When selling a dental practice, there are many intricacies to manage, and the process can be challenging. Vendors must ensure the process complies with regulatory frameworks, and they have to consider the welfare of their patients and staff. Realistically, many larger sales will involve negotiation of terms around deferred consideration, which involves accepting a percentage of the value of the practice on day one and deferring the remaining payments – usually over a period of around two to five years – after completion. Advice from specialists in dental mergers and acquisitions is vital to help the vendor think through and manage all the logistics around the sale.
In the current climate, more often than not, a dental practice valued at £2m or above is likely to be sold with some deferred consideration. The deferred amount could be a fixed sum to be paid after an agreed time frame, but more typically, it is linked to practice performance after completion of the sale.
Deferred consideration will often be linked purely to practice revenue or EBITDA, representing the income of a whole practice or individual sites. When developing an accurate projection, it is important that the vendor – who may have been chiefly concerned with individual performance during their tenure – fully understands whole-practice revenue and/or profit and loss forecasts, especially with EBITDA, as this can be open to interpretation.
Deferred consideration is different from retention. In this context, retention is when part of the purchase price is kept as security for the buyer to cover potential breaches by the seller of a warranty or indemnity. Retention is used where the buyer doubts its ability to recover from the seller due to concerns about the seller's creditworthiness, a planned emigration, or a high probability of monies needing to be re-paid.
Assurances and options
Vendors have a number of decisions to make during the process of selling their practice. They must assess whether it will be worth maintaining a stake in the business, reassuring the buyer, and overseeing continued profitability through an earn-out or whether they are happier to rely on a well-negotiated contract. Do they want to sell to a smaller investor whose buying power may be humbler but who might be more open to negotiation around the terms of the contract? Or would selling to a larger corporation, which might have greater marketing and buying power, possibly result in a more secure or faster deal? A corporate buyer may have a good headline price based on deferred consideration, but is it better to wait a year, pocket the profits, and sell to a smaller buyer who doesn't want guarantees?
Whatever the preference, it is very important to get experienced professionals involved in negotiations from the outset, both to support developing the best deal and to mitigate risks. If the deferred consideration is based on performance, how are risks mitigated?
Vendors are advised to negotiate a requirement for the buyer to support and promote the turnover of the practice after the sale has been completed. There should be a strong element of the contract ensuring the buyer can’t cease to invest in marketing, or deliberately keep turnover lower than the threshold agreed to make the deferred consideration payable.
Any deferred payments should be adequately protected in the share purchase agreement to provide the seller with the necessary assurance, and payments should not put excessive cash flow risk on either the business or the buyer.
Security over the payment should be carefully considered. Every practice owner has to consider how the buyer is going to pay the money. Realistically, this money will come from the practice itself, but this isn’t guaranteed. There may be a need for additional security or reassurance that the buyer has a genuine stake in the practice's success. Buyers may need to support the transaction through some personal guarantees.
Bring on the experts
When negotiating a deferred consideration, a legal advisor who understands the specific concerns around dental mergers and acquisitions is very important. As vital, is an experienced agent who not only understands the specific legal frameworks, but can truly advise vendors on how to ensure the whole process is safe, secure and meets their expectations. Dental Elite has fourteen years of specialist experience in managing all the complexities of the sale of a dental practice. Dental Elite goes above and beyond for a more consultative approach, ensuring the unique needs of vendors as well as buyers are met.
Because of the dental industry’s strict regulatory frameworks, selling a dental practice in the current climate can be extremely challenging. Every buyer and every sale are different, but ultimately, as a vendor, if you have agreed to deferred consideration, you need to feel reassured that the money is going to come when it’s due. Having the knowledge and expertise at hand is vital to helping you secure the fairest deal, as well as the right one for you and your circumstances.