Dental practice owners should take time to step out of their clinical roles to run their businesses
Tuesday 21st March 2017
All too often, dental practice owners take a view that, provided they have money in the bank at the end of the month, they don’t need to worry about their business. With increased clinical pressures such a view is understandable. Nobody describes being a dentist as easy. However, taking a step back can reap significant reward, in terms of profitability, better work/life balance, patient satisfaction (and retention) and even clinical results.
The starting point for a practice owner (or dentist looking to acquire their first business) is to consider what they really want from it all. Are they simply looking for practice ownership as the next step on the career ladder, or is there something deeper? Someone going through the motions in a career may never have really considered what benefits they want to achieve from all of the hard work they are putting in. For some, the driver is purely financial; for others it is about achieving flexibility in their working life to fit in with other personal commitments; whilst the driver for some dentists is more about the sense of personal achievement and pride in their business. Sitting down to consider and record your personal goals is the first step towards achieving them.
When you know what you want from the practice, set yourself goals and a vision for the business. How do you want the business to look in say 2 years’ time? Even if the goal is not fully achieved in that timescale, this doesn’t mean you have failed and should give up. It will probably mean at that stage that you are about 20 steps closer to your goal but you still have more work to do.
Your goals can also change over time. It is important to continually re-evaluate. If a new NHS contract is introduced as promised before 2018 (politicians can also set themselves goals that might not be achieved!), then you might need to reconsider where your business is heading. Adapting to change is a vital part of becoming a successful businessperson. Keeping on top of changes in the industry, demands of patients and the benefits of technology can keep you in the game. Maintaining the ability to adapt to change is tiring. Many times, I have been instructed by someone looking to sell their practice because they are having to deal with one change too many (the introduction of compulsory CQC registration for dentists being the most obvious example).
It is also vital to monitor your own progress in terms of your goals. If part of your plan is to gradually switch to plan based dentistry, then you should be monitoring the uptake of plans and putting in place strategies for improving this. If one of your associates can convert 15% of their patients onto a scheme, and another associate only 2%, then you will need to consider why. However, the information as to these conversion rates reaching you is the cornerstone of being able to do something about it.
I am constantly surprised by the number of practices that have very little grasp of their daily, monthly or annual finances. It is rarely sufficient to consider the accounts of your practice on an annual basis (which is also likely to refer to the year ending around 9 months before you receive the paperwork). However, for many practices this, and the balance in the bank account, is the only information that will ever be considered.
It is vital to have an understanding of a balance sheet and a profit and loss statement. As a business owner, if you don’t feel that you have sufficient skills or ability to read these documents, then get yourself some training or ask for the assistance of your accountants. You also need to ensure that management accounts are produced on a regular, or even a real time, basis giving you the information you need to make properly informed decisions as to the future of your business.
Dentists can often be so concerned by the clinical aspects of their role that they neglect IT or marketing planning. Commonly, a practice will make an investment in dental software but fail to implement sufficient training and monitoring, leading to underuse of the capabilities and an unexpectedly poor return on their investment. If a practice owner feels that they don’t have the skills to deliver results in these areas, then it is always open to them to recruit an expert who can.
A practice owner should also not fail to underestimate the contribution that a strong team will have to the success of their business. Unless they are operating as a sole practitioner, there will be many patients with whom they may never cross paths. It is vital that all members of staff are on board with the plans that you have in place for them to be achieved.
Responsibility for staff goes far beyond just recruiting the right people in the first place (although that is a great place to start); you need to ensure that those staff remain happy and engaged in their roles. Development of either your own, or a practice manager’s, skills in terms of HR management can be advantageous. Happy, engaged and motivated staff = satisfied patients = a step towards your long term business goals.
It can be extremely tempting to focus your time and energy into patient treatment and clinical work. However, improving the way a business is run may actually mean an overall improvement in the dental health of your patient list. Taking the time to step back, plan, adapt to change and seek advice and assistance where you need it, can and will reap the rewards.
Author: Nicola Lomas
The 5 most common causes for delay when selling a dental practice (and what you and your dental solicitor can do about this)
Tuesday 7th March 2017
In recent years, the length of time between the buyer making an offer for a dental practice, and them actually taking over has increased. There has been much talk amongst professionals assisting in these transactions as to how these timescales can be reduced and Brabners has produced and implemented strategies to ensure that we can meet the timescales required by our clients. However, there are often forces which act beyond the control of either the lawyers or the parties to the transaction.
Delays in transactions are rarely desirable by anybody. Solicitors and brokers often aren’t paid until completion takes place. From a buyer’s perspective, it is difficult to maintain excitement about a new business, when it can take up to a year after agreeing to buy before they take over. Sellers can also lose interest in the practice, standards can slip and UDA targets can fall behind. This can have a knock on effect to the value of the business.
If a transaction is taking longer than anticipated, consider whether the delay has been caused by one, or more, of the following issues.
If the property is leased and the landlord is not a party to the sale, then the transaction will proceed either as:
a) A transfer of the existing lease (with the landlord’s consent being sought)
b) The existing lease being terminated, and a new lease being granted by the landlord
c) The landlord selling their interest in the freehold of the building to the buyer
In each of these scenarios, the landlord will be involved in the transaction. The property elements of the deal need to be tied into the business transaction. A landlord may be slow to respond to requests for documentation or just not move at the same pace.
It can be helpful to set out the proposed timescales with the landlord when they are first approached. If the seller or buyer are to be responsible for the landlord’s legal costs (which is often the case) then the appropriate funds should be lodged with your solicitor quickly.
Where an existing lease is being transferred, and the landlord’s consent for this is required, the law suggests that a reasonable timescale for giving this consent should be measured in days or weeks, rather than months. It may be possible to pursue a dawdling landlord in court to speed things up. However, this is an expensive option, and an appeal to the better, more reasonable nature of your landlord should always be favoured.
Although funding in principle is often in place when the initial offer is made, ensuring that the requirements of the bank to draw down funds can take more time.
Delays in this area can vary depending on which lender is involved.
It is a good idea to put your bank business manager and finance broker (if you have one) in touch with your solicitor at an early stage in the transaction. A business manager and broker will have a greater ability to liaise with security departments at a bank to ensure that documents are reviewed quickly.
Funding is also likely to have a number of documents which need to be signed by you which may come directly from the bank or via your solicitor. You should deal with all documents promptly, even if nobody uses the word ‘urgent’.
Funding may be dependent on a valuation report, although from experience this is rarely the cause of significant delay to a transaction.
From a seller’s perspective, delays can be caused by banks producing figures to discharge any existing borrowing secured on the practice. This can happen regardless of whether you still have funds outstanding on your loan, or if the loan has already been repaid in full (often some years previously).
If any borrowing is secured on your practice, pass your solicitor details of the accounts, and any contact details you have with the bank to your solicitor at an early stage. Your solicitor can check whether there is any formal security at the Land Registry or Companies’ House at the start of the transaction.
CQC registration applications are likely to take in the region of 8 weeks. It is also important that there is a DBS check available for both seller and buyer which is no older than six months old at the time of the application.
The time the DBS check takes can vary.
It is important that the CQC application is submitted neither too early nor too late. Although the temptation can be to get the application submitted early, a CQC assessor may not keep a pending registration in place. The CQC may require a second application if completion does not take place when originally anticipated.
The solicitors acting for both buyer and seller can help set a timeframe for submitting a CQC application when planning the transaction.
Associate notice periods
If a buyer is working elsewhere as an associate, many dentists are bound by a notice period of at least three months.
The buyer will be advised against submitting notice on their existing job, until such time as the transaction is legally binding (i.e. on exchange of contracts).
This can mean a potential three month delay between exchange of contracts and completion.
There are several ways that this can be dealt with.
a) The associate can informally agree with their current principal that a shorter notice period will be accepted. Often these conversations can be had with an existing practice some time early in the buying stage.
b) The associate can work their notice period at their existing practice but continue with the purchase of the new practice in a shorter timeframe, and either work at both sites or just at the old practice with associates carrying out much of the work at the new business. This often isn’t ideal as a new buyer will want to be in the practice understanding how things work and implementing whatever changes they have planned
c) The buyer can take a risk and submit their notice in their current role earlier. However, if the purchase doesn’t proceed, they could be left without a job.
Outstanding responses to enquiries/communication
This is unfortunately the most common reason for delay. One party may not be aware that others are awaiting something from them, or might be busy with clinical duties and simply not have the time to go looking for, what they believe to be, a relatively pointless document.
It is important to have clear and open channels of communication, both with your lawyer and the other party in the transaction.
Brabners also has in place a transaction guide, which is provided to all new dental clients, allowing them to mark off the different stages of the transaction when they are reached. This makes it easier to anticipate the next thing that might be asked for, and to see what is going to be expected from each party and when.
If you find telephone calls difficult to take when in surgery it is usually sensible to request that your lawyer contact you either by e-mail or text message. Either are fine with us, if they work better for you as a reminder of what is needed, then just ask. Alternatively, if you prefer to have a conversation with your lawyer, again, that works for us too!
It is also sensible, from a seller’s perspective, to have an idea of what sort of documentation is going to be requested during the course of the transaction.
Author: Nicola Lomas
Selling a dental practice – is your compliance paperwork in order?
Monday 20th February 2017
When you sell a practice, the buyer is highly likely to want to investigate the business in some detail, before making the formal commitment to buy. These investigations will cover a variety of issues, including reviewing the accounts and financial arrangements of the business.
If a specialist dental lawyer is instructed to represent the buyer, they will also make enquiries into how the practice complies with the rules and regulations affecting the dental sector. It may be sensible, when preparing a practice for sale, to ensure that the appropriate documentation is available (and in date) including:
- Pressure vessel inspection certificates
- Pressure vessel insurance
- X-ray testing certificates
- Evidence of compliance with HTM01-05
- PAT testing certificates for electrical equipment
- CQC registration certificate and copies of any CQC assessment/inspection reports
- Paperwork relating to the GDS contract (for example, copies of breach notices)
- Copies of reports following any NHS practice inspections
- Fire risk assessment
- Asbestos risk assessment
- Legionella risk assessment/report
- Evidence of maintenance of fire extinguishers
- Evidence of maintenance of emergency drugs
- Evidence of compliance with tax laws
- PAYE and National Insurance records
- Data protection registration
- Copy statements of terms and conditions for all staff
- Copies of any staff handbooks or manuals
- Health and Safety policy statements and a copy of your accident book
- Work permits for any non EU staff
- ID for all staff
- DBS checks for appropriate staff
- Professional Indemnity Insurance for qualified clinical staff
- GDC registration for qualified staff
- Evidence of employer’s liability insurance dating back 6 years
- A PRS licence if you play music or listen to the radio
- A TV licence if you use a TV on the premises
This is not an exhaustive list, and the actual enquiries that may be raised will depend on the solicitor that represents the buyer, and the buyer’s own specific requirements. However, having a full suite of these documents ready for inspection can aide in speeding up the transaction.
Each of these documents is required by law for a dental practice- does the length of the list perhaps remind you of why you want to sell in the first place?
Author: Nicola Lomas
Are members of staff at your practice employed or self-employed (and why it matters when you come to sell your dental practice)
Tuesday 7th February 2017
The typical model you would expect to find in a dental practice is for the practice owner to employ nurses and receptionists, but for other dentists and hygienists to be self-employeed.
The question of the legal employment status of each member of staff within the business is unlikely to cause you many sleepless nights during the ongoing running of your business. But this can become an issue if a dispute arises, if you want to dismiss a member of staff or change their terms and conditions, or if you are looking to sell your business.
Associate dentists often have their own list of patients and supply their services to the practice as an independent practitioner. In turn, the practice owner provides the associate with the use of a surgery, dental materials and a nurse. The issue of dental laboratory services can be variable, with some practices allowing the associates to choose a lab of their own preference, whilst other practices require that all laboratory services are sent to one location.
The associate agreement is usually drawn up on the basis that the associate pays the practice owner a percentage of fee income.
Where the associate is carrying out NHS treatment, there are two possible scenarios: firstly, the associate holds their own NHS contract and pays the practice owner a fee for the use of the practice facilities; or, more commonly, the practice owner holds the NHS contract and allocates to the associate a number of UDAs to perform, for which they should receive a set value per unit.
However, practice owners should be certain as to the true employment status of all members of staff within their practice. Some legal rights apply only to employees, such as the rights not to be unfairly dismissed or rights in a redundancy situation. There are also tax and national insurance implications dependant on the employment status of the individual.
A practice owner is also liable for the acts of all employees during their employment at the practice, but not usually for the acts of self-employed persons.
Where individuals are ‘employees’, they have a right to a written statement of their terms and conditions. Self-employed persons do not have the same rights, although it is certainly sensible to make arrangements to formally document the agreement that you have with self-employed individuals.
To qualify as an employee, there are three minimum requirements. Firstly, the individual must have agreed to provide their work and skill personally. They are not entitled to substitute someone else to do the job. Secondly, there should be a mutuality of obligation, the employer must provide the work and the individual must accept it. Thirdly, there must be a degree of control by the employer. For example, the employer would usually be able to apply disciplinary procedures and the employee can me closely controlled in the way that they carry out tasks, their working hours and days of work. A self-employed individual would typically have a greater degree of freedom and work more independently.
You should seek legal advice if you are concerned about the arrangements you have in place in your practice, particularly where you are considering selling your business, if you have tax concerns or if a dispute arises.
When selling a practice, it is important to ascertain the legal status of each member of staff. This is because all employees will automatically transfer on to a new practice owner, under the same terms and conditions (including the same length of service) under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (which are commonly referred to as TUPE). Where individuals are self-employed, they will not automatically transfer to the buyer unless you put in place arrangements with the member of staff and new practice owner. Self-employed staff will often have a notice period of three months within their terms and conditions and it is often therefore important to ascertain their legal status at an early stage to ensure that you have given them sufficient notice of the sale. Whether an individual is engaged as a self-employed person or an employee may also have a bearing upon the attractiveness of the practice to a buyer, who may wish to make changes to the structure following their acquisition.
If you are unsure of the legal status of your staff, or concerned as to how this might affect a practice sale, it is sensible to discuss the situation with a specialist dental lawyer.
Author: Nicola Lomas
Brabners reacts to Government’s Industrial Strategy
Wednesday 25th January 2017
The Government has launched its Industrial Strategy which is designed to drive economic growth by making it easier for businesses to work across the UK. Central to the strategy are big investments in broadband, transport and energy as well as a £556 million boost for the Northern Powerhouse.
The strategy contains a 10 point plan, including upgrading infrastructure, encouraging trade and inward investment and driving growth across the whole country. Improvements to infrastructure are badly needed if the North West region is to become a true economic powerhouse so this is a welcome announcement.
The Government also pledged to take a more active role in supporting businesses that want to target opportunities in new industries and sectors. It is an acknowledgment that regions across the UK can bring different strengths to the economy and the additional funding of initiatives like the Northern Powerhouse will help support business and encourage economic growth.
Last year Brabners released its North West Ambitions report which highlighted how a strong and efficient world class supply chain hub in the North West of England will not only be a draw to the large distribution warehouses and logistics businesses, but also a compelling reason for manufacturers and industry to locate in the North West.
To download a copy of the report click here.
Author: Matthew Yates
North West Private Equity and Venture Capital Predictions for 2017
Thursday 12th January 2017
Following a turbulent year of surprises in 2016 (from Brexit to Trump), Brabners Private Equity and Venture Capital specialists looks to the future with their key predictions for 2017.
There will be a continued increase in interest from SMEs in crowdfunding and other alternative finance options
Throughout 2016 we saw an increase in interest in crowdfunding as a source of finance for SMEs (even though such interest has still led to only limited completions outside of London and the South East). The momentum behind the crowdfunding sector is likely to continue into 2017, particular buoyed by new requirements on high street lenders to refer SMEs who do not meet their requirements to alternative finance platforms.
Momentum behind the crowdfunding sector continues to draw the interest of the FCA and we predict that 2017 will see the instruction of further crowdfunding regulation, particularly in relation to the level of information required to be disclosed to investors and a tightening of regulation of debt crowdfunding in general.
Private Equity will continue to be one of the key drivers of M&A in 2017
2016 was a strong year for private equity backed transactions and we predict that this trend will continue into 2017. While confidence among domestic trade acquirers is likely to be affected by Brexit for the foreseeable future, we foresee that private equity houses with available capital will continue to be a keen buyer through 2017.
The sub-£2millon buyout market will remaining challenging for management teams
The sub-£2 million buyout funding market has still not fully adjusted to restrictions introduced by the Government in 2015, barring Venture Capital Trust and EIS funds from backing management buyouts. While several houses (notably Foresight and YFM) have since launched new, unrestricted, funds, we forecast that management teams will continue to struggle to raise equity funding for lower-mid market buyouts.
Vendor assistance will continue to be a prominent feature in lower-mid market buyouts
In response to the tightening of the lower-mid market funding market, we have seen an increase in vendor assistance in buyout transactions, with vendors showing flexibility in consideration structures to assist management teams in bridging funding gaps. We expect that vendors’ willingness to provide assistance in the form of deferred consideration, earn-outs and equity rollovers will continue to be a trend in buyout transactions through the course of 2017.
The ‘Northern Powerhouse Investment Fund’ will provide welcome additional funding for SMEs
The £400 million Northern Powerhouse Investment Fund, which is expected to be in a position to start investing in the first quarter of 2017, will provide a welcome additional funding option for SMEs looking to raise up to £2 million. The Fund will look to provide micro, debt and equity finance to businesses which are currently under served by the existing funding market and will plug the gap left by the closure of the North West Fund in 2016.
Angel Clubs will continue to be an important source of development capital for SMEs
Over recent years, we have seen a growth in activity from business angel clubs in the region. While often difficult for companies and management teams to initially locate and access, such clubs have provided an important source of development capital funding for growing SMEs. We predict that angel clubs will continue to be an important part of the funding market through 2017 and that we will see a growth in angel clubs co-investing alongside traditional venture capitalists and private equity houses, specialist co-investment funds (such as the government backed angel co-fund) and crowdfunding platforms (particularly the co-investment focused Syndicate Room platform).
Author: Daniel Hayhurst
What is the difference between a dental expense sharing agreement and a partnership agreement?
Friday 9th December 2016
Do you have more than one principal dentist operating within the same building? If so, we would expect them usually to be operating either as ‘expense sharers’, or a ‘partnership’.
The fundamental difference between the two is that expense sharers are independent businesses, operating separately but sharing some of the costs (such as the costs of a cleaner for common areas, or heating). Traditional partnerships, on the other hand, more often means that the income and outgoings of the practice are shared and the partners each take their slice of the overall profits.
A partnership is defined legally under the Partnership Act 1890 as
“the relation which subsists between persons carrying on a business in common with a view of profit”.
If you fall within that definition, you are legally considered to be a partnership for the purpose of the legislation, regardless of your intention.
From a legal perspective, an expense sharing arrangement is actually just a type of partnership. It is governed by the same laws and regulations as the more traditional model. One effect of this is that each of the partners is jointly and severally liable for all of the liabilities of the practice. This means that someone wishing to pursue a claim against the practice can sue any or all of the partners for the whole amount regardless of which partner was at fault.
There can be advantages to structuring your personal relationship with the dentists you work with as an expense share, rather than as a traditional partnership. You are unlikely to ever disagree over who is working harder. Provided you each pay your share of the joint costs, you can then determine your own level of commitment and be remunerated accordingly. You will gain the independence of running your own practice and business, but your overheads will be considerably lower, as they can be shared with other businesses.
Often a colleague’s practice operating within the same building can be a reliable source of ongoing business, particularly if you have a specialism and receive referrals from them. Running your practice alongside another dentist also allows the opportunity for interaction with another professional, someone with whom you can share experiences and discuss problems.
Whether you choose to run your business as an expense share or as a more traditional partnership, it is vital that you document what has been agreed. Where there is no general agreement as to how the practice should be run, disputes can arise. This can be avoided by drawing up a formal expense sharing or partnership agreement.
Such a document can cover most eventualities, including dealing with what happens if one of the parties wishes to sell, what happens in the event of one party being off work long term due to illness, or perhaps even what would happen in the event of the death of one of the partners.
An expense sharing agreement will also cover exactly which expenses are to be shared, and which are to be considered independent.
A specialist dental lawyer, such as members of our healthcare team at Brabners, can assist in preparing a bespoke agreement that will fit in with your particular needs and circumstances. Our extensive background knowledge of the industry will allow us to pre-empt issues that could arise in the future, and plan your business to ensure sustainability.
Author: Nicola Lomas
What options are available to the purchase of a dental practice if a problem materialises between exchange and completion?
Monday 5th December 2016
The answer to this question is, on the face of it, very simple. If you look at the contract, it should give you your options as to the next course of action.
However, the reality is (as always) slightly more complicated.
Firstly, it depends on the nature of the problem that you have encountered. Many problems could occur in the period between exchange (i.e. the date on which you formally commit to buying the practice) and completion (i.e. the date on which you pay for the practice and take over).
It is important to establish whether the issue constitutes a breach of any of the warranties that the buyer was given in the sale contract. If your issue is that you have just met the staff and you don’t like them, such an issue is unlikely to be a breach of a promise that the seller has made to you. Alternatively, if you discover that substantial financial information missing from the accounts the seller has provided, your chances of establishing that a breach of a warranty has occurred are much greater. This is very much dependant on the scope of the warranties that have been negotiated on your behalf prior to exchange of contracts.
A contract will also usually specify the remedies available to you should a material breach of warranty occur between exchange and completion. These can (but do not always) include being able to: i) withdraw from the transaction and have your deposit returned; ii) have the purchase price re-valued before proceeding to completion; iii) proceeding to completion but keeping the claim open to you; and/or iv) proceeding to completion and giving up the claims that you have for the breach. It is important that you consider before exchanging contracts, both when buying and selling, which of the remedies you feel comfortable with.
It is also possible that problems could arise between exchange and completion, which mean that completion may never happen. Where an NHS practice changes hands, a sale agreement will often be conditional upon the NHS accepting partnership notices and CQC registration occuring. In the event that either of these things becomes impossible for one reason or another, the trigger for completion will effectively never be pulled. In those instances, the contract may also contain a longstop date, allowing either party to walk away from the deal and for deposits to be returned if they are not met within a set timescale (often 4 months).
Where either the seller or the buyer breaches a term of the sale agreement between exchange and completion the remedies available to the effected party often depend on the seriousness of the breach. Remedies for breach of contract could include getting a formal court order requiring them to comply with the contract, damages or rescission (i.e. walking away).
Your options tend to be more limited if something of a personal nature affects the attitude and behaviour of the purchaser between exchange and completion. For example, the purchaser could meet the staff and dislike them, they could suffer a bereavement of a close family member or could sustain an injury which would make it difficult or impossible for them to continue to practice dentistry. If a buyer withdraws from the transaction in such circumstances after exchange of contracts, but before completion, he or she could lose any deposit paid (which might need to be topped up to a full 10% of the price if the initial deposit was lower than this). Further, they would be required to put the seller back into the position they would have been had the contract been completed, meaning that you may need to cover their extra losses. If you are a seller and want to pull out, you could face action from a buyer at court to force you to honour your obligation to sell the practice
Author: Nicola Lomas
High Court judgment considers “close of business"
Thursday 1st December 2016
A recent High Court judgment has reflected on the meaning of the phrase “close of business”, a commonly used phrase in commercial contracts (often in connection with the service of notices under the contract).
In this case, Lehman Brothers received a default notice from ExxonMobil at 6:02pm, relating to an outstanding contract. Lehman Brothers claimed that “close of business” – which was not defined within the contract – meant 5pm. As a result the notice should be deemed received the following morning which would affect the validity of the notice. ExxonMobil claimed that 7pm was a more representative closing time, given the commercial nature of the parties.
The court found that the reasonable person would be “surprised to hear” that a major investment bank would close at 5pm and as Lehman Brothers provided no evidence to show that 5pm was a reasonable closing time, the judge found in favour of ExxonMobil’s submission of 7pm.
The case throws up interesting considerations for commercial clients:
- It highlights the delicate trade-off between flexibility and certainty of terms, the imbalance of which can lead to expensive contractual disputes. In this case, use of an uncertain term provided “useful flexibility” for ExxonMobil to the detriment of Lehman Brothers.
- Therefore, one man’s “useful flexibility” is another man’s “lack of certainty”. That lack of certainty gave rise to the dispute and the attendant costs.
- However, the judge made it clear that whilst 7pm was correct for this case, people should not generally assume that “close of business” now means 7pm; it will change depending upon the facts of each case.
- A tightly drafted definition of terms - such as “close of business” - should go some way to ensuring a satisfactory level of contractual clarity, which will in turn help prevent costly disputes and maintain healthy and long lasting commercial relationships.
Author: Rupert Gill
Retentions in dental practice sales
Thursday 24th November 2016
In an ideal scenario, when a buyer purchases a dental practice, they hand over the money to the seller and, following the transfer of the business, the seller takes their cash and walks away.
However, occasionally things are not quite as simple and part of the purchase price is held back from the seller for a period of time as a “retention”. This means that the seller will not have access to the full purchase price on the date of completion, but the parties have agreed, that a proportion of the price will be retained, which may be passed to either the seller or the buyer depending on future events.
The most common scenario in which this occurs is when the practice that is being sold has patients with Denplan Care contracts. Denplan actually recommend to its members that when dental practices change hands, a retention is kept aside for 10% of annual Denplan turnover. The nature of Denplan Care contracts means that a set amount of money is received on a monthly basis to cover all of the treatment that a patient may need. However, if a selling dentist has been poorly performing for some time (which may have been the reason why they are choosing to sell in the first place), an incoming practitioner may discover that the patients either need extensive treatment or that they have been incorrectly banded. As only a set amount of money is received per month, regardless of the work that will be undertaken, this could lead to an incoming dentist struggling with the demands of the business before they have even started.
Denplan recommend a retention is set aside to cover any defective work that has been undertaken to the Denplan Care patients, or work that should have been undertaken by the outgoing dentist prior to the practice sale completing. The intention is that, if extra work is required over and above what would usually be expected month to month, there is a pot of money available to allow the buyer or one of the associates to undertake such work. It may also be that all of the Denplan patients have been correctly treated prior to completion and the retention monies returned to the seller at the end of the retention period.
Another common scenario in which a retention is required is in the event that previous breach notices have been served on the seller by the NHS in relation to the GDS contract. In these situations, a buyer may be purchasing the practice but a huge element of the buyer’s future income stream is at risk due to the actions of the seller. From the seller’s perspective, they still want to receive the full value of the goodwill for the practice on the basis that the contract will be continuing but, from the buyer’s perspective, they may wish for some assurances that, if the contract is withdrawn due to the actions of the seller prior to completion, they will not be out of pocket.
Retentions are also often used where it is considered that the seller has been significantly underperforming on his/her NHS contract and clawback is anticipated but the figures are not yet known. Retentions are also used where it is likely that one or more of the warranties given in the sale contract may be breached, so sums are kept aside until the full extent and cost of such breach is known.
Where a retention is necessary and agreed between the parties, provisions governing how this will be dealt with are inserted into the sale contract. These provisions will lay down how much is to be held, who holds the funds, how long they are to hold the funds for, what would constitute a potential claim on the retention and how such claims are to be dealt with and how the funds are to be dealt with if no claims are received within the retention period.
The retention funds will often be held by solicitors. Whether it is the seller’s solicitor or the buyer’s solicitor really makes little difference as both will be governed by the rules that have been set down in the sale agreement and the parties will have agreed that neither solicitor can release the funds except in accordance with the terms of the contract.
Retentions are commonly held by the solicitors for periods of around 12 months, but what is reasonable in the circumstances will depend on the reason why the retention was held in the first place. For example, a Denplan retention may be held for enough time for the incoming dentists to see and review all of the patients, whilst a retention in anticipation of clawback may only be needed until the end of year figures for the seller’s last financial year are known.
Author: Nicola Lomas