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Junior Party's Obligation to Purchase
Excerpt from
CONTRACT BLUEPRINT: GUIDE to a DENTAL TRANSITION and LEGAL AGREEMENT -
Revised October 2006
Note: This is an example only. Its accuracy and acceptability are not
guaranteed.
The objective of this provision is to obligate the junior dentist
(associate or buyer) to make the purchase of the full practice from the
senior dentist (owner or seller) either at a time the senior would opt to
sell or in the case of death or disability.
If the case is for death or disability, this is considered an involuntary
event (defined above). Disability here should include physical or mental
disabilities and incompetency. It should be stated that, for an
involuntary event of the original owner, the junior party would be
obligated to purchase the practice. This obligation should preferably
apply at any time following the effective (starting) date of the
agreement, but at the latest, following a trial period. To the owner, this
of course can be one of the most important issues of the transition and an
important example of why as much of the agreement as possible should be
executed at the onset of the arrangement.
Disability, as applying the parties of the agreement, is usually defined
as permanent disability. This is to allow for either party’s otherwise
recovery from a temporary disability within a reasonable period of time.
If an involuntary event should occur before a buy-in (before the junior,
as an associate, owns a portion of the practice), the obligation (to
purchase the practice) should apply to the junior party as an individual.
If the event occurred after the buy-in, and the practice were
incorporated, the obligation should apply to the junior party as a
corporation and as the remaining stockholder.
If the case is for something other than death or disability, this
obligation is considered a voluntary event (defined above). Here the
junior party should preferably also, at the owner’s option, be obligated
to purchase the practice. This event should include any probably reason
for which the senior might want out of the arrangement. This is in order
to allow a senior to complete his or her intended retirement plans and
sell the practice to the designated successor at that time.
Typically, a voluntary event would not be in effect until a date set for a
buy-in (of a portion of the practice). That is, even though it would be
preferable to a senior otherwise, there may not be such an obligation on
the junior until then. If there were no buy-in date set, either one could
be set for the voluntary event, it could be left open or notice could be
required for the purchase of this event. Such notice could vary according
to the planned length of the transition and the parties’ needs. The
wording of this notice could be as “an expeditious purchase” or it could
be up to say, two years in a long transition.
The dates, times or events under which such occurrences would take place
are often referred to as “triggers”.
In order to fund and insure that such a purchase would be carried out for
an involuntary event, it could be required that the junior obtain
insurance covering the death and perhaps disability of the senior (“cross
insurance”). This way, in the case of the senior’s death, the junior would
have the funds available to make the required purchase (that money would
then go to the senior’s estate).
Because of the following consequences for the failure of a junior to make
this purchase, however, such an insurance requirement is not considered
essential. Also, the expense to a junior of obtaining insurance,
especially in the case of an older, perhaps medically compromised senior,
could be considerable and this could be a deterrent to the junior from
entering into the arrangement in the first place. Furthermore, disability
insurance has become difficult to obtain in general and perhaps impossible
on a typical senior. A junior should not have a valid claim that he or she
did not have funds available for such a purchase because bank loans for
that would ordinarily be available.
The junior would therefore be obligated to complete the purchase of the
practice at any time for an involuntary event and perhaps only following a
set date for a voluntary event. Penalties for failure to fulfill this
obligation (for either event) should be reasonably severe and might state
that the junior party would then be considered in default and: (1) would
immediately discontinue practice on the premises, (2) would still be bound
to the restrictive covenant and non-solicitation requirement, (3) would be
required to pay the corporation, say 65% of his or her prior 12 months
patient collections, as liquidated damages, (4) (if after a buy-in) would
redeem any stock (5) would forfeit any commissions due and (6) any options
to move under the above payment for patient records provision would end.
The price for such a practice sale in either event would probably be as
defined in the below sell-out purchase price provision; however, it could
also be left to be determined by negotiation or even left silent in the
agreement.
(It should be noted that a voluntary event, prior option, buy-in and
sell-out are similar in that they all involve a purchase of all or a
portion of the practice by the junior. A voluntary event and prior option
involve the sale of the entire practice, a buy-in involves an initial
portion and a sell-out involves a final portion. A voluntary event and a
sell-out would usually occur after a buy-in point (at the senior’s
option), a prior option would occur if the junior opted to leave and a
buy-in would probably occur at a predetermined time.
Penalties for a junior’s failure to fulfill a voluntary event and sell-out
would apply because the junior, presumably being present in the practice,
would be expected to make that purchase. With a prior option (where a
junior opted to leave the practice following a set buy-in time), similar
penalties could also be used.
Concerning a buy-in, a junior could probably terminate before that, with
termination rights taking precedent over an obligation to complete a
buy-in. Even though penalties could perhaps be used here too, any such
penalties would probably also apply to a senior terminating a junior.
Furthermore, if there were an obligation for a junior to complete a
buy-in, there would probably also be an obligation for the senior to
complete that sale and those obligations would override termination right
for both parties. It is recommended therefore that termination rights
apply here for both parties rather than penalties for either for not
completing a buy-in. Also see Buy-in below.)
Copyright 2006 by Norman C. Culver, all rights reserved.
For more information, call 1.877.428.5837.
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