BUYING
So, you want to buy a practice, be your own Boss and in charge of your own destiny? First of all, you will have to find the right practice! But what is the right practice for you? There are classified ads advertising practices for sale to be found in the NSW Dentist, the News Bulletin, various dental magazines and on various internet sites. In purchasing an existing practice, a number of options are available to the would-be buyer:
- Sole owner practice
- Associate practice
- Partnership practice
Sole Practitioner
Practising as a sole practitioner has the advantages of professional and personal independence and, hopefully, the ability to achieve a desired lifestyle. However, there are a number of matters for consideration:
- Income is dependent upon your personal presence in the practice
- Overheads are always applicable even if you are not working at the practice
- You may not have day-to-day contact with professional colleagues
- Management and staff issues are solely your responsibility
- You may potentially have higher overhead costs in relation to patient fees than in an associate or partnership practice
- Income is based solely on the fees you set, less the total costs.
Many practitioners believe that the freedom to organise your life and schedule (including holidays and days away from the practice) is a significant benefit of sole ownership.
Associate Practice
This type of practice shares some or all of the equipment, rooms, staff and most overheads with other individual dentists. Individual incomes are not shared. This pooling of resources should result in cost reductions compared to practising as a sole practitioner.
It may also result in a higher standard of equipment and materials compared to what is affordable to a sole practitioner. Further, there is regular professional contact with colleagues and greater scope to structure hours of work and various forms of leave. A note of caution: competition that may develop amongst associates can result in the breakdown of relationships among associates. This needs to be recognised and managed appropriately.
It is critical to have a binding legal agreement in place covering all aspects of an associate practice including allocation of individual overheads, expenses, hours of practice, illness and other absences, equipment policy, future disposal and options to buy entitlements in the practice. It is also important for you to constantly measure that these are being applied as agreed.
Partnership Practice
This type of practice, somewhat like an associate practice, shares all of the equipment, rooms, staff and overheads between the individual dentists. However, in this model partners share the income of the practice on a pre-determined ratio basis.
Again, it is critical to have a binding legal partnership agreement covering all aspects of the partnership including valuations, future disposal of the practice or equity shares in the partnership, options to purchase equity, hours of practice, individual partner profit distributions and/or remuneration, tenancy and other entitlements.
When considering entering into either an associate or partnership practice, it is also necessary to assess issues such as your compatibility with other associates and partners, capital investment of each in relation to remuneration, sharing of casual patient fees and sharing of common insurances.
Time to buy!
Before you consider purchasing a practice, you will need to prepare a business plan incorporating cash flow forecast, projected financing requirements and a break-even analysis. Your financier will require this document. Without this document, you will be unable to determine what type of practice you are able to purchase and whether or not this will satisfy your lifestyle and, ultimately, your retirement aspirations.
In making an initial assessment of a practice of interest, you should consider the following matters as part of your overall enquiries:
- Whether the practice satisfies your personal goals
- The location of the practice and surrounding competition
- The practice layout and ergonomics
- The nature and remaining life of plant and equipment (assets)
- The value and basis of calculation of goodwill, i.e. the value of an entity over and above the value of its assets
- Staff attitude and efficiency
- Patient portfolio – age, quantity and type of services required
- Transferability of leases – both premises and equipment
- Any future restraint of trade that applies to the vendor (generally geographical or time-based)
- Vendor liability in respect of treatments prior to sale
- Assignment of business name and licences
- Vendor liability for employee entitlements at time of sale
- The current owner’s willingness to participate in a transition
- The previously mentioned and critical valuation by an experienced accountant, and advice from an appropriately experienced solicitor on the potential pitfalls and types of agreement you should be seeking (e.g. in terms of ownership or lease of premises).
Own or Lease the Premises?
When considering whether you own or lease the premises on which the practice sits, be mindful of:
- The current owner’s situation (do they own the premises or do they rent?)
- If they own the premises, is it included in the sale, or do you become a leaseholder with the former owner as your landlord?
Under any of these options, it is critical that an accountant, with appropriate experience and knowledge of the dental profession, conducts a valuation of the practice you are considering purchasing or in which you are buying an interest. The advice should include other financial considerations and taxation issues arising for you in respect of the practice, including guidance as to the appropriate ownership structure.
As in the provision of dental treatment, the importance of good professional advice cannot be overstated! You should also seek legal advice at an early stage from a solicitor with experience in advising on the purchase of dental practices or interest in dental partnerships. There are a large number of issues which can prove problematic in future years if the terms of the purchase are not negotiated in your favour from an early stage and, if you are entering a partnership, you don’t have an appropriate written partnership agreement.
Be aware that, sometimes, the seller or broker pressures a buyer to sign a “Letter of Intent” immediately to take the practice off the market. Too often, the solicitor is not given the opportunity to be involved in the “initial exam” of the target practice to be purchased. Instead, Solicitors are engaged simply to “do the paperwork” and capture the economics of the purchase in writing. At this stage, it can be difficult to either walk away from the purchase or re-negotiate the terms of the purchase.
There are many questions to ask and factors to examine before agreeing upon a price and signing a “Letter of Intent” to purchase a practice. At a minimum, the items listed below should be reviewed by legal and accounting professionals who understand the economics and practicalities of a dental practice acquisition. It is not enough to review a summary of a valuation report or rely upon the broker’s opinion. The potential buyer should ask to see:
- Recent profit and loss statements, balance sheets, and income tax returns (at least three years)
- Percentage of collections used to cover overhead
- Equipment valuation; typically, this should be performed by an independent dealer
- The present value of all usable clinical supplies and hand instruments should be assessed, as well. In addition, does the practice own or lease the equipment?
- A detailed physical description of the office, including, by way of example, the number of operators. Does the selling dentist own the underlying real estate?
- A production and collections report and a breakdown by each dentist and hygienist
- An accounts receivable and aging report. In addition, what percentage of the accounts receivable is actually collected? Further, compare the aging report to the production/collection reports to verify that these reports are consistent and accurate
- A description of all contractual relationships existing between patients, employers and insurance companies including private health insurers, preferred provider agreements, WorkCover insurance and equipment lease agreements
- A breakdown of practice expenses for insurance, retirement benefits, employee benefits, payroll taxes, medical reimbursement, telephone expenses, and continuing education. How much does it cost to run the practice?
- Total number of active patients and the number of new patients per month. This number will help the dentist and his/her advisors estimate an expected amount of cash flow for the practice. If the target practice is a specialty practice, a list of referring dentists would be extremely helpful. Where do new patients come from?
- How much revenue is based upon insurance reimbursements?
Aside from the financial items listed above, there are numerous issues that should be addressed by a buyer and their advisers when considering purchasing:
1.What is being purchased?
First and foremost, is the buyer purchasing the goodwill of the practice (including the patient base) or simply the physical plant? These are two very different transactions. If the goodwill is being purchased, there are many additional factors to consider. For example, how will the selling dentist transfer the goodwill to the buyer? Aside from letters of introduction to patients and referrers, it can be helpful for the selling dentist to stay on for several months to make warm introductions to patients, families of patients, and referrers, and facilitate a smooth transition. Of course, the seller should not stay too long. After the seller leaves, what are the terms of his/her non-competition and non-solicitation agreement? These restrictions must be broad enough to ensure that the goodwill will be captured by the buyer, but not overly broad which could cause these restrictions to be unenforceable.
Will the buyer purchase the receivables, as well? Address this issue early. If receivables are not included, the parties may agree upon how they will be collected for the seller. Buyers frequently charge an “administrative fee” for collecting the seller’s receivables. If the receivables are purchased, some type of discount should be provided. The cash flow provided by the receivables can be extremely helpful.
If patients pay based upon a treatment plan (e.g., orthodontic contracts), will there be an adjustment to the price based upon services that have been prepaid?
2. Location, location, location
A significant part of the value of the practice, of course, arises from its location. As a result, it is absolutely critical to understand the basic terms of the lease. What is the duration of the lease? Are there options to renew the lease? What are the renewal terms? Does the tenant have a right to purchase the real estate?
Carefully review the lease to understand the actual per-square foot cost in addition to the base rent, as the buyer will probably be required to pay a portion of the taxes and other expenses and, with a strata office, a portion of the common area maintenance fees.
Alternatively, if the office is owned by the seller, it can be advantageous to negotiate a right to purchase the property, either immediately or at a later date. At the least, many buyers/tenants negotiate a first right of refusal, where the buyer has the first right to purchase the property before it is sold to a third party.
Buyers should look at the demographics of the location of the office. Is it growing? What will the area look like in 20 years? What is the rate of unemployment? What are the housing costs? Are there other dentists in the area? What is the dentist-to-population ratio? The local Chamber of Commerce may be helpful in this regard. Conduct a SWOT analysis on the area.
3. Restrictive covenants
Part of the “goodwill” value of the practice may be dependent upon a former partner or employee not establishing a competing practice in the vicinity. Restraints-of-trade clauses are often inserted in a contract of sale. Again there is no substitute for good and experienced legal advice here. For any restraint of trade clause to be enforceable, it must first be reasonable.
4. Tax consequences
Before any contracts are signed, both parties should work with their tax advisers to understand the tax consequences of the transaction. How much tax will the seller be required to pay as a result of the sale? If this is a “deal killer,” it is very helpful to deal with (and attempt to resolve) this issue early, not at the close.
Likewise, the parties should ask their accountants to think about the purchase price allocation sooner rather than later. While sellers typically desire to allocate a significant amount of the price to goodwill (in order to benefit from capital gains treatment), buyers prefer to allocate the price to certain other assets, as buyers must wait 15 years to reap the full benefit of the tax deduction arising from the cost attributed to goodwill. Again, don’t wait until the day before closing to focus on this critical issue. Too often, this issue is not addressed at the right time.
5. Final thoughts
Buying a dental practice can be one of the most important milestones in a dentist’s career. If additional due diligence dissuades the dentist from purchasing the practice, it is better to make that decision as early as practical. Although a “Letter of Intent” is non-binding, after it is signed the parties become entrenched in their positions and any attempt to change the terms may be viewed as a “breach of good faith.” Working with a trusted advisor who understands the business and challenges of an acquisition can ensure that the dentist makes a thoughtful and thorough initial exam.
SELLING
The perspective of the seller is a different one to that of the buyer, yet a number of the considerations above are of similar relevance.
Seek Professional Advice at the Outset
The importance of this advice cannot be overstated. Your practice structure may be a help or a hindrance to any potential sale of your asset. Seek early advice from your accountant and solicitor.
You will need to gather financial information prior to listing your practice for sale. Potential buyers will often ask to see your financial information for the last 3-5 years, including total turnover, net earnings and your profit and loss statements.
Your accountant is best to advise you as to the date of sale – if you are retiring then you should seriously consider this aspect. Again, there is no substitute for good accounting advice as to this aspect.
The Premises
Do you own your premises? If you do, would you wish to sell them to the practice buyer, or prefer to retain them to generate an income? Are you aware of the value of the real estate? Have you arranged for a valuation or at least a couple of opinions as to the worth of the real estate?
If you lease the premises from the owner, then you will need to have negotiated favourable terms with additional lease period options going forward so that your practice is attractive to potential buyers. This should include the right to assign the lease should you decide to sell the practice. If you don’t have a good strong lease going forward for some years, and hence the right to occupy, then you are disadvantaged in your negotiations with a potential buyer. If you have no lease – you have nothing to sell! The importance of a good long and strong lease (with the right to assign) cannot be overstated.
There are variations available to purchasers and vendors in regards to the sale of real estate associated with a practice. For instance, a practice purchaser may want to negotiate an agreement as part of the contract of sale which gives the new owner the right of first refusal if the real estate is to be subsequently sold by the practice owner. Another example is where the practice owner wishes to delay the purchase of the real estate but an agreement can be reached where the new practice owner will purchase the real estate over time.
Agents and Advertising
Should you engage a business agent to act for you to sell and advertise your practice? There are various people experienced in the dental industry who may provide this service. There are companies who sell practices on behalf of owners and who advertise on the internet and in the dental press. Should you advertise and sell the practice yourself? In the latter case, you should only attempt this with good and early professional advice as to what the value of your practice is and how best to go about it.
In the Classified Ads section of the NSW Dentist and other dental press, you will find ads placed by agents and practice owners advertising practices for sale. Do you feel comfortable in handling aspects of a possible practice sale, or would you prefer a licensed business agent to do these things for you – and charge a fee for service? That fee might be a set percentage commission on the sale price, or a fixed fee to be agreed on and in which case a contract will need to be signed.
Restraints of Trade
Buyers will usually want to protect the value of the goodwill that they have purchased by having a ‘Restraint of Trade’ clause in the contract of sale. A practice seller may find that if they are not happy to provide such a clause, then it may prejudice the chances of a successful sale. One must remember that such clauses must first be reasonable to be considered to be legally enforceable. Again, dealing with good professional advisers can assist in this area.
For example, if the practice is in a country town, then a greater catchment area for the exclusion of practice by the old owner would be allowed, by comparison with a practice in the suburbs in a capital city.
The Process
Many practice sales follow a similar process. The practice is listed for sale, and potential buyers are provided with contact details to begin discussions and to assess interest from buyers. Whilst there are many variations on the theme, most potential buyers will want to come for an initial inspection of the practice. They will want to see the physical set-up of the practice and what elements it contains. They will usually want to view the daybooks for the last 3 years or so, and get an understanding of the type of practice, the range of services provided, the demographics of the practice, the type of patients usually treated, any special expertise that the current owner has, and many other aspects to assess their overall interest.
Many potential buyers will not proceed past this point. In some cases, they may be merely looking, rather than being ready to purchase. But if they want to come back for further assessment and discussions, and indicate a genuine interest in the practice, then they will be seeking that the owner and his advisers provide confidential financial details about the practice. They will want to know what is for sale (practice only or practice and premises) and at this time the potential buyer’s advisers – both accounting and legal – will wish to communicate with the owner’s advisers.
Assuming that matters proceed, there will be discussions ongoing about the detail and hopefully a position will be reached where the owner is happy to sell to the prospective buyer on agreed terms and conditions. There are many issues where the parties are best advised to reach a position of compromise and where the interests of the parties may be diametrically opposed. The obvious example would be the value of the capital and tangible assets versus the intangible assets of the practice (goodwill).
Some new owners may ask the selling owner to stay on for a period of time, following the sale. This is sometimes seen as maximising the goodwill of the practice and can go a long way to a successful handover and introduction of the new practice owner to the patients of record of the practice. Some new owners may suggest that a letter of introduction be prepared and sent to the patients of record of the practice introducing her/him and announcing the sale of the practice. This is just another example of the need to reach agreement on the important detail in the sale of the practice.
Another important point in the sale of a practice is the need to include in the contract the perpetual right to access the clinical records of patients treated during the previous seven years. This includes the obligation of the purchaser to retain those records on your behalf.
The Corporates
There are a large number of dental practices purchased by dental corporates. In such situations, the corporate usually pays a generous figure for the value of the practice, but in return, contracts the outgoing owner to stay on for an extended period of years as an employee of the practice. Advisory Services understand that corporates usually require the outgoing practice owner to meet certain production targets during this contracted period of employment, as well as run the practice and deal with many of the management issues, necessitating more time being spent on administration. This will usually create difficulty for the practitioner in meeting his/her production targets as per the contract. This dichotomy of tasks usually results in a practitioner being able to spend less time attending to patients and the inability to meet financial targets under the new sale agreement (so-named KPIs) has resulted in may practitioners having to pay back much of what they were paid in the original sale.
Needless to say, some sellers find this especially difficult, believing that it was going to be a less stressful process. It has to be said that there can be adverse health effects arising out of such increased stress and pressure. Practice owners would do well to keep this in mind when negotiating with a corporate who wishes to purchase their practice.
Again, there is no substitute for good professional accounting and legal advice.
Further information can also be obtained at:
- The Australian Tax Office website – ato.gov.au/businesses
- Starting a business checklist | business.gov.a
Disclaimer: This is one of a series of Advisory Services information sheets created by ADA NSW. They are intended as general guides that highlight key pieces of information frequently requested. They do not set out to provide comprehensive information about a topic and they are not legal advice. Please be mindful that information provided in these resources can change after the publication date.
