The team at HRC Law have been helping their clients to buy or sell their businesses for years.
Here are a few headline points we’d recommend that you consider if you are thinking of buying or selling a dental practice. For ease of reference, we call the business which is being bought or sold ‘the target’ throughout this piece.
Different considerations apply depending upon which side of the negotiating table you are sitting on. Be sure to brush up about both sides, so that you can better understand the other party’s perspective too.
Buying a dental practice
- Choose your advisers early on and involve them from the start.
- Your key team should include legal, financial and valuation professionals. Legal work, for example, is usually done on a fixed fee per transaction basis, so you won’t be paying any more by engaging lawyers right at the start, and will probably save yourself time and money by doing so.
- If you don’t have a target in mind, it’s worth engaging a broker or agent to help you to find a target which meets your criteria. We can provide recommendations.
- Obtain a professional valuation, which includes the split between goodwill and equipment.
- The split is important from a tax perspective. Sellers will push for more of the share to be goodwill. It’s in your interests to push for more of it to be equipment, though, of course, a good valuer will be able to advise you of what price, and split within that price, is fair.
- The final decision on price will be a commercial one (and in a seller’s market, you may be afraid of losing the deal), but we think that all commercial deals are best reached with as full a picture of the facts as possible.
- Look into the future so far as possible, and plan for what it holds.
- You need to be confident that once you own the practice you’ll be able to run it at a profit (once any loan repayments, tax deductions, changes required to fit the business into your own existing business model, and ongoing business and operating costs – wages, insurances, rental-payments or services charges etc. have been deducted).
- You need to be sure that cash will keep flowing and that you’ll have something tangible to show for your endeavours.
- Think about what CQC applications need to be made and start this process as soon as possible so that the necessary CQC registration is in place ready for completion.
- Consider whether you will have the people to achieve your objectives. In our (law firm) business model, and yours, the professionals you employ or otherwise engage are a key asset and are crucial to continuing profitability. If there are existing principals, will their specialist skills need to be replaced? Do you, or others in your existing business, have the skills required in the target practice?
- If the target practice has an NHS contract, how will the transfer of the NHS contract be managed? Is the NHS Clinical Commission Group (previously known as Primary Care Trust) likely to consent to the transfer? Will the CQC registration correlate with the NHS contract?
- Get the right tax advice. It is crucial that you structure your acquisition or sale in the most tax efficient manner. Solid tax advice will help avoid future headaches and unexpected costs. We work with a number of excellent tax advisors who can help you.
- Obtain finance (assuming you need it), preferably with the assistance of your accountant and/or agent. Few purchasers are lucky enough to be able to purchase something without third party finance. Your advisors should be able to run through your potential options, ensuring that you find the product which works for you. S/he should then help you to achieve the best deal. Financing options are split into two types: debt (e.g. borrowing from a financial institution, such as a bank); and equity (whereby an investor or group of investors provides capital in return for shares in the practice).
- Know what you are buying. The starting point is that you buy something ‘warts and all’, so you need to know if there are any warts lurking under the surface. There are certain stages in each sale and purchase transaction that exist because of this default position:
- Enquiries of the seller: as buyer you’ll have an opportunity to ask detailed questions of the seller about the target practice. Your legal and financial advisers will help with this. Usually a questionnaire is sent with detailed questions covering each area (e.g. contracts, buildings and property, employment).
- Due diligence: this is your opportunity to inspect the seller’s documents provided in response to your enquiries. Your lawyer and financial adviser (and possibly also your lender), will need and want to scrutinise the seller’s responses to the enquiries, including any documents provided. Where there is an NHS contract in place, for example, they will need to look at this to check that the NHS Clinical Commission Group (previously known as Primary Care Trust) has not amended the template terms (and to assess the implications, in the event that it has).
- Warranties and indemnities from the seller in the sale and purchase agreement. There are some areas where the seller’s answer won’t be enough in itself. You’ll want them to promise that it’s true via a warranty in the sales agreement. For really key issues, you may instead need an indemnity (e.g. in respect of employment liabilities, risks of future NHS Contract reduction due to the seller’s historic performance, defective treatments, NHS Contract claw back). Other areas may be outside the control of both parties. In respect of these risks, as buyer, you’ll want to push the risk onto the seller if possible.
- Ensure that the sale and purchase agreement reflects what you have agreed and protects what you have bought.
- As well as the warranties and indemnities discussed above, the agreement should include enforceable and relevant non-compete provisions. You don’t want to buy a business to then discover that the sellers have opened up a competing business down the road and that all your newly acquired staff are leaving to go to work for them.
- The agreement will also apportion uncompleted treatments between you and the seller.
- Ensure that any other agreements are in place (e.g. a partnership agreement between you and any other buyers);
Selling a dental practice
- Choose your advisers early on and involve them from the start.
- As with buyers, a seller’s key team should include legal, financial and valuation professionals. The more expertise your team has, the better.
- Be prepared and get your practice in order.
- Potential buyers and their advisers will be looking at your business with a fine toothcomb (pardon the pun!). If you want to maximise sale value (which every seller does), then do what you can as soon as possible to ensure they will like what they see.
- Much of this can be done in advance by thinking about and (where necessary) pulling together, tidying or updating, everything related to your business. These might include for example:
- accounts and financial statements including monthly management accounts and projections. This will be key in demonstrating value to a buyer;
- contracts. If you are selling an NHS practice, your NHS Contract, where applicable, and any NHS and NHS Clinical Commission Group (previously known as PCT) documentation including recent vital signs reports and pay statements;
- anything in connection with building or planning regulations;
- an inventory of equipment;
- employee information and records;
- lease or freehold property information;
- regulatory/CQC documents including an up-to-date practice Statement of Purpose, and any correspondence with the CQC;
- Marketing materials (including website and social media sites) and any information on your customer base or goodwill; and
- The physical appearance of your practice and equipment.
The more prepared you are, the more likely you are to maximise the value you achieve for your business.
- Ask your adviser to sit down with you, face-to-face and spend a little bit of time explaining the process before you start. In summary, most sales follow the following format:
- Initial negotiations leading to the agreement of ‘heads of terms’;
- Buyer secures any funding;
- Due diligence (whereby the seller gives the buyer information and documentation relating to the practice). The buyer will ask questions and the seller should answer these;
- Negotiating and drafting the sale and purchase agreement and other legal documents, including the scope of the (usually hotly debated) warranties and indemnities and other protections;
- Exchange of contracts (this usually happens a month or so before completion);
- Completion. Ownership is transferred, the transaction is completed;
- Post-completion. There are a number of things which need to be done post-completion (e.g. filings, tax, and ‘house-keeping’ issues).
- If you have any skeletons in the closet, be aware that even if they aren’t discovered through the due diligence process, you may have to warrant their absence as part of the Sale and Purchase Agreement. Secrets have a way of coming back to bite you. In our experience, it’s far better to deal with, rather than ignore or try to bury them.
- Keep someone at the helm throughout this process. Selling your business is time-consuming. Make sure you that you’ve got adequate resources in place to keep your practice ship sailing on course whilst the sale process is happening. If this sale doesn’t happen for some reason, you want to make sure you’ve got something that’s still as valuable at the end of the process.
Here at HRC Law, we have lots more information for people who are thinking of buying or selling their business.
July 2016: This Bulletin contains general overview information only. It does not constitute, and should not be relied upon, as legal advice. You should consult a suitably qualified lawyer on any specific legal problem or matter.