Selling Your Dental Practice: How Much is Deferred Consideration Worth?
One might assume that before you sign a Sale and Purchase Agreement (SPA) and exchange contracts that you would have received appropriate legal and financial advice as to the obligations that you are entering into.
Uppermost in your mind will be the completion of a smooth dental practice sales transaction and the avoidance of a dispute and the agreement being tested in Court with clauses from it being removed or worse, the entire SPA being overturned by the Judge and replaced with the Court’s interpretation as to what were the intentions of the parties at the outset of negotiations and prior to the point at which the SPA was signed.
But that could be the case.
“People sell dental practices for all sorts of reasons. In disposing of the goodwill of a dental practice it is not uncommon for buyers to pay an initial consideration (70-90%) on completion and then a further consideration, staggered over a 2-5 year period. In a limited company or partnership, it is common for some partners to remain at the practice as Associates, whilst others may choose to move on or retire on completion” says Jeanette, Pluto Partners Management Consultant.
Prior to January 2020, there was no legal framework to decide whether deferred consideration of a share purchase was a bonus or an asset of the sale of the company. Within the context of big bucks banking the question had come up twice. In both cases there was only basic pay paid to the individuals whilst they sat out their tie -in term.
In dentistry it is common for the individual who sells his share to continue as an Associate on a high percentage wage. Usually, the further consideration is a fixed figure based on the existing practice gross income at the point of sale. This gross may be made up from hygienist income, other associate income, sales of sundries etc.
In a recent case (January 2020) two directors had shares in a corporate dental practice. Although they both signed a Share Purchase Agreement and provided finances commensurate to their shares in the company (51% and 49 %), the Judge ordered that the ‘further consideration’ be paid out at a 75% proportion to the dentist who stayed on after completion and 25% proportion to the individual who left In effect he argued that 50% of the further consideration was a bonus payment and would be taxed as such (45%). And that 50% of the further consideration was the property of the company and that only the initial consideration would attract entrepreneurs’ relief at 10%.
This ruling has a huge effect on the tax management of dental practices, especially share purchases.. It assumes that the individual staying post completion will benefit from the lion’s share of the goodwill payment of further consideration and that the dentist who retires from the practice will be significantly financially penalised for so doing.
“It is important that when making the decision to sell your dental practice or a share in it, that you seek proper comprehensive advice. That advice may include a proper valuation of the business together with advice from a solicitor and accountant on respect of the legal and financial implications, particularly if the Buyer is acquiring the business on an “earn-out” basis.
Taking the right advice could be crucial to the decisions that are made before, during and after completion” says Max Bazzucchini, Director & Partner at Pluto Partners.
We spoke with Jonathan Jacobs, a specialist dental solicitor who said “the dental business is a very different animal to a general commercial enterprise. There are many facets to the sale of a dental practice that are not pertinent in the everyday commercial world and expert advice is truly fundamental to achieving the right conclusion”