Purchase and Sale - Tenth Post

AF: Having dealt with the value of the practice, it is important to keep in mind that the purchase price will be based not only of the value of the practice but additional factors such as the timing of the practice in terms of whether the vendor requires an expeditious completion of the transaction; how the practice is to be financed; and what is included in the purchase price. As in the discussions which have taken place concerning associateships, many of the issues involved in a Sale/Purchase of a chiropractic practice are interwoven as part of a big picture. It would be foolhardy and quite impractical to deal with any particular issues such as billings or a purchase price without looking at other issues such as staff turnover, what assets are included or the patient base. As such, the topic of which have been dealt with previously may well be raised again in a different context or as indicated, in the "big picture."

What should be included in the transfer of a practice, and just as importantly what constraints do the parties have in dealing with assets of the practice?

It would appear to be trite to indicate that a vendor can only sell what a vendor owns. However that is not necessarily the rule that governs a commercial transaction. The better principle to work by is that a "vendor has the right to transfer any interest which he, she or it may have in an asset subject to any constraints which may be placed on that transfer." For example, with respect to a computer that a doctor may have purchased, he or she may sell the computer to a purchaser, if there is no lien placed upon the equipment; if the equipment is actually owned and not leased; and if the doctor is the owner as compared to a management company. In any event, even if the computer can be sold, it is surely also trite to indicate that the computer software cannot be sold B it can only be assigned pursuant to the software agreement which generally exists and governs the acquisition of the software by a person purchasing the software from a retail vendor.

If equipment is the subject matter of a lien by a lender such as a financial institution, it is imperative that the vendors ensure that the lien can be lifted prior to the completion of the transaction or by using the proceeds obtained at the closing of the transaction. Vendors obligate themselves to discharge such liens pursuant to the Agreement of Purchase and Sale. This principle likewise applies to equipment that is leased. If the purchaser is to assume the lease then the Vendor should ensure that the lease agreement can be transferred to the purchaser and at what cost prior to signing any sale agreement. The leasing company may require that the vendor purchase the equipment or "pay off" the lease prior to any transfer of the equipment.

If the equipment is owned by a management company then it is imperative that the Vendors ensure that the management company is a party to the sale agreement. A vendor would not want to be surprised, at closing, by a management company that he or she may not control which is unwilling to transfer the assets.

The Purchaser should review the practice location of the Vendor very carefully to ascertain what is to be included at the time of the closing of the transaction. The list of assets being transferred would include a comprehensive list of each assets and might include the following: receptionist desk, chair, reception shares, end table, pictures, filing cabinets, telephone system, radio, television, refrigerator, fax machine, photocopier, computer, assignment of computer software, exterior sign box and sign, treatment tables, view box, x-ray, developer, office desk, chairs, skeleton, fire extinguisher, smoke detector, plants. This list is by no means comprehensive. A purchaser would be well served by visiting the location at least twice to ensure that a comprehensive list of assets to be included in the purchase agreement was actually created.

With respect to assets such as an x-ray machine, photocopier, computer, etc., a purchaser should have a provision inserted in the Offer whereby the Vendor agrees that the assets will be in good working order on closing. While the assets should be in the same condition which existed at the time that the Offer was presented (with or without a clause requiring them to be in good working order) it is not uncommon for a purchaser to fail to examine and try all equipment prior to the Offer being signed. This is a clear example of when the principle "let the buyer beware" applies.

In addition to the assets previously mentioned, a purchaser should have specific regard to the following assets:

1. Patient Files: The files should be transferred to the purchaser in their entirety. This should include all old files (which may be used to reactivate a relationship between the doctor and a patient) in the possession of the vendor together with all x-rays relating to the files. The vendor should require that the purchaser maintain the records for at least 7 years after the completion of the transaction and in addition, the vendor should ensure that he or she has reasonable access to the files or a copy of them if required by law (this might include matters such as a malpractice claim; billing dispute; a licensing board issue; or an income tax audit).

2. Financial Records: In so far as the Purchaser might require financial records for the ongoing care of patients or the maintaining of the practice, the purchaser should obtain such financial records. Again, the vendor should ensure that he or she has access to the records as may be reasonably required and that such records are not destroyed except in accordance with the sale agreement.

3. Supplies: Any supplies which are customarily maintained at the practice should be included in the purchase price. The vendor should agree to maintain the level of supplies in its usual quantity.

4. Inventory: If the vendor maintains products such as orthotics, vitamins or back supports, the purchaser will want to ensure that they are being acquired at the cost that the vendor paid, and secondly, that the inventory is in merchantable condition, that is, that each of the products is saleable, ie. the packaging is in a proper condition and/or the product has not reached or is about to reach its expiry date. In addition, the purchaser will want to ensure that the level of the inventory of the vendor is maintained in its usual capacity.

5. The computer software will require, as indicated, an assignment of the software licence agreements. If such software is created by a particular software producer, the licence agreements should be reviewed carefully to determine whether there are any restrictions affecting the transfer of the software in addition to the cost associated with the transfer.

The Vendor should ensure that any assets which are to be transferred to the Purchaser are subject to a Bill of Sale being provided to the purchaser. If assets are leased then the terms and conditions of the leasing arrangements should be reviewed carefully and dealt with in accordance with the lease and the purchase agreements. It is most important that the Vendor review any appropriate documentation relating to the ownership and leasing of equipment prior to executing an agreement relating to the sale of a practice. Being surprised after signing an agreement can be an expensive enterprise.

From the position of the Purchaser the assets which are specified in the Agreement of Purchase and Sale must be in existence at the time of closing, in good working order and free and clear of all encumbrances. A Purchaser who has paid a significant amount of money for a practice will be loath to have to expend any further funds to equip the office, whether that involves the replacement or addition of assets. The fact that a Vendor has an extensive amount of assets is of little concern to a Purchaser who is generally concerned only with the amount of the purchase price and the ability to maintain the practice in its previous state after the completion of the transaction.