You need to consider a number of fundamental matters before purchasing a professional practice – we discussed these in our “Basic Fundamentals” article (published in NSW Dentist, April 2004). Before taking the plunge to buy into or sell a dental practice, there are many additional issues that you should think about, which are discussed in this follow up article.
Are you thinking of a partnership with another like-minded dentist or practice? Is the existing structure a partnership, company structure or trust structure? You need to think carefully about practice ownership, how it works and whether you are prepared to take the financial and personal risk and bear the responsibilities involved with practice ownership.
In buying into an existing practice, the structure and how it will be financed are key issues to address with proper advice. The acquisition structure and the financing arrangements will have many implications going forward, such as the ability to access tax concessions, practice cash flows and flexibility to deal with the interest in the practice.
Professional legal, financial and tax advice will assist you to understand the existing dental practice structure, what you are buying and how (or whether) this will work for you.
In looking to buy a practice, you should get proper legal, financial and tax advice about the structure that you would like to operate the practice. With the appropriate advice to hand, you can proceed to negotiate the purchase of a practice on the basis of the proposed structure appropriate to your needs. Once you secure the deal, you can then proceed to implement the appropriate structure.
Preparation for due diligence
As mentioned in our earlier article, you should conduct a thorough due diligence before committing to a deal to acquire a practice. You should ask for, and the current owner should be able to provide, detailed records of the dental practice including financial statements and records, key supply, third party, employment and other material contracts, equipment records, patient and staff records, premises lease, databases, marketing programs, compliance policies etc. Note that there may be confidentiality or privacy issues to consider here.
As a seller of a practice, you can prepare ahead for buyer due diligence enquiries by:
- providing a well-drafted non-disclosure agreement for the prospective buyer to sign prior to disclosing any information; and
- compiling relevant information regarding the dental practice in an orderly manner, ready for the prospective buyer to review.
Among other things, this will help reduce the timeframe for the due diligence process. Information on the dental practice should be thoroughly reviewed and proper advice sought to ensure that you make a fully informed decision to proceed with the transaction and that it is properly documented.
Some buy/sell issues
In buying or selling a dental practice, there are many factors that should be carefully considered and addressed prior to committing to a sale and purchase contract. Some key issues to consider:
- What is the structure of the dental practice and who owns the goodwill of the practice? Is it transferable in the future?
- Who owns (or leases) the dental practice equipment?
- Is there a need to invest in substantial dental equipment and if so, who will and how?
- Is there a service company or how are administration/support services performed and costs borne?
- What are the expenses of the practice, what proportion is fixed, e.g. rent, and how are they borne?
- What will be the terms of your agreement with other practice owners (if applicable) and how will you deal with disputes about practice management, investment, conduct etc?
- How are the dentists remunerated and incentivised?
- Will the vendor dentist be contracted to the practice for a period going forward to ensure patient loyalty and referrals? How do you maintain productivity or interest in the practice? Should the sale and purchase be structured with an earnout for the vendor dentist, which may depend on future practice fees or profit?
- How will you ensure confidentiality of the deal and a contract with little conditionality?
Working through these questions at an early stage and managing the various risks will help to avoid many disputes after the transaction.
Interest in a dental practice
If you are buying an interest in an existing dental practice, there are a number of important matters to consider in these circumstances. These include:
- Who are the other practice owners, how do they run the practice, what stage is each dentist’s career at and are they engaged/interested in the practice and how are profits dealt with (distributed or reinvested in the practice)?
- Whether it will be a staged buy-in/buy-out e.g. where an initial interest is acquired upfront and a further interest acquired at a later point in time, perhaps acquiring another retiring dentist’s interest.
- What interest will you acquire and will you have any influence on decisions?
- What will be the terms reflected in an agreement between the continuing practice owners to reflect each owner’s rights and responsibilities and address decision making and control, conduct and management of the practice, financial matters, future dealings with each owner’s interest, valuation methodology, exit strategy and dispute resolution?
A prudent dentist should consider these issues and seek professional advice on terms of a sale or purchase of a dental practice.
Meridian Lawyers can assist you with the legal issues of buying and selling a dental practice and managing various risks by providing focused and practical legal advice. We are familiar with the issues and can guide you through the process to help determine what is the best approach or outcome for you.
Contact Mark Fitzgerald for more information. This article was published in NSW Dentist, July 2014.