Your practice offer is accepted – now what? Kaival Patel shares essential advice on how to successfully navigate the process of buying a dental practice.
Look, I have an addiction. Yes, I admit it. I fully binge-watch any Selling Sunset type programme on Netflix or other subscription channels.
For anyone who hasn’t come across these, in a nutshell they are reality TV shows that tend to follow a real-estate firm selling some of the most beautiful homes in their respective area and all of the inter-personal drama that ensues. The latter of which all of us in the dental industry call… Monday morning!
When you brush aside the high-end, Oscar-worthy drama you are left with the bit I love the most – agents negotiating with potential buyers and agreeing a price. Often it leaves two very happy sides – the first having cashed in on a sale, and the other often embarking on a new chapter in their life.
From the outside, it looks like both parties will instantly ride off into the sunset, albeit in different directions.
I bet when you look at the sale of a dental practice, on the face of it, it will look the same. The one aspect that often gets glossed over is the middle bit! The six to nine months or more that happens between having an offer accepted and finally getting the keys. This article will hopefully give all of its readers a better insight into this process.
Valuable insight
Having gone through the purchasing process a number of times while growing The Kana Health Group, I feel like I could give some good, genuine insight into the stages to consider after you’ve had that all important offer accepted.
Each time we have purchased a practice, there is always a different challenge that presents itself. I then had the thought, why don’t I interview someone who has been in the middle of the process hundreds of times?
Therefore, I reached out to my good friend, Andy Acton, director and co-founder (together with the fantastic Chris Strevens) at Frank Taylor & Associates (FTA). FTA have had over 30 years in the game and Andy was only too happy to give up some of his valuable time to help me on my quest for knowledge!
So you’ve had your offer accepted, congratulations! What’s next?
1. Get your A-team ready
You are not alone in the process and the best thing you can do is get the relevant external team/partners ready for the forthcoming few months.
Andy’s tip: You could do the majority of this before you have even found your dream practice. There is absolutely no harm in being prepared and it will save you a lot of time and stress when you get to the business end!
Funding
Before even looking at your first practice, go and meet with some banks and brokers. Get a good indication of what level of borrowing you can afford and you are likely to achieve, assuming you are in the majority that need some sort of funding – and don’t just speak to one bank, but as many as you can.
One thing I have learned on my journey is that banks are far more flexible than you think. The key is that they need to believe in you and believe in your journey. The majority of the time they actually want to lend and they are just going to look at comfort factors to allow them to do this.
Establish the relationships with your local healthcare bank manager as early as you can. Get a feel of what the current norm for cash deposits are – is it 10% or 20% or more? Does that have a bearing on what value of practice you can go after?
Can you have a discussion of what other security you can use if you do not have that type of cash lying around – maybe a property, or can your family help? If they do help, let’s say with guaranteeing some of a loan against their house, at what stage would a bank be comfortable releasing that security? Would you even feel comfortable having someone else’s property on the line?
Get an indication of typical borrowing rates and plug that figure in to your cashflow when you consider the affordability of a practice. These are all questions that you want to consider before embarking on the journey.
Legal
The same with a solicitor firm. There is no harm speaking to a number of firms before you have even found the right practice. Andy was really keen to emphasise that the value of having a firm that understands the dental side of things is often worth the extra cost and I tend to agree.
Find out whether they charge a fixed fee or an hourly rate. If it’s the latter, what are the typical fees they historically have charged? My preference is always a fixed-fee, to the extent that I would probably not deal with a firm if they do not offer this as an option, having been stung in the past!
Also, there is likely to be a property element of the deal, whether leasehold or freehold. Does the firm have someone or a team that deals with this or would you need to find someone else? What are the fees for this?
Accountant
Although your accountant may not get too involved during a purchase, it is always a great idea to run the idea through them in the first instance.
They may have some advice on what your purchasing vessel should ideally look like based on your own situation, eg should you buy via a new limited company or sole trader? What are the implications when indeed it comes the time for you to sell, even though it may seem a million miles away.
2. Appoint your solicitor
Hopefully you have had some initial conversations with solicitors and you know who you will be instructing to help you with the sale. If not, don’t despair, but pick up the phone and start calling.
Andy’s tip: Someone with dental experience is key. This can speed up the process significantly, but remember that you are instructing them and not the other way around. They should be able to give you their advice, but you should be making the calls during the process.
3. Heads of terms
The first real document between both parties will be the heads of terms, or HoTs. This is an agreement between both parties in principle, subject to a formal contract being drafted. It’s important to include anything pre-agreed here.
For example, if the total purchase price was £1 million but 95% of this is upfront and the rest is deferred, or if the seller has agreed to stay on post sale for a period of time, include it in here.
Holding deposit
Sometimes in the HoTs or discussed before, you will include and agree to a holding deposit (not to be confused with any deposit agreed for the sale). This is a smaller amount, typically 1-2% that shows commitment on your side.
In return, the seller should offer exclusivity and should not be entertaining any other viewings or offers going forward. There is often a time period that the exclusivity would remain for, typically how long the sale will normally take.
Share sale versus asset sale
Ideally, this is in the sales prospectus, but often it gets overlooked which actually makes a significant impact on the process. Are you buying the assets of a company/business or are you buying the entire company itself?
There are often tax implications for the seller, but it’s also a great question to ask your accountant. For the buyer, you need to be a aware that if you are buying an entire company (share sale), you will buy any existing liabilities.
Therefore, if there is a black mark from a number of years ago, this will now be your black mark. As a result, your legal team should do a deeper dive into the history of that company.
This usually incurs additional cost as it takes more time. The flip side is that any contracts that are in the companies name would just roll over to you without having to terminate and re-instate and run the risk of re-negotiations.
4. The draft sale purchase agreement
This is the main legal document that the solicitors will get cracking on when the sale is agreed. The main aim of it on your side will be to clarify what you are buying with regards to the practice, team, property and warranties.
The process should identify any gaps in documentation (eg a lost NHS contract that was signed decades ago) but above all it allows for full transparency and disclosure between the seller and the buyer.
Often at the end of this you will have some disclosures and warranties provided by the seller, and if the worst happens in the future, then it is the legal framework that allows for a claim by the buyer if something wasn’t disclosed.
Andy’s tip: If you are the seller, don’t wait until the last minute to start getting the documentation together. Using the above example, if you don’t have a copy of the original NHS contract, it can take weeks or sometimes months to request this and have it sent. So, the earlier you can see if there is anything missing, the better.
If you are the buyer, ask your solicitor to send a list of everything the seller needs to provide as early as possible.
5. Dealing with third parties
For me, sometimes the most frustrating part of any process is when part of it is in someone else’s hands. Again, the key here is to plan as much as possible.
The CQC (Care Quality Commission)
This is a delicate one. You will need to let the CQC know that there will be a change of ownership and fill out an application form to that end.
However, the CQC have a waiting time and the application will only be valid for a certain period of time.
Speak to the sales agent and even the CQC themselves to understand time frames. Andy tells me that, at the time of writing, the waiting time is roughly four months, but in recent times this has been significantly longer.
One option could be to use an external company to help with this process, especially if time is of the essence.
The NHS
If the practice has an NHS component then they will need to be informed of a new name on the contract or even a change in the contract. Speak to your solicitor to understand when notice of this change should be given, as the NHS will often need a number of weeks’ notice. They can also often have a set date when these changes can take effect from, eg the first of a month.
If you have completed everything else but delay this notice, you can sometimes delay the completion by a number of weeks unnecessarily. This is frustrating when its simply something you can be slightly proactive about.
Third party landlords
Let’s face it, if you are buying a practice and the property is owned by a third party, the landlord really doesn’t have much incentive to do anything.
So, getting any property process underway early is really important. They may want to use the opportunity to revise the rent which could well affect the valuation and prompt another chat with the seller.
You don’t want all of this to happen at the end of a sale process!
6. The bank
Many of us will require funding to purchase a practice. The lender’s main role is to assess the quality of the purchase.
Initially, they will tend to give you indicative terms of the loan. Then, once you are comfortable with these, they will submit a formal application to the underwriters, and if all goes well you will receive a formal sanction.
The latter will also let you know if there are any conditions that you would need ticked off before you can draw down on the loan, for example having life insurance in place or critical illness cover.
They will also tell you what covenants you may need to meet on a monthly/quarterly/yearly basis after you have drawn down the loan. Basically, do you need to consistently show a certain level of profit compared to debt, and how often will they want to check this?
The bank will often instruct an independent valuer to assess whether the price you are paying stacks up, and you will need to pay for this privilege. They also will have their own legal team to evaluate the due diligence. Again, you will often have to pay for this, so it’s a good idea to understand the cost and timescale involved.
7. The valuation
The valuer appointed by the bank have their own indemnity and they typically tend to be cautious. They are not there to tell you if the practice you are buying is worth more than the purchase price, but rather if the purchase price seems a fair reflection in the current market.
There are certainly times that the valuation might not meet the purchase price, and this would lead to a conversation between the buyer and the seller about how to proceed. Realistically, the options at this stage tend to be: reduce the agreed price, cover the shortfall yourself, pull out of the deal or meet somewhere in the middle.
Andy’s tip: It’s important for everyone to look long-term here, and sometimes looking at the financial impact over the term of a loan will give some clarity.
If there is a £50k difference for something you are paying £1 million for, how much does that work out monthly? How much profit are you left with if you did negotiate something in the middle? Think for the future.
8. Telling the team
When should the team know that there will be a transfer of ownership? This is a tricky one, and I can understand all the various points of view. If a seller tells the team too early then inevitably the team becomes unsettled.
Team members could leave if they have been on the edge of leaving already, which sometimes seems silly as they would be experiencing change in any case! What if they tell the team, and through no fault of their own, the sale doesn’t go through?
If you tell them too late, there can be a sense of resentment that they were not told sooner, leaving a bitter taste, especially for team members that have been with the seller for decades.
I think every process is different and every circumstance is different. However, I would say the best thing, whenever the team have been told, is for the new prospective owners to meet the team as soon as possible. Answer any worries or questions they may have and just reassure them that you don’t have two heads and breathe fire!
9. Exchange and completion
All the paperwork has been done, everything values up and all third-party involvement is in hand! Congrats!
Now it’s time to exchange contracts and decide when you are going to complete. When you exchange, you are legally bound to purchase the practice? It gives the seller the chance to be comfortable and the buyer the security knowing the deal is done.
Often completion, ie when you officially get the keys, will be done simultaneously. However, sometimes there may be some loose ends to tie up, or a holiday planned in between which means you may need some time between exchanging and completing.
Andy’s tip: Try and have these dates as close together as possible.
10. Got the keys! Now time to relax…
If only! Now it’s the time to get your graft on. Spend time to get to know the team members, induct the practice manager into any processes you would like them to adhere to, and look back at that business plan you made with the help of my last article – really start implementing everything you said you would do.
Oh yes, and don’t forget to… smash it!
Andy had some final words of wisdom for anyone embarking on the practice purchase journey…
- Do it for the right reason –Very often in the short-medium term, you should expect a drop in income and being an associate is more profitable. (As per my last article, know your ‘why’)
- Don’t hide behind solicitors – It’s really important to keep a good relationship with the sellers and vice-versa. Each set of solicitors will be protecting their clients’ best interests, but sometimes it’s important to remember why you embarked on the process in the first place and not let emotions take over! A stalemate is often best resolved by picking up the phone to the seller and just having a good old fashioned chat to find the middle ground
- Motivation and drive – Keep this going throughout the process as it will serve you well when you are the owner.
I would like to give a massive shout out to Andy for giving up his time and being so open with his advice. Andy and his team will always be happy to help if you are thinking of selling or indeed buying a practice, and its never too early to have a chat.
If you have found this article useful or need any further advice, please contact me on [email protected].
Read more from The Kana Way:
- Are you ready to buy your first practice?
- How do you make ‘I do’ work in business?
- Introducing The Kana Way.
For more information, visit www.kanahealthgroup.com or www.kanadentalacademy.com.
This article is sponsored by Kana Health Group.
