Sale and purchase
The sale and purchase of a dental practice can either be:
1. An asset sale and purchase where the business and assets of the practice are sold to the buyer; or
2. A share sale and purchase if the practice has been incorporated and the shares in the limited company that owns and runs the practice are sold.
Whilst the two processes and the two agreements are fundamentally different in many ways, the main elements of each agreement and the negotiation of these elements is broadly similar.
What any buyer or seller will benefit from if they instruct a specialist dental solicitor to act on their behalf is not only their expert legal advice but also the practical and commercial common sense and experience of somebody used to dealing with transactions in this sector. This therefore gives you, the client, the opportunity to benefit from your solicitor’s practical experiences, their knowledge of elements that make dental practice transactions unique and their insight in to what your needs are when buying or selling a practice.
Some fundamental elements to consider when negotiating the sale and purchase agreement (SPA) are:
Whilst the price should already have been agreed prior to the SPA being drafted, sometimes the provisions surrounding payment of the price are not finalised or require further negotiation. This is usually when the full purchase price is not payable on completion but a certain element of it is to be paid after completion.
In many dental practice transactions, completion is conditional on certain matters taking place prior to the completion date, and these need to be negotiated and agreed upon.
Examples may be:
• receipt of correspondence from the Care Quality Commission confirming the buyer will be registered on completion
• the associates at the practice agreeing new associate contracts with the buyer
• the seller having informed the staff, consulted with them and dealt with their obligations (and the buyer having complied with theirs too) under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE)
• any property element included within the transaction is completed at the same time as the sale and purchase of the business i.e. a new lease is entered into on completion, an existing lease is assigned on completion or the sale and purchase of the freehold property is entered into on completion
Depending upon the preference of the solicitor, the property provisions may well be included within the SPA or there may well be a separate agreement.
• Is the property freehold or leasehold?
• What enquiries have been raised in relation to the property and what, if any, warranties about the property are being given by the seller.
The caveat emptor (buyer beware) principle applies in asset and share transactions. There is no statutory or common law protection for a buyer relating to the nature and extent of the assets and liabilities they are acquiring. There is therefore the need for extensive contractual statements from a seller stating that certain elements in relation to the practice, assets etc are true.
Comprehensive due diligence should provide a buyer with detail of the value of the company or practice but warranties should not be used as a substitute for due diligence – the two elements complement one another.
Warranties serve two main purposes:
• to provide a buyer with a remedy (a claim for breach of warranty) if the contractual statements made prove to be untrue after completion has taken place; and
• to encourage a seller to given as much detail as they have, including known problems, to a buyer. As you will see below, a seller’s liability under the warranties is often limited in a number of ways, including that the seller has properly disclosed against a particular warranty, and therefore this should ensure that any information is provided, be it good, bad or indifferent.
With the above in mind, the provisions relating to warranties are likely to be the most heavily negotiated within an agreement. What is warranted, what is not, are certain warranties limited to the awareness of the seller?
Limitation on warranties
Again, in conjunction with the warranties themselves, the limitations that apply to the warranties are often heavily negotiated.
Limitations that are often considered within a transaction and negotiated between the respective solicitors are:
• the purchase price being the maximum amount that a buyer could bring a claim against the seller for in respect of a breach of warranty
• a time limit being put on the length of time that the buyer has to make a claim against the seller for breach of warranty
• a monetary limit to prevent spurious claims being made e.g. that any single claim for breach of warranty must at least have a value of £1,000 and that the amount of that claim, when taken together with any other claims of £1,000 or more, exceed the sum of £10,000
• the buyer not being able to recover more than once in respect of the same loss e.g. if the same set of circumstances lead to the seller being in breach of two separate warranties, the buyer can only claim once and be remedied once.
Contracts and uncompleted courses of treatment
Things to consider:
• What contracts are there?
• What is there likely to be in terms of uncompleted course of treatment on completion?
• How are the fees for uncompleted courses of treatment to be split between the buyer and the seller?
• Have there been any prepayments made by patients?
• Who will be responsible for what?
• What liabilities will the seller retain (if any)?
• What liabilities will the buyer take over?
It is standard practice for apportionments to be agreed with the completion date being the ‘line in the sand’ with the seller being responsible for everything prior to completion and the buyer being responsible for everything after completion.
• Who will be responsible for chasing and collecting any debts after completion?
• Will the buyer acquire these or will the seller retain them?
• Is the buyer to be under any obligation to chase patients for monies due?
• If so, for how long and at what intervals should the buyer account to the seller for monies received?
Protection of goodwill
Another vital area of negotiation in any SPA is the seller giving assurances to the buyer that they won’t set up in competition, try to continue to treat patients of the practice or try to entice staff away from the practice.
There are no definitive rules on what is likely to be enforceable in court if there were ever the need to test these provisions but the case law in this area is extensive and offers solicitors guidance as to what is reasonable without restricting a seller from earning a living.
It is often agreed that a seller will not set up or work in a practice within a certain radius of the practice they are selling for a certain period of time after completion. For instance, not to work within a five mile radius of their former dental practice for 12 months following completion.
The balance with these provisions has to be struck between what will be enforceable, what is reasonable in the circumstances and also, what is going to happen practically. What I mean on a practical level is, what are the intentions of the seller, how long does the buyer believe it will take to build a rapport with the patients, where is the practice and how many other practices are there in the vicinity. All of these elements need considering when negotiating these provisions in the SPA.
Things to consider:
• Have the parties complied with their responsibilities in relation to TUPE – Transfer of Undertakings (Protection of Employment)?
• Should each party indemnify the other in relation to the carrying out of their respective obligations in relation to employees?
• Has everyone ensured that everyone who is an employee has been accounted for in the SPA?
Based on the due diligence exercise and the information gained by the buyer about the practice, is there anything the buyer needs to negotiate a specific indemnity on. For instance, is there an ongoing complaint by a patient, is there an ongoing personal injury claim? It is beneficial for the buyer to request indemnities relating to patient complaints, defective work, CQC compliance and monies owed by the seller in relation to the practice amongst other things.
An indemnity, put simply, is the promise by one party to the other that they will meet a specific liability if it arises. For instance, if there are monies owed by a seller to a supplier on completion and the supplier pursues the buyer for payment, by giving an indemnity the seller is agreeing to pay this and refund the buyer if they pay in the first instance.
Every transaction is different and therefore there are no set rules on what should be negotiated in an SPA but the above are some important considerations that should be borne in mind.
You might say that you don’t need to consider the above as that is what you are paying your solicitor for. To a certain extent I agree but the more aware our clients can be of what we are doing and areas that need extra consideration the better!
Jonathan Tyson is partner at Knights Professional Services, which delivers legal and professional services to all businesses. Jonathan specialises in corporate and commercial transactions with a strong emphasis on healthcare and since 2006 has developed a niche in acting for dentists in all aspects of buying, selling, running and/or owning a dental practice.