Sealing the deal
Many articles have been written about aspects of the sale process, but this two-part series identifies the key problems that have troubled both buyers and sellers alike from time immemorial.
The key problems that have cropped up during my years of experience are:
1. The sale package
In order to make meaningful progress on a sale, the buyer’s solicitor has to receive a package of fairly basic documentation concerning the practice. The only person who can compile this package is the seller.
Typically, the seller is overworked and unable to find a significant block of time (up to a day or more) in which to compile the essential information needed. An obvious solution is to work on the package over the period between deciding to sell the practice and when the buyer actually instructs their solicitor. In this way, the inevitable pressure and delay involved in preparing the package can be spread over a period of time.
What should the package comprise? All information relating to the business of the practice. For example, accounts, ongoing commercial contracts (Yellow Pages advertisements, web page maintenance etc), employment papers (associate agreements, employment contracts and disciplinary procedures) and property papers (lease and licence to alter).
Abrahams Dresden is happy to email an enquiry form to any prospective seller, without obligation or charge.
2. The unprepared buyer
It is not only the seller who is typically unprepared for the hard work entailed in the sale. The buyer will, generally, need to borrow all or most of the purchase price. There is no shortage of bankers willing to assist, subject to valuation of the practice in question, which is usually a formality. What takes time is the completion of the money laundering, identification and account opening procedures.
In fairness, the banks have got the process down to such a fine art and buyers are usually so keen to proceed that the offer of finance is rarely a meaningful obstacle in the process. However, the security process of some banks is a lot more time consuming than others, so it’s worth doing your research in this area.
3. Delays by the solicitor
There are a few solicitors who specialise in buying and selling dental practices and some are more efficient than others. The problem is that there are a large number of solicitors, whether they be patients of the dentist in question or simply local solicitors, who will ‘have a go’, and who can blame them?
Another criticism that can be levelled at some solicitors is their failure to embrace modern technology. This even extends to using the telephone (as opposed to tortuous and lengthy letters), conference calls and email attachments. I recently saw a most courteous exchange of letters posted by solicitors to each other on the subject of whether it would be appropriate for them to communicate with each other by email!
There is also a resistance to attending meetings – by all parties. I am of the view that the documentation should be prepared and reviewed by all parties and resolved in a meeting, not by correspondence. These exchanges inevitably end in those immortal words from one solicitor to the other that ‘I will take instructions from my client and revert to you’.
The simple way is to have all parties present in a single room for an hour or two and for all the issues to be knocked on the head there and then. Of course, it is time consuming and expensive to pull all the parties together, but it is not that difficult for everyone to meet in central London at 5pm on any given day and conclude all the paperwork, within reason, in a single evening. This process has to be easier than three months of pointless correspondence.
4. Difficult solicitors
One of the main difficulties with ‘general practice’ solicitors is that they do not have relevant experience of dental transactions. The area is specialised and any solicitor who, when pressed on his/her experience in the field, declares the deal to be nothing more than a conveyance or a business sale is probably not the person for you. Ask them what they know about the new NHS contract or the implications of change of ownership on the restrictive covenants contained in associate agreements.
You will have been referred to the solicitor by your practice broker or banker. Ask that person whether the solicitor in question is pro-active in their dealings with dental matters.
Ask the solicitor whether they deal differently with a case if acting for the seller or the buyer. This is a very interesting question and a crucial issue. In my experience, dentists are professionals and all they want is a fair deal.
If you want to be aggressive, you must make this point very clear to your lawyer, who should act in this way on your behalf. On the other hand, you may wish simply to take a middle ground line on every aspect of the transaction, to bring negotiations to a conclusion as speedily as possible, to keep costs down and to maintain a balanced relationship with your buyer/seller.
Certain lawyers take the view that, unless they are being totally unreasonable on their client’s behalf, they are not doing their job properly or, worse, are laying themselves open to the claim of negligence. This is absurd. If the client simply wants to get the job done, they should recognise this fact and get on with the job.
Another difficulty often encountered is that of humble solicitors and pushy clients. A solicitor has got to have the confidence to tell their client that what they are requesting is wrong or unreasonable.
In one transaction in which I was recently involved, the solicitor on the other side was a very mild man with no experience whatsoever of dental practices. He was instructed to sell the practice purely because his wife was a patient of the seller. The solicitor effectively acted as nothing but a mouthpiece for the seller’s wishes, without advising as to the reasonableness of his demands at any stage.
My view is that dental transactions are handicapped, to a large extent, by the concept of independent representation, leading to the sale being conducted in a confrontational manner. I see a far better way forward in a single experienced solicitor pulling together the various strands of a transaction from a commercial and legal perspective.
Even if you are taking a lease of the property and are not paying a capital sum for the property interest, you still need to consider getting a survey to assess the structure of the property.
Regardless of obligations under the lease, you are taking a new home (albeit for your practice) and you need to know the cost of keeping that home running. Does it need a new boiler? Have you taken a lease over the first and second floors, only to find that the boiler is in the basement which you have no access to? The simple geography of the building, items you need access to and the condition of all items within the property must be made clear to you by a professional.
6. The landlord
The seller cannot sell the practice without the landlord’s consent. In principle, this could comprise a simple letter or a brief phone call.
However, the business of landlord and tenant law has developed to such an extent that the consent is now often given in the form of a six-or-seven-page deed prepared by the landlord’s solicitor, approved by the seller’s and buyer’s solicitors.
This costs a great deal of money and can take a very long time to conclude, even though it is a desperately simple document. The seller, in addition to their own costs, usually meets the landlord’s costs of this document.
While the landlord has the obligation to deal reasonably speedily with an application for consent to assign the lease, the truth is that landlords rarely care. They get the rent regardless. And if the landlord does not care much, their solicitor will care even less. The issue of landlord’s consent is therefore a major delaying factor in concluding the sale of a practice.
Some solicitors like to enter into a sale agreement to buy the practice, with completion on a certain date, or later if the landlord’s consent to the assignment has not been obtained by that date. I invariably resist completing on these terms because you effectively end up with a floating completion date at the convenience of the landlord.
If you are planning the takeover of a business, this is not a very good starting point. It is an essential piece of housekeeping to get the landlord’s licence obtained at an early stage, so you can then conclude the sale process and enter into binding contracts to complete on a fixed date.
7. Key issues
Finally, the following aspects of a sale agreement need to be considered:
• Warranties. The buyer needs the seller to provide personal guarantees of certain representations they have made in relation to the practice. Are the accounts true? Does the practice have an active patient base? Is the equipment owned outright or subject to HP or leasing agreements? I have often encountered the suggestion that ‘my client does not want to give any warranties.’ This is insane. It is tantamount to saying that the seller has told a pack of lies and does not wish to be held to account.
• Defective work. This is often a very difficult area. One extreme is that the buyer should not be expected to make good the defects of their predecessor without payment. If the seller agrees to pay the buyer for their time associated with all defective work, you may find that every item of work undertaken by the seller in the last 12 months is redone by the buyer at the seller’s cost.
The middle ground is that the cost of materials and lab fees associated with re-commissioned work falling within 12 months of sale should be met by the seller, but not the time spent on the case by the practitioner in question.
• Restrictive covenants. Watch out for the seller who runs two adjacent practices and is selling one for full value and is wriggling horribly on the subject of promising not to take patients with them. This conduct speaks volumes about the seller’s true intentions.
• The new NHS contract. If you are buying a practice with a substantial NHS contract, make sure you have a direct link to the PCT to ensure they agree in writing to issue you with a contract on acceptable terms, effective on completion of the purchase. You should usually make completion conditional on the issue of the contract.