Dental Law Discussion w/ David Cohen – What You Need To Know!

Bill (00:03):

Hello everyone, this is Bill and I’m with KickStart Dental Marketing. Thank you for joining us on our consultant network. Today, we have David Cohen of Cohen Law Firm, who specializes in serving dentists and dentist specialists with various legal needs such as business formation, transition services, partnerships and sales. David serves dental practitioners nationwide and has also spoken to audiences across the country.

Bill (00:27):

So thank you for joining us on our show today, David. Welcome.

David Cohen (00:32):

Absolutely. Thanks for having me.

Bill (00:34):

Thank you. I know we’ve had some brief discussions. In getting a little bit more familiar with you and your practice, I quickly realized the critical role you play, or your services play, throughout a lifetime of a dental practice. From the initiating of the dental practice, events that happens throughout regarding partnerships and transitions and so on, all the way through to an exit, when they’re retiring, the selling of the practice, and so on and so forth.

Bill (01:04):

Before we start to cover some of these topics, why don’t you tell us a little bit about how you started and why you created a firm that specializes in the dental industry?

David Cohen (01:14):

Sure. I grew up in a dental family, my father’s a periodontist. I always grew up going to meetings and such. He actually, aside from being a periodontist, is the starter of a continuing education business, so I had grown up going to meetings with dentists, and I always loved interacting with them and they’ve become longtime friends.

David Cohen (01:37):

So when it came to graduating from law school, I wondered how I could get back to dentistry without being a dentist and how I could interact with them. So I began to work for the CEO of a firm who just happened to have many clients who were dentists, even though we weren’t doing dental related things. By doing that, I was able to see what their general needs were in their lives, and I took that and ran with it and decided to start my own law firm to focus on those needs. And those needs typically being business related, practice transition, partnerships, formations of businesses, employment situations, just to name a few.

David Cohen (02:24):

So in 2011, I started my own law firm that specialized in those areas in helping dentists and specialists. That’s where I stand today.

Bill (02:37):

That’s awesome. Great. Hey, I know that we’re talking and I know that you’re located primarily in Dallas. I did see a reference to the Seattle area. I know you have clients across the country. But, do you spend time in both locations?

David Cohen (02:51):

I do. You nailed it though, that my clients are all over the country. We do really most of our business on the phone and via email, so location hasn’t been an impediment so to speak. But yes, as far as physical locations are concerned, we have a location in Seattle, we have a location in Texas, and I do spend time in both places.

Bill (03:16):

That’s great. You know, I heard a conversation of yours a little while back, I think it was with Howard on Dental Town. You were talking about the three phases of a deal, and I’d really love that to be the conversation that we talk about today on our podcast. But, I’d like to break it up into two phases.

Bill (03:36):

The first being the startup or a new dentist, someone who is starting a new practice. And I guess, a lot of the focus on that section will be on phase one, which you call the beginning or the formation. And then, the second half of our time today, I want to talk about existing or established practices and how some of the events that happen to them regarding partnerships, or associates and stuff like that, can influence the parameters of those deals, phases one through three. And then, we’ll conclude today in letting everybody know how they can contact you best about your services. So how’s that sound?

David Cohen (04:15):

Sounds great.

Bill (04:17):

All right, so let’s begin with the dentists, they’re just starting out. There’s basically two options, when we remove the associate part. It’s really a startup, they have 300 to 500,000 in capital, whether it’s a loan or whatever. Or, their other option is acquisition, I can acquire another practice, take over a practice from somebody whose retiring, or so on and so forth.

Bill (04:43):

Let’s talk about that, from a startup standpoint. I noticed in looking at some of your information, you really focus on the forming of the practice but you also help them with possibly some of their real estate needs, and so on and so forth, equipment. How does that work?

David Cohen (04:59):

Yeah, that’s correct. When we work with clients who are doing startups, we work with them in a couple of capacities.

David Cohen (05:04):

Number one, as you mentioned, forming the appropriate business in the state that they’re in to own their practice with. Every state has different requirements and different options regarding what types of businesses doctors can have. So what we do is we give that client the options and we talk to them about what might be the best for their situation. And then, once we’ve done that there’s always a real estate component, whether that client is buying real estate or leasing. Whichever the case may be, we then help them review … Usually it’s a review, because the landlord or the seller is the one that drafts the documents. We help with the review of those documents.

Bill (05:52):

Okay, perfect. So then when you look at the other option, an acquisition, the terms are basically the same. You might be talking to a person who actually owns a building or they’re under an existing lease, and so on and so forth. There’s typically equipment involved.

Bill (06:08):

And then, I want you to touch base, too. I’m not as familiar, but I’ve heard terms in reference to how they’re purchasing a practice, whether it’s on a flat rate basis or a per chart basis. Maybe, if you could touch base on residual compensation, and some of the things that they might have to face in acquiring a new practice.

David Cohen (06:31):

Well, yeah. When a client is buying a practice, usually they’re buying assets and usually the assets that they buy consist of furniture, fixtures and equipment, supplies, goodwill. And sometimes, accounts receivable, it really depends on the situation in whether they’re buying those or not.

David Cohen (06:54):

Also, they acquire records. And every state has different requirements with regard of who owns records and if those can really be bought or acquired, or if just the rights are assigned. There are other things to consider, but as far as records are concerned, as you mentioned, from time to time I have doctors who are going to acquire somebody else’s patients and bring them over to their office, and not do the traditional method where they buy somebody else’s practice and actually establish themselves in that location.

Bill (07:30):

Gotcha.

David Cohen (07:30):

When that happens, when they’re only doing a transfer of records, there are different ways that I see clients operate as far as purchase price is concerned. I’ve seen routes where the CPAs come up with specific numbers and it’s just like any other sale, the buyer pays the purchase price in consideration for the interest in those records. And then, I’ve seen a hybrid model where a purchase price is paid, but it’s perhaps only a fraction of what maybe the total could be. And then, the remainder of the purchase price is based on a formula of per patient, that comes to actually be treated by the purchaser. And then, I’ve seen the other extreme where a purchaser buys records and the entire purchase price is based on how many patients actually come and visit that purchaser’s office for a treatment. For a dental practice, at least getting hygiene treatment and usually the baseline of that.

David Cohen (08:35):

So I’ve seen all three different ways. And, based on the situation, based on the practice, based on the numbers, that’s how it’s determined as to which route they go and what actual price they’re going to be putting on the records. The most difficult thing to do is records are not like equipment, where it’s difficult to come up with an exact number that a chart is worth. All the parties, the teams involved, particularly the financial people do the best that they can to come up with a fair and equitable number based upon that practice.

Bill (09:15):

Yeah, that makes total sense. You know, you can definitely see that it’s a revolving dynamic based on the circumstances of each deal. That’s very good.

Bill (09:24):

So moving from the startup or the acquisition, I want to start talking about this, I want to go into details more about what you call phase two and three in this segment, also. Although, phases two and three are also applicable to the startup and acquisition. We’ll cover them in this scenario a little bit better.

Bill (09:48):

When you talk about existing or established practices, here at KickStart Dental Marketing, we also specialize in helping dental practices grow. We just do it through digital marketing efforts for new patient acquisition so we talk to all of our clients about their growth strategies. In the majority of the cases, in addition to what we do for them, many of our clients have also handled growth in different capacities. As they’ve worked with us in the past, they’ll get new clients or their work threshold will increase to where they’re looking into adding an associate, and so on and so forth. We’ve also had clients who’ve added a strategic partner.

Bill (10:34):

One of my very first clients was a pediatric dentist here in Colorado, actually. She added an orthodontic specialist into her practice in making a more holistic solution for pediatric services.

Bill (10:52):

So when you’re doing that, now you have an existing practice, or two existing practices. I know that in the past, you’ve talked about adding an associate, a partner, a merger. This is where the buy-in option also comes into play. Let’s talk a little bit about how that dynamic now changes, from the beginning standpoint when it’s talking about a partnership from either a buy-in or a merger, or so on and so forth.

David Cohen (11:21):

Yeah. With a partnership, there’s really three ways into the deal. A merger, merging existing practices. Startup, which is partners starting up brand new together. And then, a purchase where one doctor buys into another doctor’s practice. The most common of those three is the purchase.

David Cohen (11:41):

There’s typically purchase documentation drafted to effectuate the buy-in. That purchase documentation typically consists of either a stock sale or an asset sale. Usually, it’s an asset sale. What that means is that the actual practice, the actually company that the seller owns is not being sold, but actually an interest in the assets that the seller owns is being sold. That’s not always the case. Sometimes, stock sales happen and purchasers buy interest in the actual company of the seller. The teams that are involved in the deal are often going to come together to find the best resolution.

David Cohen (12:30):

It’s typically better for a buyer to buy assets then to buy the stock. There’s tax reasons for that, and also buyers want to steer clear of all liabilities from prior. If they’re just buying assets, then they are not responsible for the liabilities of the seller’s corporation prior. The seller likes to sell stocks because they’re not worried about the buyer in protecting themselves for liabilities, they’re more worried about their taxes and they usually are better off from a tax standpoint if they sell stock instead of selling assets.

David Cohen (13:09):

Now, that’s the usual. That doesn’t mean that it’s that way in every single case. I always encourage people to consult their advisors to make sure that they are doing the right thing in their circumstance.

Bill (13:22):

Sure, sure. Now, before we move on to what you call phase two of the deal, what’s the most common thing that you’re seeing? I’ve seen studies and I’ve heard that there are more people opening dental practices, so starting in dentistry, than they are retiring. Are you seeing a lot more from a startup or acquisitional buy-in as independents, or are you seeing a lot more from partnership, association, merger aspect, in the dental field since you’ve been practicing over these years?

David Cohen (13:55):

I’m mostly seeing buy-ins. I certainly have clients that do startups and do mergers, mergers probably being the least common. It’s mostly that I see buy-ins happening.

David Cohen (14:08):

As far as more people buying than retiring is concerned, I don’t have data on that so I can’t confirm that with certainty. I will say that the numbers may be skewed a bit because some people may have existing practices that are looking to expand and buy multiple practices, and that might be considered acquisition. And if they buy three practices, then that may look like there’s three more acquisitions going than sales happening from a retiring doctor. But, I think that it wouldn’t surprise me if that was the case. You have a lot of people that are entrepreneurial now coming out of school that really want to own, they’re not interested in associating in practices, and so they’re hungry to own practices. I can see that being the case, where acquisitions might outweigh retirement.

Bill (15:04):

Sure. Yeah. We’ve had several clients who, like I had mentioned earlier, used one aspect or another of the situation as a growth strategy, whether it’s acquisition or partnership. Which is very interesting as we talk to phase two of the deal, when you have a dynamic like that. I think that you reference this as operational, or the time during the deal. You’ve established a deal and now you’re operating within this deal.

Bill (15:32):

What are the things that are evaluated during that? Costs, and so on and so forth.

David Cohen (15:40):

Yeah. When clients go to stage two, which is operations through the deal, they’re mainly going to focus on management decision making, and how the costs and the money are split. With regard to management decision making, it can be based on majority consent, which means that whoever owns more of the company makes the decisions. Or if there are multiple, more than two, I guess two would be multiple as well, but if there are more than two doctors in the practice, then majority would just consist of more than 50% voting on something to make it effective. And then, there are other practices where they base their management decision making based on unanimity.

David Cohen (16:24):

There are positives and negatives to both. If you base things on unanimity, then everybody has a say, which obviously everyone is happy with. But then, it could frustrate the progress of the practice because if not everyone can agree on something, then it doesn’t happen. On the flip end, majority consent typically makes things happen, makes things go. But then, often times you have a party who doesn’t agree with what is happening, and how material that decision is could obviously impact how upset somebody might be that it didn’t go their way. Obviously, if it’s a very material decision they may be very unhappy. If it’s something that’s not a big deal, then they may be less unhappy, so it varies. That’s how I see management decisions being made.

David Cohen (17:15):

And then, when we move on to how costs and the money are split, that’s where I always recommend that clients bring a team in on their deal, one of the teammates is a CPA or financial based person who knows numbers, and it’s always great to confer with them based upon the practice, what the best scenario as far as splitting the money and the costs are concerned. Typically, I see practices that are purchased or owned as investments, where the doctors aren’t actually practicing in those locations. They usually just split the money and the costs based on percentage ownership.

David Cohen (17:49):

In practices where the doctors are actually working, I seldomly see the doctors split the money and the costs based on ownership. The reason why is because you could then have a doctor that’s producing 70% of the work and one’s producing 30, and then getting paid equally. And then, that causes a problem because the 70% producer is not happy because they’re getting less than they’re producing. And the lower producer is obviously happy because they’re getting more than they’re producing, and they’re less incentivized to work hard because why work harder when you’re getting more anyway for doing less. Usually, I see doctors split money based on production, and even split costs based on production.

David Cohen (18:34):

But, I often see hybrid models too, where there maybe carve out of a certain amount of money, or a profit pool so to speak, that is known money that comes in based on percentage ownership, every say month, where the parties know exactly what they’re getting, they know they’ll have something to pay their expenses. Buyer and younger associates that are buying in can service their debt. But then, the majority is based on production.

David Cohen (19:01):

That’s usually what I see. Again, this can be done in any way and the parties have to do what’s best for them, under their circumstances. But, I’m just mainly speaking on what I typically see.

Bill (19:11):

Gotcha. Yeah, it could be very, very complex. You know, as with any deal, there’s always the exit. Whether it’s retirement, or a partner retires and some of the complexities of one person continuing in practice, one person leaving. I’ve heard circumstances regarding non-compete in those situations.

Bill (19:32):

Why don’t you talk to us a little bit about phase three, the exiting of the deal so to speak?

David Cohen (19:38):

Sure, I’d be happy to. Exiting a deal consists of five things. Retirement, death, disability, disagreement and default.

David Cohen (19:47):

And just going through those, starting with default. Default would be something that a member of the company conducts an action or fails to take action on something that could materially adversely affect the goodwill of the practice. That’s usually what it’s based on. So for instance, if a party loses their license, or if they commit a felony or something like that, those are typically reasons for kicking someone out of a company, and they’re called default. Usually, the non-defaulting partners have the option to buy that person out, usually at a discount, because the goodwill has been affected if there is a default, which also holds all the parties accountable.

Bill (20:33):

Sure.

David Cohen (20:34):

Moving on to disagreement. Disagreement is probably the toughest thing to govern in these deals because you can map it out however you want if the parties don’t get along, but by the time the parties don’t get along, whatever plan that was implemented for the beginning may not be realistic or reasonable anymore, or fair to everyone, which is the key. One example would be that if it’s a multi-location practice and the parties decide that, if they break up, they’re going to split the parties among all the different locations. That might be fair on day one, but on year five, maybe it’s not an equitable deal anymore.

David Cohen (21:16):

I typically encourage parties to come to the table and try to work out an equitable resolution. Of course, their partnership agreement will have provisions that govern what happens in a dispute, and usually a dispute resolution provision that says the parties will go to mediation first, and then arbitration, et cetera. Or, maybe it’ll just say that you go to arbitration. Whatever the case may be, they’ll typically have that implemented. The issue is all of the things I just mentioned usually cost time, money and headaches. And usually the parties, even when things are most contentious, are more prone to want to come to the table and work something out before they go that route because they do save time, money and headache.

David Cohen (21:59):

Moving on to death. Death is typically governed by life insurance. Usually, the parties get cross insurance policies on the lives of one another. In the event somebody dies, the estate of the descendant then is paid the proceeds of the policies from the other partners in exchange for the interest in the practice. That way, the estate doesn’t own the practice anymore, which in some states they can own it for say up to a year, which nobody really wants. And that way, the interest goes back to the other partners and the estate gets paid out, which is usually what they want, and they go their separate ways.

David Cohen (22:35):

Why is this effective? Because death is often times sudden, or unexpected, and when that happens it’s difficult to come up with the financing to buy a partner out. But if they’re just paying premiums on a policy, they can just take the proceeds from the premiums and buy out the estate, and just continue to move forward.

David Cohen (22:57):

Moving on to retirement, or just transferring interest, usually the parties conduct some sort of plan to have a notice, where one party has to give X amount of notice to the other party that they’re going to retire. This gives the other party the time to buy them out, or to find a replacement partner, et cetera. That notice is really key, and then the parties come up with a valuation methodology as to how a retiring doctor’s going to be bought out of the practice.

David Cohen (23:31):

I usually see the same methodology used for disability. If a party gets disabled, they usually get bought out under the same methodology as retirement. You may ask well, why don’t they just do a disability policy like they do for life insurance? The reason why is because it’s often cost prohibitive. It usually costs so much to pay premiums on a disability policy that it doesn’t make sense to do so. But, the doctor can obviously always look into that and see if that is a possibility.

David Cohen (24:02):

In a nutshell, that’s really the five ways out of the deal and how I see them usually administered. Again, as I’ve continued to say, the parties have the liberty to do and handle these areas however they want and whatever works best for them, and they don’t have to do the norm or what I typically see. But, one thing that I do recommend is that they govern each of these areas in their contract. It’s really important to A, have a contract and B, govern the key areas in their contract.

Bill (24:32):

Sure. Yeah, it’s very interesting. Hopefully, regarding all of the different opportunities that you just discussed there in phase three or exit, hopefully retirement is the situation that those people listening today will be pursuing.

Bill (24:49):

You know David, thank you so much for spending some time with us. I really wanted to cover the three phases of a deal, I think that’s going to be very good for those listening on the podcast. I know that you are known throughout the industry as the trusted dental law professional, so for those of you listening, if you have any questions or need any legal advice at all, definitely contact David. He can be found at cohenlawfirmpllc.com, his number and email are there.

Bill (25:21):

I know typically as a courtesy, you’ll chat with people regarding their circumstance and give them guidance on how to pursue different circumstances that they may be facing with their practice.

David Cohen (25:34):

Yeah, that’s right. I’d love to chat with people. And if they have any questions about their certain situations or want to just talk about their certain situations, always happy as a courtesy to talk about their situation and see if it’s something that I’m able to help with or not.

Bill (25:51):

[inaudible 00:25:51]. Well thanks again, David, for joining us on the show today. It’s been a pleasure having you, and thanks for sharing such great information. I know that a lot of our listeners will find it very useful. So you have a wonderful day, and we’ll be talking to you soon.

David Cohen (26:03):

Thanks so much for having me. Take care.