You have been an NHS dental practice owner for years. You have grown and developed your practice into a thriving and profitable business, however you now feel the time has come to wind down. You would prefer to spend your day on the golf course or the French Riviera rather than staring into somebody’s mouth and listening to the life problems of your dental nurses. You decide to sell up. You find a buyer, instruct a solicitor, and the first question asked is “do you have a PDS or GDS NHS Contract?” You look in your filing cabinet and there, staring back at you is a PDS Contract. What does this mean? What’s the difference? Well, if you’re looking to sell your practice the type of contract you hold can have a significant effect.
A GDS contract can be transferred between individuals without NHS consent being required. The established way of transferring the contract between two individuals is through a method known as the partnership route and it is not
something to which the NHS is entitled to refuse consent provided certain criteria are satisfied.
A PDS contract however cannot be transferred in the same way. There are no provisions contained within a PDS
contract that allow the contract to be transferred between two individuals by the partnership route and that option does not therefore exist for the holder of a PDS contract. However the fact you have a PDS contract does not mean your NHS practice cannot be sold. In fact there are ways in which we have experience of procuring the transfer of a PDS contract:
Change from PDS to GDS status
The provisions of a PDS contract do provide the right to serve notice on the NHS to change the status of your contract from a PDS contract to a GDS contract with the effect being that you can then transfer your contract by the partnership route. There are however two issues to keep in mind here. Firstly, that orthodontic services cannot be provided under a GDS contract and therefore if your contract is for orthodontic work, this option is already a nonstarter for you as you’re stuck with PDS status. In addition even if your contract is not for UOAs, whilst there is an established procedure in place for requesting consent to change from PDS to GDS status, this procedure will undoubtedly involve a renegotiation of your NHS contract value. Whilst the area team are obliged to offer you a GDS contract for the same number of UDAs, they do not have to ensure that the contract value or UDA value remains the same. In the vast majority of cases, a period of negotiation needs to be entered into with the area team as to what is a reasonable value for the renegotiated contract. In the context of the sale of a practice, such a renegotiation may have a significant impact on the price a buyer is willing to pay for your goodwill.
Consent of NHS area team to transfer the PDS contract directly to the buyer through the partnership route
I have recently dealt with a number of practice sales involving PDS contracts, all of which are proceeding by way of a sale of assets accompanied by a transfer of the NHS contract between the seller and the buyer through the partnership route.
The PDS regulations do not provide for the contracts to be transferred in this way but the area teams do seem increasingly willing to accommodate such a request if they approve of the proposed buyer of the practice. I have not encountered a situation where they would allow this to happen if the proposed buyer was a “corporate” or if limited companies were involved either as seller or buyer, but where the seller is an individual with a decent relationship with the area team proposing a partnership route transfer of a PDS contract to an individual dentist of good standing, it has been known for them to agree to the request. The key would seem to be open and honest discussion with the area team involving all parties. This is not without risks though. There is no obligation on the NHS to accept a request to transfer a contract in this way and it is very much dependant on the attitude of your area team as to how amenable they are to the request. The downside here is that the NHS can simply refuse to allow you to transfer the contract in this way and you would have by that point already placed them on notice of your intention to sell. This may consequently hamper your negotiations if you then choose to go down the only
option then remaining to you - incorporation.
Request to incorporate the NHS contract into a limited company followed by the sale of shares in the limited company
If the NHS refuses to allow the transfer of the NHS contract then the only option available is to incorporate the dental practice into a limited company structure. This once again cannot be achieved without the consent of the NHS to the incorporation. A failure to address the ownership of the NHS contract would lead to a flawed incorporation and you would not be able to sell the practice.
The procedure for incorporation is that an initial request needs to be made to the NHS in the correct form. They should then consider your application on its merits against certain key criteria. Provided you were successful at this stage, they would then enter into negotiation with you for a renegotiation of your contract value to the ‘local average’. If you were willing to accept the renegotiated contract value, they would then issue a new PDS contract in the name of your limited company. Your solicitor at that point will finalise your incorporation and all the business and assets will transfer into the limited company. Once this has happened you are then able to sell the practice by way of a sale of the entire issued share capital in the limited company. This is a ‘share sale’ as opposed to an ‘asset sale’. With this option you are selling the entire company itself. This means that not only assets but also
liabilities will go with the company when it is sold.
In addition, your new PDS contract in the name of the limited company will contain a new clause that was not present before. This clause is called a ‘change of control’ clause. Basically it means that any attempt to transfer your shares in the limited company, once again needs us to go back to the NHS area team for consent. This can involve further negotiation and delays given the timescales that the area teams seem to be working to. It is the case however that consent to change of control is ‘not to be unreasonably withheld’. In my experience I have usually managed to argue successfully that a change of control should be allowed however there is no guarantee that significant negotiation and delays will not be caused if the area team choose to refuse consent.
This option is therefore a two stage approach. The negotiations to incorporate can take many months and involve significant negotiation with the area team and there is no guarantee it will have a successful outcome. The attitude of the area teams in our recent experiences of procuring an incorporation, could best be described as obstructive. Despite written guidance being issued to all area teams outlining the procedure to be followed, it seems the procedure for getting a successful practice incorporation is becoming ever more difficult, time consuming and frustrating.
Assuming your incorporation request is successful and incorporation takes place on terms acceptable to you, you would then have to go back to the NHS to obtain consent to change of control when you wish to sell the shares in
your new company.
A final point to bear in mind with this route is that a sale of shares is fundamentally more complex than a sale of assets by virtue of the fact that when you sell your company, you sell it ‘warts and all’. Both assets and liabilities stay with the company post sale and this means a more complex due diligence exercise will be undertaken by the buyers and a more complex sale contract is required. As the net asset position of a company will change on a daily basis dependant on cashflow and other financial factors, the sale agreement requires provisions to cover this and accountancy input is required throughout the process. For this reason, a sale of shares is always a more expensive option than a sale of assets due to the level of input required from both accountants and lawyers.
The one point I have not yet discussed in respect of incorporation is that this process cannot be done quickly. There is a high level of negotiation required with the area team to obtain a successful incorporation and the timescales within which they take to respond can take a significant length of time. Further to that, HMRC are scrutinising goodwill values placed on practice assets at incorporation and I am increasingly seeing examples of incorrectly carried out incorporations being challenged and even unwound at huge expense. A properly carried out incorporation should address the NHS contract and put in place a properly drafted incorporation agreement documenting the transfer of the assets into the limited company and setting out their values. You should obtain a proper valuation from a dental practice valuer to evidence how you have arrived at the valuation figure. If there is bank funding in place over the premises then your lender may also need to be involved. Your incorporation agreement should also contain an ‘adjuster clause’ to cover the circumstances should your incorporation ever be successfully challenged by HMRC.
Whilst you may feel that much of this is unnecessary given that you will be selling the practice immediately afterwards anyway, you do need to remember that a buyer would expect to see the incorporation had been carried out correctly to properly protect themselves after purchase. Even if your buyer was prepared to take a laid back approach, it is highly unlikely that their lender would be willing to do so.
Whilst having a PDS contract can mean there is more work involved in selling your practice, it does not mean that it is impossible, you have to take extra care with your sale. Instructing a dentally aware solicitor with experience in dental practice structures and the negotiations involved in a PDS contract sale is imperative. Having that experience and knowledge will be invaluable and will mean that your dreams of retirement can become a reality.