Dentistry Matters: Transfer of Dental Practices

In this article, we take a look at some of the key issues faced by both buyers and sellers of a dental practice.

Perhaps the time has come for you, as the owner of a dental practice, to retire or take a step back, or maybe circumstances have arisen that require re-location or joining forces with another practice, to deliver greater efficiency.

A number of important issues will arise for both buyers and sellers of a dental practice and, depending upon the circumstances, some of those issues may be more problematic than others.

Preparation and Investigation

• A buyer should conduct thorough investigations to establish exactly what is being acquired, and the value that can be realistically attributed to the acquisition.
• Dealing with the buyer’s enquiries can be a drain on the seller’s time and resources. The seller should, at an early stage, compile all relevant documents and information relating to the business; typically, copy accounts, contracts and details of workers at the practice.
• The buyer should establish whether the practice is a primary care service provider and, if so, examine the terms of the General Dental Services Contract (“the Contract”). Recently incorporated practices should ensure that all contracts (including, in particular, the Contract) are in the name of the corporation.
• The buyer (and investors) will review and assess the results of their enquiries, paying particular attention to the assets and liabilities of, and restrictions affecting, the business. Where the buyer agrees to acquire the shares in a dental corporation, the buyer should note that the obligations and liabilities of the business will, in all likelihood, remain with the corporation following the transfer.

Structure of the Transfer

• Tax advice should be taken by both buyer and seller at the outset. Where a dental corporation is involved, the seller may, as an alternative to transferring the assets of the practice (as a sole trader would do), transfer shares in the company to the buyer. This can be more tax-efficient for a seller, as the purchase price will be treated as capital, as opposed to income, allowing the seller to take advantage of the lower rate of tax and entrepreneur’s relief. The buyer should, however, note that acquiring ownership of a corporation will cause greater potential exposure to the historic, and often hidden, liabilities of the practice.
• If the practice provides primary care dental services under a Contract, the consent of NHS England will be required to transfer the Contract from a sole trader to the buyer. The consent of NHS England will also, in many cases, be required before a change in control of a dental corporation. It may be different for a partnership where the buyer is admitted as a new partner. In that case, NHS England will generally reserve the right to terminate the Contract if it is not satisfied with the performance of the new partner within a period of time following his admission to the partnership, which can in itself present its own problems.
• It is quite common, in the case of transfers by a sole trader dentist or partnership, for the seller to enter into a transitional partnership arrangement with a buyer for a limited period before the Contract is transferred (with the consent of NHS England). During the transitional period, the Contract will be varied in favour of the seller and the buyer (together, as partners), and special arrangements will be put in place between the partners in respect of the liabilities and profits of the practice during that period.

Terms of Transfer

• For primary care dental service providers, the prospect of regular income from the government may appeal not only to dental practitioners, but also to third party investors and finance providers. Such is the importance (and a possible requirement of NHS England), that the transfer will undoubtedly be subject to NHS England consent, who should be approached early.
  The latest NASDAL Quarterly Goodwill Survey (where the goodwill of a practice is measured as a percentage of fee income) suggests (in general terms) a greater willingness for buyers (and funders) to recognise a higher goodwill value for NHS practices compared to private and mixed practices (although private and mixed practices do appear to be closing the gap). The average goodwill value paid for an NHS practice during the quarter ending April 2015 was 125% of turnover, and 104% for mixed practices. During the same period, the average goodwill value paid for a private practice was 99% (an increase from 90% for the previous quarter ending January 2015).
• A seller will seek the highest price, minimal risk and little or no ongoing liability. In contrast, a buyer will seek to acquire all the assets of the business at the lowest possible price and, where possible, avoid all liabilities of the business which arise before, or from matters occurring before, he acquires the business.
• If the buyer agrees to pay a “fair” price for the practice, the seller must expect to be subject to limited restrictions on future activities and be prepared to give reasonable protection to the buyer through warranties and indemnities. The extent of the restrictions and protection will, however, be for negotiation. The seller should consider future plans and seek limitations on liability. Much will depend upon the relative strength of each party’s bargaining position.
• Of particular concern to a buyer of a primary care dental services provider will be potential liability for under-performance of a Contract. Other liabilities would include negligence, breach of regulations and employee claims. It is not uncommon for a buyer to retain a portion of the purchase price to cover such potential liabilities. The seller should ensure that any retained sum is secured (ideally by deposit in a separate, independent account) and that the period of retention is as short as possible. The amount of retention will be assessed by reference to the estimated potential liabilities of the practice. So far as liability to NHS England for past under-performance is concerned, written confirmation from NHS England in respect of the period up to the date of transfer should be sought.

Conclusion

Clearly, there are a number of issues involved in buying and selling a dental practice, of which some are common to all business transfers and some are peculiar to the transfer of dental practices. The issues should be identified and considered at an early stage and, unless these can be resolved to the satisfaction of both buyer and seller, the transfer of the practice (in whatever format) can be fraught with delay and give rise to unnecessary professional costs.

For more information on the content of this article contact Nick Mayles on 01206 217 010 or nick.mayles@tsplegal.com.

Nick has also written an article on the Ownership of Dental Practices, click here to read.