Buying a dental practice can be both a complicated and stressful process, almost as stressful as a trip to the dentist itself. Whether you are an established businessperson or a dental professional planning on buying a dental practice, there are a myriad of issues to consider.
Corporate set-up: Generally, buying a dental practice can be achieved either by way of an asset based transaction or a transfer of company shares. Although both will seek to achieve the same goal, the preferred transaction route to buying a dental practice is often driven by a number of factors, not least tax and financial considerations.
A transfer of shares will involve a buyer inheriting all the assets and liabilities of the target company whilst an asset purchase will result in the buyer cherry picking specific assets (e.g. property, goodwill, third party contracts etc) to operate the business.
Whether you intend on buying a dental practice through an asset or share purchase, there are a number of issues which arise in any transaction.
Associates: Unlike employees, contracts with associates (dentists who work as contractors rather than employees for a practice) do not automatically transfer to buyers on completion. As a means of addressing this issue, when buying a dental practice buyers should consider drafting the sale contract in a manner that requires associates to enter into a new contract on completion. As an alternative, buyers may obtain a side letter from the associate(s) confirming their acceptance to the contract being transferred.
Primary Care Trust (“PCT”) issues: If a practice holds an NHS contract with a local PCT, this is likely to influence the method of buying a dental practice in terms of the structure of the acquisition. Unless a buyer is acquiring shares in a company that already holds a General Dental Services (GDS) / Personal Dental Services (PDS) contract (in which case the target company will continue to hold the contract), an application will need to be made to the PCT to change ownership of the contract.
PCTs have historically used a change of ownership application as an opportunity to amend the seller’s contract value, i.e.: by reducing the number of target UDAs (units of dental activity). Naturally, this is likely to have a negative impact on the revenue generated by the business. A solicitor experienced in the healthcare sector will be in a position to take pre-emptive action to ensure the new terms agreed do not prejudice the buyer.
Care Quality Commission (“CQC”): Dental surgeries in the UK are not permitted to practice without having the relevant CQC registration in place. When buying a dental practice, a buyer will be keen to carry out the necessary due diligence investigations to ascertain whether the seller has committed any breaches of the regulations. As a means of protecting the buyer against a seller’s breach pre-completion, indemnity provisions can be inserted into the sale contract.
In the case of an asset purchase, when buying a dental practice a buyer will need to make an application to change the CQC registration. The CQC have indicated that this process can take up to 120 days – buyers should consider this at an early stage of the transaction to avoid delays to completion. Where the transaction is structured as a share purchase, this application will not be required (as CQC registration will be retained by the target company) however the “registered manager” of a practice will need to be varied.
Finance arrangements: When buying a dental practice, you will need to determine how the acquisition will be financed. It is likely that a bank will require the borrower to provide security over the assets of the business e.g. a charge over the practice property or in the case of a share sale, a charge over the company shares.
If the transaction involves a transfer of a leasehold property, we will review the terms of the lease to check whether there are any prohibitions on the property being charged. By disclosing any issues to your lender at an early stage, necessary arrangements can be made to restructure the finance arrangement. Transactions are often dependent (either wholly or partly) on commercial funding and this often dictates the pace of a deal – an experienced advisor will be able to identify potential obstacles to avoid lending approval being delayed.
Tax: A buyer of shares will be inheriting all the past liabilities of the company. As such, a share acquisition will involve the buyer carrying out extensive due diligence on the tax history of the business. The buyer will also seek contractual protection in the form of warranties and indemnities which give the buyer a right to bring claims against the seller after completion.
Protecting goodwill: Whether a transaction involves an acquisition of assets or shares, buyers of a dental practice should consider ways of protecting the business’ goodwill which has been developed since its inception. Unfortunately, there are no implied terms in contracts prohibiting sellers from carrying on a competing business in close proximity to the dental practice you are buying.
A sale contract should therefore include “restrictive covenants” prohibiting the seller from soliciting patients and / or opening a competing business. The restriction often applies for a period of time after completion and within a certain radius from the dental practice property. The extent of the restrictions imposed upon the seller is a matter of negotiation between the parties.
The nature of the transaction can sometimes necessitate a deviation from the market standard position. An example would be a seller which owns and operates another dental practice close to the dental practice being acquired. In these circumstances, a seller may insist that the covenants do not prevent him / her carrying on normal trade at the second dental practice.
This article merely scratches the surface of the issues solicitors are faced with day-to-day when dealing with dental practice acquisitions / disposals. Buying a dental practice is not limited to purchasing a business and a property – the transactions are made far more complex due to the regulatory requirements imposed on dental practices.
If you are considering buying or selling a dental practice, contact our experienced healthcare team to discuss the options available. We will offer clear, pragmatic advice minus the legal jargon. Most importantly, our team is accessible and will guide you throughout the transaction with a view to protecting your interests.
By Krishen Patel