Michael Blenkharn considers what might make you want to shy away from a potential purchase.
The process of purchasing a dental practice is a long way from the stereotypical unscrupulous world of the second-hand car trade industry, but the lessons learnt from buying a car can be applied when buying a dental practice.
Performance
In the same way car buyers compare each car’s acceleration, economy and boot space against one another, prospective dental practice buyers can do the same thing. A practice’s performance can be benchmarked against national averages and compared to other NHS, private or mixed practices. This benchmarking process can highlight any significantly high expenditure as a proportion of income. One example of how this can be particularly useful is when reviewing staff costs. If you acquire a practice with high staff costs you will find it extremely difficult to reduce these as, under the TUPE (Transfer of Undertakings (Protection of Employment)) legislation, you cannot reduce an employee’s pay rate after buying the practice. The benchmarking procedure enables the prospective buyer to interrogate and evaluate the financial performance of the target practice.
Reliability
Once the performance of the practice has been ascertained, it needs to be established whether this profitability will continue forwards once the new owner has taken charge. Depending on how the clinical staffing changes, it may be necessary for the buyer to utilise an associate to cover the selling principal’s patient list (or if the selling principal stays on, paying them as an associate). Another thing to bear in mind is that profitability does not equal affordability. This may be true for buyers who are relying on lending to acquire a practice. The cash outflow of the loan repayments needs to be taken into consideration. An initial affordability calculation in the early stages can save hours of time and heartache as feasibility is crucial for lenders to consider lending.
Service history
Ignoring property, the biggest element cost-wise of buying a practice is the goodwill. Goodwill is not tangible – it’s not something you can see or touch. What you can see and touch is the dental equipment, computers and fittings such as units and cabinetry. It is important to consider the condition of these items, how they have been maintained and how long they are expected to last before needing to be replaced. If a practice purchase is already marginal in respect of affordability, any unexpected costs, such as replacing a dental chair or X-ray machine, could be the straw that breaks the camel’s back.
Previous owners
When buying a practice, you are taking on the reputation of the previous principal and associates. In the same way a used car may have been abused by its previous owner, a patient base that has not given the correct level of care may come back to haunt you, so it’s always advisable to lift the bonnet and have a good look around. The same can also be true for staff members. When buying a practice which the seller has incorporated into a company, there can be further complications, particularly where an NHS contract is involved. If the seller is selling assets held in a company, there are two methods available to acquire these assets. The first is the most straightforward – an asset purchase. An asset purchase is the same method you’d use when buying a practice from an individual. The second method is to buy the whole company (warts and all) from the seller. This is known as a share purchase. When purchasing the shares of a limited company, there will be more professional fees incurred, due to the enhanced level of due diligence required. This is because when purchasing the shares of a company, you are taking on the inherent risks and liabilities that may have previously occurred in the company. Your solicitor/accountant will want to ensure these risks are minimised by thoroughly reviewing the affairs of the company.
Evasiveness
I had experience recently of a seller who was unwilling, or unable to answer questions or provide information. The seller had two practices, with the performance of these merged into one set of accounts (which is not unusual, I must add). The seller was selling only one of these practices. From a specialist dental accountant’s point of view, the first step in assisting a dentist in buying a practice is to ascertain and appraise the performance of the target practice and then comment on the asking price. As mentioned above, this is the key to exploring the financial strong and weak points of the practice to enable us to assess the affordability for the buyer and the price being asked by the seller. In this case, the seller/seller’s accountant was unable to give a breakdown of each practice’s performance, thereby stopping us from appraising the target practice’s performance. Without being able to undertake this initial work, we advised our client to not pursue the purchase. In essence, due to the seller’s inability/desire to answer our questions and provide basic information, the prospective buyer walked away.
The key thing to remember is that there are plenty of practices located throughout the country. Just like when buying a car, you don’t always need to buy the first one you see.