Anatomy Of The Asset Purchase Agreement Part 3: Work In Progress

In our previous posts in this series, we looked at the allocation of the purchase price and the treatment of accounts receivable.  In this post, we examine how to handle work in progress (or work in process, depending on the verbiage your attorney uses).  These are patients whose treatment requires several visits and are most commonly an issue in dental and elective surgery specialties such as orthodontic, periodontic and cosmetic practices.

In many cases, the patients have paid up front for the work.  Whether you are buying or selling a practice, you must account for these patients and the money they have already paid.  You have several options to accomplish this, depending on the circumstances of each case.

Allow The Selling Doctor To Complete The Work At His Expense

If you are buying a practice and the selling doctor is going to remain as an associate for a while to assist with the transition of the practice patients and goodwill, this is usually the best option.  The selling doctor will just continue along with the treatment plan.  Since associate doctors are usually paid on a percentage of production or collections, you will not have to pay the selling doctor any more for the work (since he has already collected the upfront fee), and you can maintain the continuity of care for, and relationship with, the patient.

However, if the selling doctor is not staying on as an associate, this approach can be more complicated.  You would have to make operatory and staff time available for the doctor and work with both the selling doctor’s and the patient’s schedule to ensure timely and appropriate care.  The selling doctor is also using your operatory and staff to complete the work, which diverts resources away from treating your patients.  Therefore, in these circumstances, the asset purchase agreement usually includes provisions requiring the selling doctor to provide notice and a per diem or per hour fee for the use of the space, equipment and staff.

Have The Buying Doctor Complete The Work And Pro-Rate The Fee

If you are buying a practice and want to have a clean break with the seller, or if you are selling the practice because you are retiring or have a disability, this option is usually necessary.  Under these circumstances, the parties will determine how much work has been done on each patient, versus how much work they anticipate it will take to finish the case.  Then, the parties will usually adjust the purchase price in the asset purchase agreement to credit the buyer for the work he will have to do on patients who have prepaid for the services.

The downsides to this approach are that, depending on the number of pre-paid patients, it can be very time-consuming to review each patient’s chart, project out the amount of work that remains to be done, and reduce that to a percentage.  Also, sometimes contingencies arise during treatment that the parties do not know about, or planned-for contingencies do not happen.  Therefore, if you are buying a practice, you may end up having to do more work than you anticipated for the same amount of money.  If you are the seller, you may end up giving up more of the fee than you needed to.

Finally, although sometimes unavoidable, this approach disrupts the continuity of the patient’s care.  Not only is changing doctors mid-treatment often disconcerting for patients, but each doctor brings a different perspective to his practice.  If you change that perspective mid-treatment, it can result in a different approach that may require you to go back and re-do work that was already done satisfactorily by the first doctor in order to try a different approach.

Bill The Selling Doctor Directly For The Work The Buying Doctor Does

Another approach is for the selling doctor would retain the prepaid fee, and then the buying doctor would bill the selling doctor for the work done on the patient.  Although this is logistically simpler than pro-rating the fee, it can lead to post-closing disputes about the necessity of the treatment and the amount of the bill.  This is particularly true if you have a different approach to the case than the other doctor and change aspects of the treatment plan during the course of the treatment.

Therefore, this approach works best when you have worked with the other doctor for an extended period of time, trust the doctor, and share the doctor’s treatment philosophy.  This approach is most commonly and successfully seen when a long-time associate purchases the practice in which he or she has worked from the selling doctor.

Have The Selling Doctor Treat The Patient In His New Practice

Under this approach, the selling doctor simply continues to treat the patient in his new practice.  This is probably the least frequently seen approach, particularly because of the importance of non-compete and non-solicitation provisions in asset purchase agreements.  These provisions will be discussed in more detail in a future blog post, but they are vital to the asset purchase agreement.  When you are buying or selling a dental practice, the practice’s patients are typically one of the most, if not the most, important asset in the transaction.  Allowing the selling doctor to poach the practice’s patients can cause a sharp drop in a practice’s profitability.

However, in certain circumstances, particularly when the number of work in progress cases is relatively few and there is little work left to be done, this can be a simple and effective way to account for those cases.  A carve-out for the work in progress patients will be made to the non-solicitation and non-compete provisions, allowing the selling doctor to continue treating the patient or patients in the new location.

Of course, this can cause considerable inconvenience to the patient.  Due to the non-compete, the selling doctor will typically need to relocate a new practice 5, 10 or more miles away from the former practice.  Therefore, with this approach, it is important to notify the patients of the change in treatment locations and obtain their consent to finishing the treatment elsewhere.

Every practice sale is unique, and these are just some of the issues that arise as you and the other party negotiate the best way to structure the asset purchase agreement and care for your patients.  Whether you are buying or selling a practice, you should consult with an experienced advisor to guide you through how best to structure the transaction.