Buying a dental practice with a colleague – some issues to consider
Buying a dental practice with a friend or colleague has much to commend it – including the sharing of costs, knowledge and risk. However, in the rush to complete the purchase and get the new business venture underway, important legal issues can get overlooked. Time spent on the issues below will often avoid major problems and disputes in the future.
Structure?
When two or more people are buying a practice, an early discussion should take place between the buyers, their advisers and lenders concerning the structure of business ownership and whether the buyers will operate the practice moving forward as a partnership, expense share arrangement or in a limited company, or even a combination of these. As the choice of structure often involves financial and tax issues, the advice of a dental specialist financial adviser and/or accountant is important. Lenders will structure their security requirements in accordance with the buying vehicle being used so the lender needs to be involved “early doors” too. The danger here is that the buyers start out under one structure of their own choosing only to be advised later on that another form of structure is preferable, meaning much time and costs have been incurred unnecessarily.
Written Agreement Between the Owners
Whatever buying structure is chosen, it is essential for the ownership “agreement” between the buying parties to be recorded in a written partnership/expense share or shareholders’ agreement.
The written agreement needs to cover (at least) the following:
- As a basic issue – how the profits and losses of the practice are to be divided between the owners and what drawings the owners may be entitled to on an interim basis;
- How are decision within the practice to be taken? Is unanimity required on all matters? However, this may not be appropriate where the ownership shares are not held equally. Conversely, even where shares are not held equally, are there certain key decisions where the unanimous consent of all owners is required? Common decisions in this category will include sale of the practice, hiring and firing of staff and expenditure above a certain agreed amount;
- Defining what each party is to contribute: both in terms of clinical and management commitment;
- What happens if a partner/shareholder wants to leave? Key issues to be resolved here include the length of notice required, how the departing party’s share is to be valued, who gets offered that share, over what timescale is a buy-out structured and what happens should none of the continuing parties want or are able to afford the purchase;
- What happens to a party’s share should they die, lose GDC registration or become unable (through ill health) of attending to their practice duties? In the latter instance what period of continuous or repeated bouts of ill health trigger events such as a forced sale of a share?
- What grounds allow a party to be expelled from the practice and trigger a forced sale and purchase of their share?
- What non-compete restrictions should be placed upon a departing party? The continuing parties do not want to pay for the departing party’s goodwill only to find them “setting up shop” in the near-by vicinity.
Having agreed these points in a binding agreement the potential for future dispute is greatly reduced.
Other protections
Issues to discuss under this heading would include:
- Life and critical illness cover – these may be required by the lender in any event but need to be considered. Cross options can be put in place so that the benefit of these policies can be used by the continuing parties to pay for the departing party’s share;
- Wills – we would also recommend everyone has a will in place no matter how old or young, but particularly if a share in a dental practice is owned;
- Business Powers of Attorney – this can be used so that one owner can appoint another owner or another trusted party to operate the donor’s share of the practice should certain issues affect the donor (such as a loss of mental capacity). These can avoid serious disruption to a practice where an owner is suddenly unable to carry out their practice duties. (They are even more important should you currently be trading as a sole trader).
Therefore, in the words of the great Stephen Covey “begin with the end in mind”.
Should you wish to discuss any of the above issues in greater detail – please contact Stephen Knowles on Stephen@pfmlegal.co.uk.
