How to Structure Earn-Out Agreements in Dental Practice Sales

When selling or buying a dental practice, one common tool used to bridge valuation gaps is the earn-out agreement. This arrangement allows the seller to receive additional compensation after the sale based on the practice’s future performance. While earn-outs can be mutually beneficial, they are legally complex and require careful structuring to avoid disputes—making the involvement of a business law attorney essential.

An earn-out agreement typically outlines performance metrics, such as revenue targets, patient retention, or net profits, that must be met over a defined period. The buyer agrees to pay additional sums to the seller if these benchmarks are achieved. While this provides the seller with an incentive to support the transition, it also introduces the risk of disagreement over how those metrics are measured. A well-drafted agreement will clearly define these terms and include protections for both parties.

Legal challenges often arise from vague language or poorly defined responsibilities. For instance, if the buyer makes operational changes that affect revenue, the seller may claim those changes unfairly impacted their earn-out. To mitigate this, the agreement should spell out what control—if any—the seller retains post-closing and what actions the buyer may or may not take during the earn-out period. An attorney ensures these clauses are enforceable and reduce the risk of litigation.

It’s also important to address accounting methods and audit rights. How will the performance metrics be calculated? Will GAAP standards be used? Who verifies the numbers? These are critical questions that must be answered in the contract. A seasoned attorney can help structure the agreement to include clear reporting procedures and third-party audit options, ensuring transparency and accountability.

In conclusion, earn-out agreements can be powerful tools in dental practice sales, but only if they are properly structured. Given the potential for disputes, ambiguity, or unexpected outcomes, it’s crucial to work with a Florida business law attorney who understands the dental industry. Legal guidance ensures your agreement is fair, enforceable, and tailored to protect your financial and professional interests during and after the sale.