All in the timing

03 September 2012
Volume 28 · Issue 8

Ray Goodman begins a series of articles on practice purchases.

Few dentists will buy or sell a practice more than once or twice throughout their lifetime. Inevitably, they often lack the experience and knowledge to smooth out possible pitfalls and potential difficulties attendant to the transfer of a business ownership.

Dentistry is a specialist occupation, with many UK practices' financial profiles further complicated by their association with the NHS, and so engaging specialist legal representation is important. At the same time, a basic understanding of the options and procedures ensures a more productive solicitor/client relationship and assists in the making of informed, prudent policy decisions where only the principal in the case can determine the final outcome.

From the seller's point of view, especially for those contemplating retirement, a successful transfer of ownership revolves around a timely, tidy completion and the realisation of the expected valuation. Practice buyers, however, perhaps particularly first time buyers, have more complex matters to consider in their pursuit of a suitable, career-building business opportunity.

Unlike most domestic property transfers, when the buyer is usually acquiring merely premises from the previous owner(s), either on a freehold or leasehold basis, businesses can be owned in at least five different ways, and long standing family businesses may have, over the years, developed their own, individual peculiarities. The principal business ownership structures within the dental practice market are sole practitioner ownership, multiple practitioner owners working as an association or with an expense sharing arrangement, a formal partnership, a limited liability partnership (LLP) or a limited company.

It is important the purchaser understands the precise nature of the enterprise he is buying, or buying into, as the business structure will determine his subsequent responsibilities, whether legal, financial, clinical or in respect of personnel.

Many recent graduates or associate first time buyers, especially in the current economic climate, will probably not have access to the funding required to buy a successful practice outright, so some knowledge of the differences between the various styles of ownership is highly desirable.

Clearly, sole ownership is accompanied by sole overall responsibility. The principal will be personally liable for all contractual matters including employee and associate contracts. The principal's personal assets are at risk in the event of a liability default. Although this form of ownership, along with partnerships, is that favoured by most PCTs, there are limited options for maximising tax relief.

Also common within the industry are situations where individual dentists share premises, reception staff and facilities, with each practitioner responsible for an agreed proportion of the expenses (an expense sharing arrangement). In this scenario the individual practitioners will own their own practices but share other income and expenses on a pre-agreed basis that should be properly documented in an expense sharing agreement to avoid future dispute.

A formal partnership is an agreement between any number of partners who jointly own and operate the practice. Liability here is joint and several between the partners.

This means a creditor can claim against one or any of the partners for a partnership debt. It is essential that a proper partnership agreement is drawn up to set out the various obligations and entitlements of the partners and to deal with issues such as death, retirement and expulsion. In the absence of such an agreement the partnership is regulated by the terms of the Partnership Act 1890, which is out of date and deficient in its provisions. It does not, for example, provide any provisions to enable a partner who goes off the rails to be expelled.

Limited liability partnerships have only been legally accepted in the UK since 2000. These differ from traditional partnerships by limiting the partners' personal liabilities, (protecting their personal assets in the event of failure). The LLP is in effect a legal entity in its own right and the business operates along the lines of a limited company. To an extent an LLP has some of the benefits of a limited company and of a partnership but it may be taxed differently to a partnership. Guidance should be taken as the LLP is, like a limited company, a separate legal person. It will not be possible to transfer a PCT contract to an LLP using the partnership route.

Limited companies are owned by their shareholders and managed by a board of directors. A dentist buying shares in a limited company becomes a part owner of the company but not necessarily a director with the ability to influence its policies or operation. As a limited company is a separate legal entity its shareholders are protected from liability, as any claims will be against the company. If the company is unable to meet its liabilities it can be liquidated and liability does not attach to the shareholders. The decision of which vehicle to use when buying a practice is dependent on many different issues, for example taxation, the transferability of any NHS contract, risk and many others. It is therefore essential to take specialist legal and accountancy advice.