Purchasing a practice by Martyn Bradshaw and colleagues
This article was first published in The Dentist July 2016
The PFM Dental Group is again running its annual series of seminars around the UK for anyone looking to purchase a practice. From the questions we are asked, particularly from dentists who have not bought a practice previously, it would appear that some of the processes and terms are not thoroughly understood. Here I run through the buying process with the help of my expert colleagues and also provide an insight into the main areas buyers need to consider when seeking to purchase a practice.
Understanding the values
The market has changed substantially over the last decade and more so over the last couple of years. Therefore, it is important that anyone looking at a practice considers obtaining a professional valuation. This will not only allow the purchaser to determine whether the asking price is fair but an experienced dental practice valuer will also be able to provide a breakdown of the value between goodwill and equipment. Many people may feel that they have agreed the price so why does it matter what the split is? Well, the split is important due to future tax relief. Goodwill cannot be written down against tax yet equipment can gain you income tax relief. A vendor will generally push for the goodwill balance to be higher due to this giving them a significant tax advantage. If you are unaware as to the true second-hand in situ value of the equipment, then it may seem easier to agree to this request. However, if the value of the equipment split could be agreed at £20,000 higher, this could give you additional income tax relief of £8,000 (40 per cent of £20,000).
Preparing financial projections
Although there may be a high level of demand for practices, leading to high values, it is important that any purchaser looks at the projected profits of the practice under their ownership. These may look very different compared to how the principal currently runs the practice compared to the subsequent buyer. If an accountant prepares the projections, they can also calculate the tax that needs to be paid and the loan repayments (as the capital element of the payment does not attract tax relief). Once the projected profit, tax and loan repayments have been calculated, this will demonstrate the personal drawings potential of the purchaser to ensure that these are sufficient to cover the client’s normal expenditure.
Information from Jon Drysdale, Chartered Financial Planner
To ensure you have the best chance of raising finance and also to achieve the most competitive interest rates, a well prepared proposition will need to be put to the bank demonstrating the viability of the practice and the strength of the purchaser. Where we act as broker, a lending report is produced and sent to a number of banks. We can then recommend the best package to the prospective practice purchaser after taking into consideration the various loan packages.
The lending report will consist of full details of the practice (easily gathered if your broker has also undertaken a full valuation of the practice) and comprehensive information about the prospective purchaser, such as current income, assets held, liabilities, cash deposit available and security being offered. The projected profit and loss accounts for the personal circumstances of the buyer will then demonstrate that the practice is a viable option. The more (but concise) useful information supplied, the better the bank can assess the lending risk and so offer the most appropriate interest rates.
A good finance broker can potentially save you tens of thousands of pounds over the term of the finance.
Minimising risk is the banks’ priority. They will often ask purchasers to increase their levels of income protection and to also arrange loan protection (typically life and critical illness cover for the loan amount and term). For any purchaser there are two important considerations. First, does the insurance provide comprehensive cover and second have they achieved the most competitive premiums?
For a dentist it is vital that any insurance policy is taken out on an ‘own occupation’ basis, meaning that if they cannot work as a dentist for reasons of ill health, the benefits can be released. If the policy is based on an ‘any occupation’ basis it may not pay out as a dentist could arguably work in an alternative employment (such as lecturing). To ensure that premiums are as competitive as possible we would always suggest using an independent financial advisor (IFA).
Information from Stephen Knowles, specialist dental solicitor
The overarching principle when buying a dental practice is ‘buyer beware’, in other words the practice is sold as seen unless the buyer has raised specific enquiries of the seller. It is vital that detailed questions are raised of the seller, both in relation to the practice and the premises, via the process known as due diligence. Specialist solicitors in this field have compiled dental specific questionnaires to send to sellers. The responses to those enquiries should be considered carefully between the lawyer, the client, the client’s accountant and the buyer’s lender. Areas of concern must be the subject of further investigation and/or the subject of suitable protective clauses in the sale agreement. On the property side, the buyer will need to consider whether a full condition survey is obtained or whether to leave matters with the lender’s less rigorous structural survey.
At the earliest stage possible, the incoming buyer needs to consider what CQC applications need to be made to ensure the buyer is registered correctly at completion. Sometimes a partnership application with the seller will be required. Applications are very likely to require all applicants to have CQC countersigned DBS checks not more than six months old – so obtaining these checks may be the starting point of the transaction. The CQC is extremely strict (some might say pedantic) when reviewing the forms and therefore some time needs to be spent in ensuring the forms are completed fully before submission. Again, an experienced solicitor will be aware of the pitfalls and the common reasons for rejection by the CQC.
In tandem with these matters, the respective solicitors will be preparing a sale agreement. From the buyer’s perspective it is vital that this contains adequate warranties and indemnities from the seller to protect the buyer against key areas of concern – which usually include the seller warranting the accuracy of accounts provided, protecting the buyer against NHS Contract claw back, risks of future NHS Contract reduction due to the seller’s historic performance, defective treatments and employment liabilities (to name a few). Appropriate and enforceable binding out (non-compete) provisions must also be included.
As ever, a dental specialist solicitor will be able to ensure the sale agreement is tailored for the needs of a dentist rather than the normal business acquisitions handled generalist solicitors.
Information from Jeff Williamson, specialist dental accountant
It is vital to understand the future profitability of the target practice under your ownership. Your bank will require this to establish affordability and you need to ensure that it is a worthwhile acquisition in terms of both annual income and potential growth/capital return.
Buying a practice is a commercial decision but you’ll need sound tax advice to help you keep more of what you earn. Business structure and profit extraction need careful consideration.
Understanding working capital requirements and general cash flow to repay borrowing will keep the business on a sound footing. Planning the timing of equipment purchases or property improvements will maximise tax allowances.
Once you have taken on the ownership of the practice you will have ongoing requirements including: bookkeeping, payroll, annual accounts and tax returns. Your bank may also require management accounts, probably on a quarterly basis, as part of its lending offer. It is also important for you to know whether the practice is trading as profitably as planned and that costs are under control. It is important to have a specialist dental accountant who can advise you throughout.
Keeping up to date with your financial affairs and avoiding late submission fines and penalties will give you peace of mind with HMRC.
Conclusion by Martyn Bradshaw
Buying a dental practice can seem daunting at first but I’ve guided hundreds of clients through the process and witnessed their satisfaction of practice ownership. Most have thrived and gone on to purchase larger practices or to form a small group of practices. Then when they’re thinking of selling up, they are welcome at our retirement seminars!
Martyn Bradshaw is an experienced valuer and sales agent and a director of PFM Dental Group, which includes legal services, dental accountancy, financial advice as well as sales and valuations.