PDS and GDS
Ray Goodman’s continues his series of articles on practice purchases.
The sale and purchase contract is the definitive agreement between the seller and the buyer, and is legally binding after both parties have signed and each party’s signed copies have been exchanged. This is commonly known as the ‘exchange of contracts’, with a completion date being agreed and becoming a fundamental term of the contract.
Since no two practices are the same, each sale and purchase agreement will include clauses specific to that transaction. However, the contents of every agreement can be divided under common headings.
The contract will open by naming the parties to the sale and defining particular expressions to be used later in the document in the interest of brevity. If the practice being sold has more than one owner, or all of its assets are not jointly owned or is a limited company, the full details of ownership and addresses of every participant in the transaction must be recorded.
The core of the agreement describes the assets to be sold, including separate apportionments of the different constituent parts of the practice (premises, goodwill, equipment and so on) and how and when the payment(s) will be made. Negotiations should determine the proportion of value ascribed to specific elements within the practice to minimise any tax liabilities. Stock is usually valued later, on the completion date. Most contracts will feature an attached, detailed inventory of exactly what is included in the sale.
The agreement will include limited warranties given by the seller regarding the state of the practice, the condition of its assets for example. The post-sale breach of a warranty may expose the seller to a financial penalty, and a percentage of the price may (where necessary) be held in a solicitors’ joint account against the purchaser subsequently bringing a warranty claim against the seller. The terms under which the buyer assumes liability for any on-going liabilities will also be stated. It is usual for a 10 per cent deposit to be paid on exchange, and the balance paid on completion. Sometimes part of the final payment is withheld or subject to later adjustment depending on, for example, some loss of goodwill over the first months of trading for the new owner, or difficulties arising from renegotiating a PCT contract.
Practice sellers with PDS contracts need the consent of the PCT to transfer the contract to the buyer. This will rarely be given as the PCTs are compelled by EU rules to re-offer the contract for tender, a contest which the buyer may not win. However, the PCT cannot refuse, subject to certain conditions, to convert a PDS contract into a GDS contract. It is often possible to affect the transfer of a GDS contract by utilising the partnership provisions that are contained in the GDS contract.
The principal practical difference between PDS and GDS contracts is their time frame; PDS contracts are fixed term, so the PCT has an opportunity to renegotiate when they expire, while GDS contracts are not. The PCT will clearly not wish to place itself in a less advantageous position, and a recent NHS Litigation Authority ruling upheld a PCT’s right to refuse to offer a GDS contract with the same value as the PDS contract it was replacing. At the same time, any reduction in value could not fairly be described as ‘significant’ compared with the previous value.
Typically, contract values in these circumstances have been reduced by between 10 and 15 per cent, but not necessarily in solely remunerative terms. Some dentists have agreed to increase the delivery of UDAs for the same overall return, while others have perhaps agreed to longer opening hours or increased their provision of emergency services to maintain the contract value, or agreed to an increase in UDAs year on year. ‘Significant’ is not a precise definition, and will have a different relation to the original contract value to each side in the negotiations. The transfer of designated orthodontic PDS contracts will always require PCT consent.