new graduate with the
incredible debt that means nowadays, find someone, somewhere, in the family that owns a house you
can put a second mortgage on. Even if the equity in the house is not worth the entire amount of your loan,
you at least have some security and a great deal of family concern about the success of the practice. If
your Buyer is unwilling to do this, I’d take a deep breath, pick up your drill and keep drilling a while longer
as you look for another Buyer.
3. Do not be shy about demanding a full buy out of your practice, if that is what you want. Remember, a
bird in the hand may be worth more than one in the bush despite the tax consequences. There are many
sources of practice purchase money, some of which do not even require a down payment. Your
retirement may be at stake and you certainly know by now that no one will take care of you if you don’t
take care of yourself. Should your Buyers not be able to obtain any financing - take this as a RED FLAG.
Banks and financial institutions are in the lending business. You are not and probably never have been.
(Check your past due accounts receivable to be sure of this fact if you have any doubts.) If lending
institutions won’t finance your Buyer, you probably shouldn’t either.
4. No matter how you set up the financing, be sure your sales contract contains a take-over and/or buy-
back clause. In the worst possible scenario that you have to take over your practice again, your contract
must specify exactly what happens next. Consider the dilemma when the Buyer defaults after 4 or 5
years. Who owns the practice? What is the practice worth and to whom?
5. If, despite these warnings to the contrary, you decide to chance it and finance your practice unsecured
- STAY IN YOUR PRACTICE. Work a couple of half days a week. Visit frequently. Stay in touch with your
patients and your employees. Heaven forbid, they may be yours again. This is not the time to take a 6
month cruise around the world. Practice golf at your local course until you have your money.
© Bette Robin, DDS, JD 3/97
|Bette Robin 877-DrRobin
Dentist, Attorney, Real Estate Broker 877-377-6246
17482 Irvine Blvd., Ste. E
Tustin, CA 92780
SELECT PRACTICE SERVICES, INC.