Selling your practice to an associate
An associate buying your practice has advantages but beware of taking shortcuts, as Martyn Bradshaw explains
A principal seeking to sell to their associate may feel that half the battle has been won and the transaction can proceed with minimum formalities. This is rarely the case as there is still plenty of work to be done. It is
also important that the vendor’s day-to-day working relationship with their associate continues and that neither party is put on the spot into making decisions, not to their best advantage. At PFM Group we undertake independent valuations of dental practices and find that more than half of principals selling to associates choose to use a sales agency, solicitor and accountant in the same way as an open-market sale.
The preferred route
Using professionals means vendors take advantage of experienced advisors who deal with practice sales daily. Such experience may result in, say, tax savings of thousands of pounds and pre-empting difficult negotiations later in the process.
Some purchasers may also prefer to have an experienced agent who can answer questions on how things normally work and who can also assist with putting things into place – such as the finance – to ensure
that the sale goes through as smoothly as possible.
An agent is likely to prepare a sales prospectus for the practice as if it were going on to the open market. This is done for numerous reasons but the main advantage is to demonstrate to the purchaser that the practice could, if necessary, be readily placed for sale on the open market. Marrying this up with a deadline for the sale completion puts the vendor in a significantly stronger position in the negotiations.
The prospectus is also a good source of all the information the buyer will need. This includes the background information, staffing, gross fee income and accounts, which can be passed on to the buyer’s accountant and bank.
Offers and negotiations
As previously mentioned, the negotiations would usually be handled by an agent. This leaves the vendor and purchaser to enjoy their normal working relationship, without feeling they need to negotiate – which could put the vendor in a less favourable position.
Where associates have not been actively looking at practices on the open market they often don’t realise how high values are and sometimes feel a practice is overvalued. A sales agent can discuss market values with the associate so they understand the practice value is accurate in the current market. If the associate is not willing to pay the asking price, the practice is ready to put on the open market – should the vendor wish to progress the sale on this basis.
If the associate does wish to proceed with the purchase, the next stage is to ensure that finance is possible. The banks are happily lending to dentists looking to purchase a dental practice but they are more cautious than they were 20 years ago. It is important that this is established ‘early doors’ so as not to waste time and money in legal costs if the buyer is unable to raise the finance.
Where a buyer has not yet arranged finance, I ask about their deposit, assets, liabilities and expenditure as this gives a strong indication as to whether they should be able to raise the required finance. As a company, we will happily assist the buyer to arrange finance. Doing so means we can ensure everything is done correctly and that the sale goes through smoothly.
Getting to the end
Once the offer has been agreed and finance has been verified, the next step is to instruct solicitors. Ideally, both parties will instruct solicitors with experience of the specific requirements for dental practice transactions.
The sales agent should be in regular contact with both your solicitor and the purchaser’s solicitor to ensure everything is going to plan. They may also need to interact with the accountants – especially if the practice trades as a limited company – for the split of the goodwill and equipment as each element has different tax consequences. Mistakes in dealing with the taxation requirements could mean the loss of many thousands of pounds.
In addition, as the buyer’s bank is likely to require their own valuation of the practice (as with a residential mortgage), the buyer’s valuer would generally contact the agent to get the relevant information and ask for comparisons with other practice sales. A valuer to valuer conversation is likely to be beneficial. If the bank’s valuation comes in lower than expected, the bank will seek to lend less, which will most likely affect the buyer’s offer.
Martyn Bradshaw is a director of PFM Dental and head of sales and valuations. Martyn undertakes dental practice valuations, sales and consultancy work advising internal buy-ins and buy-outs and structures. www.pfmdental.co.uk