Key considerations when purchasing a dental practice

Are you looking to buy your first dental practice or an experienced principal setting up a new venture?

Property lawyer and healthcare specialist Lisa Davison at Wake Smith Solicitors looks at key issues when purchasing a dental practice.

Funding

The first step in purchasing any asset is to evaluate your finances.  There are many funding options available to practice owners and most lenders have teams specialising in healthcare funding to suit your particular needs. Lenders will have different requirements depending on whether you are a first time buyer, the deposit you have available, whether you are part of a dental corporate group and whether your practice is NHS, private or mixed.

It is likely that any lender will want to secure the loan against the practice by securing a first legal charge over the property.  Whilst this is standard practice, you should consider any flexibility required in using the property as security for any future funding.  Note that any future dealings affecting the title to the property, for example transfer to an additional principal or grant of a lease to a secondary operator will require the consent of the lender.

It is important that your appointed solicitor is on the lenders panel of approved solicitors or otherwise able to act on behalf of both the practice owner as borrower and the lender itself.  This will ultimately save you time and costs whilst in the knowledge of dealing with a network of specialist healthcare professionals.

As part of the funding process, the lender will obtain a valuation of the practice by instructing a specialist dental RICS surveyor. As an expert in the sector, the surveyor will look at comparable practices in order to value the property and also look at fee income and profitability by reference to any UDA’s/UOA’s under any NHS contract (where applicable) in order to value the goodwill of the practice.  The banks valuation report is reviewed by your lawyer as part of the due diligence process.

Due diligence

Once you have instructed your lawyer, one of the key tasks is for your team of specialist professionals is to evaluate the practice, establish its assets and liabilities and determine viability of the purchase.  Note there is no binding agreement between the seller and buyer until contracts have been exchanged.  It is therefore important to carry out a full due diligence exercise before contracts are exchanged.

The due diligence process will involve your lawyer:

  • Investigating title to the property. This will typically include reviewing the registered title to the practice, raising standard enquiries and carrying out a suite of searches on behalf of yourself and the lender (typically, local authority, drainage and water, coal authority, environmental and flood risk reports and any other site specific searches);
  • Ascertaining the property has the correct planning consents and reviewing any conditions attached to that consent. Dental practices fall within use class D1 of the Town and Country Planning (Use classes) Order 1987;
  • Looking at the practice’s finances and accounts in conjunction with your appointed accountant;
  • Reviewing the NHS contract (if applicable) and advising on any assignment/transfer provisions;
  • Reviewing any partnership agreement and contracts relating to the practice such as for dental practice equipment, employee contracts and advising as to any assignment/transfer provisions and if applicable, the requirement for new contracts and/or partnership agreement.

Note that a more thorough survey may be needed in respect of the property itself, for instance where the property is of an older structure, to determine whether the property is structurally sound.  If significant works are needed, this may make you better placed to revisit the agreed purchase price in order that such works be funded.

Structure

Practice ownership comes with its significant benefits but also financial and personal risk and responsibilities.  Taking advice on and carefully thinking about the structure of the practice at the outset is prudent.

The traditional practice structure is by way of a principal sole trader or partnership.  In today’s markets however there are an increasing number of dental corporates, expense sharing arrangements, incorporated practices and hybrid structures.  Each of which have their own merit and risks and careful advice should be taken as to the proposed structure, particularly when setting up a new practice.

Each structure will have its own tax implications both on its initial set up and exit. In that regard it is also important to think about flexibility of the structure in taking on any additional principals, for example.  Likewise, a rigid structure can cause complications when a principal wants to exit.

In buying an existing practice, the structure and how the acquisition will be financed very much go hand in hand and expert guidance will be required from your team of specialist professionals. With an NHS practice for example the structure will very much depend on the entity holding the NHS contract.  This is where the goodwill and value sit in the practice and any transfer will need to first be approved by the Local Area Teams (‘LAT’s).

Practice Goodwill

Unlike other areas of the primary care sector, much of the value of a dental practice in its practice goodwill.  Such values often substantially exceed the value of the bricks and mortar of the practice itself and with this being the pinnacle of any bank lending, its valuation is key.

Valuation of dental goodwill is an interesting topic in itself and not discussed at length for the purposes of this article. Goodwill values are influenced by a number of factors, some of which are static (such as geographical location of the practice) and others more variable such as fee income/turnover and profits.

As part of the due diligence process, your professional team will look any private fee income, together with any UDA/UOA’s under the NHS contract and verify the information provided in the valuation report mentioned above.

CQC Registration

Every new dental practice will need to apply for CQC registration.  Likewise, any transfer of ownership of the practice will also require registration.  Such process can take up to 3 months so it is best to start the process as soon as the decision is made to set up or buy an existing practice.

In terms of procedures, an up-to-date DBS check (formerly CRB) will also be required (not more than 6 months old).

There may be other regulatory hurdles to go through as part of CQC registration including liaising with the LAT in respect of the proposed transfer of any NHS contract.  Your professional team can manage this process for you and advise as to any intermediate structures necessary so as not to delay completion of the purchase.

In a rapidly changing environment, our team of specialist healthcare lawyers stay ahead of the issues to work with public and private providers in dentistry, leading the way to achieve better, integrated solutions, more efficient businesses and improve service user outcomes.

For further information and friendly expert advice contact Lisa Davison at lisa.davison@wake-smith.com or on 0114 224 2029.

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