What every Dentist should know about buying a practice

You’ve just graduated from dental school and are ready to hit the ground running. There are several options available to you:
(1) You can apply for a job working for a dental company such as Western Dental;
(2) you can apply for a job at a preexisting dental office;
(3) you can start your own dental practice from ground up; and
(4) you can buy an already existing dental practice.

All the options mentioned above are viable options; however in this blog I will address the entrepreneurs out there who want to have their own business, but would rather buy a preexisting dental practice.

Why buy a pre-existing practice?

In a few words – instant access to patients and immediate cash flow. Unlike starting your own practice from scratch, buying a pre-existing practice gives you the advantage of an already existing client base, pre-existing billing system, a trained and established staff, which in turn translates to instant cash flow. Although the idea of buying a practice can seem daunting, with the proper guidance you can purchase your business and begin creating your future.

It’s no secret that in dental school you are taught to be a dentist, to acquire the skills necessary to pass the board exams and work with patients. However, dental schools rarely if ever educate their dentists on the skills necessary to own and operate a business. As a dentist who owns a business, you are not just a dental specialist; you are also a business owner. Learning the skills necessary to purchase, operate and manage a business is necessary for your success. Below I will discuss the key elements necessary to acquiring a practice.

Location is key

When buying a practice, you want to make sure that the location is conducive for you and your family. Is this where you want to plant your roots? Is this where you want your children to go to school? These questions may not be important to you now, but as your family grows it is inevitable that you will want to address these points.
 
Building and working with your team of professionals

There are things in your life that you “know you know”. There are things in your life you “know you don’t know”. Then there are things in your life that you “don’t know you don’t know”. This third area is what we call the blind spot and generally blind spots in business are where things can go wrong.  It is imperative that you work with professionals who are experienced with Dental Business Law and who can help you with the business purchase and transition. Following are some of the professionals that you should have on your team:

  1. Dental Business Attorney
    1. Creation of a new entity if necessary;
    2. Drafting business contracts;
    3. Drafting Re-treatment clause in your purchase agreement;
    4. Reviewing the current contracts to ensure full compliance;
    5. Drafting new agreement such as non compete.
  2. Dental CPA
    1. A CPA is necessary part of any dental practice to help you navigate the complicated financial issues. However, working with a CPA who specializes in dental practice is extremely important because they can help assist in analyzing the financial viability of the practice.
  3. Transition Consultant
    1. A transition consultant is more than just a “buyers agent”. Essentially a transition consultant will help in locating a practice, analyzing the practice and helping finalize the purchase of the practice.

Thorough Analysis of the practice

Once you have identified a practice that is for sale and one that you are interested in purchasing, the next step is conducting an initial analysis to determine the financial standing of your potential purchase.

Do the numbers make sense?
Based on the purchase price, and after making the necessary payments, would the cash flow allow for you to meet your financial needs?

If the answer to the above questions is yes, then the next step is to visit the practice and see firsthand how the business is run and whether the patient count matches what you have been told by the dentist. Interviewing and speaking with the seller on a few occasions will be necessary to get a true feel for the practice.

By this time you should have a good idea of what the seller is asking for, and you should have already been working with your transition consultant and CPA to calculate the numbers from the previous years. Conducting a thorough valuation should provide justification that the asking price is legitimate and can be supported by the financial numbers.
 
Making a Qualified Offer

Once your team has thoroughly reviewed the financials and is comfortable with the numbers, the next step is to make your offer. The offer should outline certain key sections such as:

  1. purchase price
  2. are you purchasing the real estate or leasing it
  3. are you purchasing the equipment, if so specify which ones you will purchase and which ones you will not;

This process can be scary for both the seller and buyer; therefore the more the parties can agree on earlier, the easier the transition to finalizing the sale.

Secure Financing

Once you have submitted your offer, the next step is to apply for financing based on your purchase offer. Your team of professionals will be able to put you in contact with banks that deal with dentists and have a clear understanding of what is necessary during the process.
In order to apply for a loan you will likely need most of these documents:

  1. Buyers financials for the last 2 years
  2. Buyers credit check
  3. Buyers dental license
  4. Business valuation
  5. Income tax returns of the practice you are purchasing
  6. Business plan
  7. List of assets in the business that you will be purchasing

Drafting the Purchase Agreement

The agreement will clearly state the details of the sale. It is important to thoroughly review the document with your attorney to ensure that all the terms of the agreement have been stated. Some of the items that the agreement should outline are:

  1. Purchase price and the allocation of purchase price for tax purposes;
  2. Clearly identifying the assets being purchased;
  3. Warranties of the Seller and Buyer;
  4. Information regarding patient records;
  5. Covenant not to compete;
  6. How to handle patients who are returning to have work re-done

Renegotiating Lease

Once you have agreed to terms with the seller and the documents are being drafted, it is important to review the lease as well. Commercial leases are very different than residential leases and usually require the consent of the landlord before a new tenant can take over. Seller should notify the landlord that the business is being sold and the new landlord should be aware of the date that new buyer expects to take over the lease and should sign the lease. If the lease is at the end of its term, you can use that as a way to possibly renegotiate more favorable lease terms.

Take ownership and let the patients know

Once the documents have been signed and you have finally taken over ownership, a transition letter should be sent to all patients informing them that you will be taking over the practice. Use this opportunity to put the patients at ease by letting them know of your qualifications and informing them that the transition will be smooth and that it will not affect their level of care.

You are now ready to start your new practice. As expected, buying a new practice can be daunting but know that you don’t have go through it by yourself. Experienced professionals are available to guide you step by step during this process to ensure a smooth and painless transition. At the Law Office of Kris Mukherji, we pride ourselves on working hand in hand with our clients and ensuring a successful future. Call us at 858-442-5747 to discuss your new practice. 

Estate Planning for Young Adults

I am in my mid 30’s and as far as I am concerned my life is just beginning. I have been married for two years and my wife and I have an amazing, playful, loving, caring baby boy. However, as I look towards and plan for my future I can’t help but think of people that I knew my age or younger who lost their lives this past year. They passed away either to tragic accident or an illness. Now more than ever I realize that life is precious and you have to live each day to its fullest.

Tragedies such as these make you think about the families of these individuals. Were these family members able to communicate with the doctors, did they have permission? Who was in charge of the medical decisions, or did they have proper instructions of what the decedent wanted? Who will take care of the medical bills or the funeral expenses? It doesn’t matter if you have limited assets; it is never too early to think about creating an Estate Plan to ensure that your loved ones are always protected. A Comprehensive Estate Plan includes several documents such as: (1) living trust, (2) pour over will; (3) advanced health care directives + HIPAA authorization; and (4) durable power of attorney. However, for the sake of this blog, I will focus primarily on the health care directives and durable power of attorney documents.

Advanced Health Care Directives

Via the AHCD documents you can name a person to act as your health care agent, at a time when you are unable to act on your own behalf. Your health care agents power only activates when you are deemed to be incapacitated and/or unable to make intelligent medical decisions on your behalf. You can provide instructions on what type of medical care you want. You can instruct your agent on end of life decisions and burial/cremation plans. By having adequate life insurance you can ensure that financial burdens such burial expenses and any other last minute costs are not incurred by your family. Additional documents such as the HIPAA authorization gives your physician permission to discuss your medical records with your health care agent.

Durable Power of Attorney

A durable power of attorney (dpa) is a legal document that allows an agent that you select to make financial decisions and manage your assets on your behalf. Similar to the AHCD, your agent’s power only activates when you are deemed to be incapacitated and therefore unable to make financial decisions on your behalf. The DPA is a powerful and helpful document because it allows your agent to pay your bills, pay your mortgage, and manage your properties, and even your business if you are unable to do so. Unfortunately your bills don’t stop even if you are in the hospital, . Mortgage banks still expect to be paid and your DPA agent can help take care of these bills.

Often a DPA agent and AHCD agent can be the same individual, but they don’t have to be. You can select a family member to make healthcare decisions on your behalf, and a different person to make financial decisions. Regardless of whom you pick, you retain the right to modify these documents. Once you regain capacity, your agent’s authority will end.

If you have questions regarding the Comprehensive Estate Plan or any of the individual elements discussed above, you can contact my office at 858.442.5747 or email me at Kris@kmsdlawoffice.com

What you should know before transferring property to your children

What is a Step Up in Basis? and Why should I consider transferring property via a Trust?

There are number of reasons to create a Trust. Some of them involve avoiding Probate; others may involve avoiding conflict between heirs. However, one that most people don’t think about is avoiding capital gains taxes.

I recently had a client contact me regarding a house that her father had given to her before he passed away. The father was ill and wanted to make sure his daughter received the property. He decided to create a deed and transfer the property via deed. The issue with this type of transfer is the likelihood of capital gains taxes once the daughter sells the property. The father bought the property in the 1970’s for $40,000. The house was now valued at $640.000 and had no mortgage on it. Since the father transferred the property before his death, it is assumed the daughter acquired the property at the “original basis” (original tax basis) of $40,000. When the daughter sells the property, she will owe capital gains taxes on the difference between what her father bought the property for in 1970’s and what she sells it for today. If she sells the property for $640,000, she will be taxed on her gain of $600,000 ($640,000 – $40,000). [Note: There is certain exclusions that might apply in a situation such as this, however that is something your accountant can better advise you on].

A simple way avoid a situation such as this would be to use a Living Trust. If the daughter had acquired the property after the father’s death, via a living trust, she would have inherited it with a “step up in basis”. What this means is that she would have inherited the property at the current value of $640,000 and not the original basis of $40,000. Therefore, when she sells the property for $640,000 she would owe nothing in capital gains, because she would have zero gains.

Speak to a qualified Estate Planning attorney or Tax Specialist to advise you on your individual scenario.

Important Things to Consider Before Starting a New Business

As an attorney with a practice focusing on Business Law and Estate Planning, I have met a fair share of individuals who have started businesses without doing the proper legwork and without knowing what they were getting themselves into.  Before long, problems with business partners, legal issues, and money issues throw the business into a downward spiral, ending what could have been a successful venture.  Eventually this leads them down the path of litigation.  It is my job to help my clients start off on the right foot, ensuring their success in whatever business venture they choose.  Below I have listed a few things that you should think about when starting a new business. 

1. Business Plan 

Before starting your business, it is essential to create a strong business plan.  A business plan could range from a few pages, to hundreds of pages.  Having a great business idea isn’t enough; you have to have good business plan to address your business concept, financial figures and your market.  It should outline the company’s vision, and should be structured so that it attracts investors, partners and even vendors.  People want to be in business with someone who has a plan on how to make their idea successful, not just someone with a good concept.

2. Naming your Entity

When creating an entity, one of the first things you have to do is select a name that is not currently owned or being used by another entity.  You can do a name search at the Secretary of State website.  The last thing that you want to deal with is a lawsuit demanding that you change the name once you have started your business.

3. What type of Entity do you need?

Notice the headline states what type of entity “do you need” and not what type of entity do you want.  Quite often I have individuals who come to their consultations to create a “Corporation”, without understanding what that means.  For example most people don’t know that a C Corp., has double taxation and might be a bit too much for most start-ups.  Knowing what type of entity is best for you is important because different entities have different advantages and disadvantages and are also taxed differently.  Although both the LLC and S Corp offer pass through taxation, and offer some form liability protection, there are some differences that could impact your choice.  Speak with a business attorney and a CPA to determine what is the best option for you.

4. Different documents that you will need

Depending on the type of entity you create; you will need to file the Articles of Incorporation or Organization with the Secretary of State.  You will also have to file the Statement of Information.  Depending on the structure of your company and the number of members/directors, you will need to draft Corporate Bylaws or an Operating Agreement, which will provide your business with a concrete framework on how to function.  Just as the Articles are important for the creation of the entity, the Bylaws and Operating Agreement are crucial for the internal governance of the entity.

Operating Agreement

    • An LLC’s Operating agreement is entered into between all of the members (owners) of the new LLC.  As the owners of the LLC the members have the ability to determine how they want their company to run.  The operating agreement can be as complex or as simple as the members want it to be.  Generally the operating agreement will set forth the initial members contributions, responsibilities, accounting details and can also include details about the tax issues related to the LLC.

Corporate Bylaws

    • Corporate Bylaws are similar to the Operating Agreement and determine how the Directors of a corporation will essentially run the company.  Under California Corporations Code Section 212, corporation’s bylaws must set forth(,) among other thing(s), the number of corporate directors and how the corporation can add or remove a director.  The Bylaws must also include: (1) time and place for shareholder and director meetings, (2) compensation and qualification for directors, (3) creation of financial statements to the shareholders.

5. Avoiding conflict

Be Proactive!!  This is your business.  I don’t know anyone who decides to start a business, intending and expecting it to fail.  If you are, then stop and go get a 9 to 5 job.  Maybe being self-employed is not for you. However, if you feel like you are ready to take the next step, do it right the first time.  A lot of people go into business with their friends and family members without having the proper contracts and agreements in place. STOP.  For the sake of your family and friendship, do the right thing, and make sure that you have all the necessary partnership and business agreements in place.  Doing so will avoid conflicts that could arise from running a business.  If you outline your individual roles and have a plan in place, you will save yourself a lot of money, a lot of trouble and guide your business down the path to success.

Good luck with your new business venture.

Estate Planning for New Parents and Parents-To-Be

About a year ago a friend called me and asked if I wanted to join him on a skydiving trip.  Two years ago I would have jumped at the opportunity, however this time there was something different.  Before I answered him, I started to think about my life insurance policy and if I had made my wife the beneficiary.  My life was different.  No longer was I a bachelor, who could drop everything on a whim and jump out of a plane without any concern.  I had a family to think about.  I had to make sure that if something were to happen to me, my wife would be protected.

To make things even more interesting, earlier this year we were overjoyed to find out that we were expecting our first child.  We were extremely happy, and immediately began researching the best doctors, hospitals, foods, and eventually started looking into the safest crib, the best stroller, car seats, the burp cloths, whether or not to get a diaper cloth warmer, what’s the best lotion and baby powder?  You get the idea.  However, even with everything going on in our lives, I knew that one of the most important things that I could do to protect my family was to create an Estate Plan or update a pre-existing one.

According to Forbes, half of Americans do not have the basic estate planning documents, including a will, financial power of attorney, medical power of attorney, needed to protect them and their assets if they became incapacitated.  Most people have the misconception that you have to be a Rockefeller or Warren Buffet to need an Estate Plan.  The fact of the matter is, regardless of the size of your estate, a well-documented Estate Plan can provide you the peace of mind by knowing that if something were to happen to you, your family will be protected.

Estate planning for new parents and parents-to-be may be a bit intimidating, so here are few simple things to set up to ensure that your loved ones are protected:

TRUSTS
There are a number of different Trusts, and different reasons to create a Trust.

  • You may want to create a Revocable Living Trust to avoid probate.  If an individual passes away and has assets over $150,000, in order for the heirs to receive the assets, they have to go through the probate courts.  Probate is an expensive and long process.  By creating a Revocable Living Trust, you eliminate the need for probate and ensure that your heirs receive the assets in a timely and inexpensive manner.
  • Another reason for creating a Trust is to determine how your assets would be distributed upon your death. By creating a Trust, parents can set up a plan to ensure that their minor children will receive their inheritance, but only when they are old enough to manage the money themselves. 

WILLS
A Will is a legal document with instructions on how to distribute an individual’s assets after death. Simply documenting your wishes on a piece of paper and stuffing it into your desk drawer, is not the best way to create a Will.  Regardless of the size of your estate, I suggest contacting an Estate Planning Attorney to have a valid Will drafted for you and your spouse.  NOTE: there are major differences between a Living Trust and a Will.  Simply having a Will does not avoid the Probate process.  A Living Trust is still the best option.  A complete Estate Plan package will generally include a Living Trust and a Will.

GUARDIAN FOR YOUR CHILDREN
My wife and I recently discussed the topic of guardianship and who would take care of our child, if something were to happen to us.  We decided that my in-laws who are local to San Diego would be the best option.  This is a topic that most parents discuss, but don’t always document.  Although courts will honor the parent’s choice of guardianship, this choice should be officially documented. Failure to document your guardianship selection will result in the court deciding who should take care of your children.  Once again a professionally drafted Estate Plan will cover the topic of guardianship.

ADVANCED HEALTH CARE DIRECTIVES AND FINANCIAL POWER OF ATTORNEY
Who would manage your finances if you were unable to do so?  What actions would be taken in regards to your health, if you were incapacitated, and unable to make those decisions?  These are the key elements that are addressed by a Power of Attorney and Health Care Directives.

The Power of Attorney deals with individuals’ financial needs.  Via a POA you elect a person who will make financial decisions on your behalf such as paying your bills, your mortgage etc.  Health Care Directives names an individual who you nominate to make medical decisions on your behalf.
Through the Advanced Health Care Directives, you can nominate an individual to make medical decisions on your behalf if you are deemed incapacitated.  You can state your wishes regarding medical treatments and end of life decisions.  Clarifying these choices helps take the burden away from family members.

LIFE INSURANCE
No one ever wants to think about death, but regardless of how we feel, there is no denying that parents should have adequate life insurance.  To put it simply, a life insurance policy provides money for the beneficiaries (survivors) upon the death of the insured.  My wife and I each own a life insurance policy.  Generally, an individual who has a Living Trust would name his Trust as the beneficiary of the life insurance policy.  This ensures that if something were to happen to the individual, the money from the life insurance policy would be disbursed to the beneficiaries based on the language of the Trust.

Regardless of which avenue you decide to go, there is no denying that as parents you always want to make sure that your children are protected.  As a soon to be father I have spent a lot of time test driving baby strollers, researching which car seats are the safest, and which feeding bottles and feeding bibs are the best.  At the end of the day, I just want to be the best father in the world and protect my child.  However, nothing will give you more comfort than knowing that by creating an Estate Plan or purchasing Life Insurance, you have prepared for the unknown and provided for your child’s future.

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