Playing both sides: It’s never wise to use one attorney for both sides of a practice sale

Attorneys are needed to handle dental practice sales and transitions. However, there is no advantage to having the same attorney represent both sides, including saving money. So hire your own attorney!

Most dentists don’t have the need to interact with attorneys on a regular basis. They probably had an attorney draw up their corporation or LLC, or they might have had an attorney draft an associate agreement or non-compete when they hired a new dentist. They might reach out for help if they have some employment issues with staff, and they’ll probably need to talk to an attorney when it’s time to sell their practice.

Sometimes dentists, in an effort to save some money during a practice sale, choose to have a single attorney handle both sides of the transaction. This seems like a sensible option, particularly when a dentist sees ads in dental publications from practice brokers proclaiming they handle both sides of a practice sale. Why pay two people when you can pay one?

A good reason is that a purchaser and a seller of a dental practice have many interests that are fundamentally unfavorable to one another. When I say unfavorable I don’t mean that the parties are hostile. It’s just that some aspects of a sales transaction are always going to be zero sum, namely, when one party gains the other one loses.

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For example, taxes. In an asset sale, one of the steps that the seller and purchaser need to agree on is the allocation of the purchase price among assets. That’s because they’ll both need to file Form 8594 with the IRS listing the allocation. Here’s the problem: the buyer will want to allocate a greater share to tangible assets, which he or she can either depreciate over five to seven years, or take a Section179 expense in the year of purchase. The seller, on the other hand, will want to allocate a greater portion of the purchase price to intangibles such as goodwill, which are taxed at more favorable capital gains rates.(1) This creates a conflict. How does one fairly represent both sides of a transaction with fundamentally adverse interests?

What about covenants not to compete? When you buy a practice, you don’t want the seller to hang up a shingle across the street and continue to practice, taking all of your recently acquired patients with him. A purchase agreement should therefore include a restrictive covenant prohibiting the seller from competing with the buyer after the sale.

In order to be enforceable, non-competes must be “reasonable” in time and geographic scope, but there’s a fair amount of space in the realm of reasonable. Should the non-compete be narrow or broad? Should it be aggressive or generous? What’s good for one party will necessarily be bad for the other party; how do you balance those interests? What’s more, how should you determine the reasonable amount of monetary penalties for violating the non-compete?

Fundamentally adverse relationships in some aspects of practice sales are inescapable. This will be true even when the two dentists in the transaction get along well, have worked together for years, and want only the best for their patients. When two parties’ interests are fundamentally adverse, there’s no way for a single party to fairly represent both sides of the transaction. Because of this, for an attorney it is considered a violation of the ethical rules that govern the legal profession to simultaneously represent clients whose interests are fundamentally adverse to each other, even if both parties are willing to consent.

The American Bar Association’s Rules of Professional Conduct, which govern the ethics and professional responsibilities of attorneys,(2) state, “A lawyer may not represent multiple parties to a negotiation whose interests are fundamentally antagonistic to each other.”(3) If you have an attorney who is offering to handle both sides of a practice sale, the person is either unfamiliar with the Rules of Professional Conduct, which is bad, or the person is familiar with the rules and does not mind violating them, which is worse.

One last point: if you should never use a single attorney for both sides of a transaction, why would you use a single accountant or practice broker? Those unavoidable conflicts don’t go away just because your advisor doesn’t have a law degree.

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Allen Reece regularly counsels dentists in a variety of personal and professional matters, including the formation of corporations and limited liability companies, shareholder and buy-sell agreements, practice valuation and purchase agreements for practice acquisitions and sales, real estate acquisitions and sales and lease agreements, employment documents, non-compete/nondisclosure agreements, asset protection planning, estate planning, and other significant business transactions that dentists face during their career. Mr. Reece has a JD from the University of Michigan Law School and is an attorney with Frank & Kraft P.C.

NOTES
1. Except for covenants not to compete, which are taxed as ordinary income.
2. All 50 states plus the District of Columbia and the Virgin Islands have adopted the ABA Model Rules of Professional Conduct, the last being Maine in 2009.
3. See Comment 28 to Rule 1.7 Conflict Of Interest: Current Clients (2016). In American Bar Association, Center for Professional Responsibility, Model Rules of Professional Conduct.