The practice sales market – retaining associates a priority

At a recent Practice Plan event Creative Director, Les Jones, spoke to Solicitor, Tom Coates, of Buxton Coates Solicitors and Jonathan Watson, Director at Christie & Co, to get a feel for current trends in the practice sales market.

Les: Are you seeing any changes from a legal perspective? Are you noticing any patterns regarding whether buyers are setting up expense sharing agreements, partnerships, or limited companies? What are you seeing there?

Tom: I think there's always been the desire to use a limited company, and that's never changed. The extent to which there are tax benefits in doing that have been eroded over the years due to various changes in the tax regulations. There is still some benefit to acquiring through a limited company, and if a buyer can do it, we tend to find that they still want to do it. However, complications come in if there's an NHS contract. How the seller is constituted can sometimes dictate whether you can use a company or not, but there's still a preference for doing that.

Les: I suppose from a legal and financial perspective this makes a significant difference regarding the sort of advice anybody buying a practice would need to be able to have the full picture. So, you would be drawing more things to their attention than if the purchase were being made by an individual rather than a company.

Tom: Absolutely, especially if you are using limited companies. Whether you're buying one or whether you're buying as one, if you’re registered as a company yourself and you're looking to buy a practice, there are different tax considerations. This is particularly the case if you're buying or selling a practice. A limited company has assets as well as liabilities, so, you certainly need more specialist advice on the tax, legal and accountancy side of things. 

Les:  Can we touch on corporate acquisitions and what that journey looks like? Has it changed much?

Tom: Jonathan will probably see many more than we do. Historically when we have dealt with a sale to a corporate there has been a significant period of tie-in over a number of years. There has usually been a sum of money held back and set against future turnover targets. And if you don't meet those targets, then a retained sum gets chipped away at usually on a pound for pound basis. This is often accompanied by a requirement for the seller to stay on, if the seller is a key part of the practice. If the seller doesn't work in the practice, and it's associate-led, there can be more flexibility in a seller's requirement to stay on. However, usually you're tied in for a period of years with an earnout as well.

Jonathan: That’s right. One of the biggest changes we've seen is with deal structure. Partly, because of the hike in interest rates over the past year or two. The private equity firms that are backing corporates have their hands tied to an extent, and are perhaps feeling the squeeze in terms of what they can realise going forward. Some of the offer terms we've seen are not as attractive as they once were. We're seeing money sometimes deferred by six or seven years, and some of the proceeds deferred by 40% or even 50% in some extreme cases, depending on the reliance on the principal and the perceived risk of the patient transfer. We’re also seeing people taking a slightly lower offer attached to more favourable deal terms

We've also noticed people approaching the independent market for their large practices. Independents will generally be more flexible on post-sale deal terms. They might pay all or most of the money upfront, and there have been some pretty sizable deals. These have been bank-funded deals with practices being sold to independents and groups rather than opting for a less favourable overall deal to a corporate.

Les: That’s an interesting change and bodes well for independents. However, a major concern now in dentistry as a whole is retaining staff, retaining associates, and dealing with their self-employed status. How has that impacted the market?

Tom: It's huge. We've seen a massive impact from that, particularly with the corporates.

We completed a deal just before Christmas and we were taken aback by the fact that this particular corporate would not complete on the deal unless they had a signature from every single self-employed member of staff. We knew that they'd always had an eye on it, and if certain key staff members left, it could jeopardise a deal. But we'd never had a deal where it was a case of ‘until we have every single signature, we're not doing the deal’. So, buyers are clearly very spooked about the associate side of things.

We dealt with another sale where the buyer didn't want the associate, but the associate hadn't signed an associate agreement. So, there weren't any valid and binding restrictive covenants to prevent that associate from going and setting up next door. In the end, the seller incentivised the associate to sign on with the buyer and then that associate served three months’ notice and left anyway.

So, associates are becoming increasingly important in the context of deals. And yes, it can be a problem if you have an associate who is massively important to the practice, particularly if they realise that themself. We've had an example of an associate realising how important they are to the practice sale and asking what's in it for them?

Buyers are now more cautious and look to ensure key staff members stay with the practice. We've seen things such as golden handshakes to entice them to do so. Also, a lot of the buyers have more business acumen than previously and are willing to invest in the correct process and making sure that’s in place at the very beginning. That means having properly drafted associate agreements, staff contracts, ensuring that the legal process at the point of sale is there and properly dealt with for the employees who will transfer on their existing terms and conditions. Buyers are meeting that challenge head on and they're doing so by availing themselves of the correct advice. All this gives them a fighting chance of retaining good staff.

Les: There have been some interesting shifts in the practice buying and selling market. Thank you for sharing your insights.

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About Les

Les Jones is the Creative Director at Practice Plan, the UK’s number one provider of practice-branded dental plans. He has over 30 years' experience of working within the creative and dental sectors in the fields of design, marketing and strategic consultancy.

About Tom

Thomas Coates is the managing director and corporate solicitor at Buxton Coates Solicitors. Tom specialises in the sales, acquisition and restructure of dental businesses, commercial advice and drafting commercial agreements. Alongside his role as Managing Director, Thomas still has a busy caseload of acquisitions and disposals acting for clients ranging from sole traders to larger corporations.

About Jonathan

Jonathan Watson has been at Christie & Co for 13 years and heads up the North & Midlands dental team; he has handled some of the largest transactions in the UK as well as helping independent dentists achieve their goals.