Avoiding common pitfalls when selling or buying a dental practice
The dental sector is heavily regulated, which can make the process of selling and buying a dental practice quite complex. Throw in an NHS contract and the process becomes more complex still.
As lawyers with significant dental transaction expertise, we have identified some of the main areas of risk and offer some thoughts on how these risks can be managed to achieve a successful outcome.
In this article, we look at reconciling NHS contract performance, restrictions on friends and family treatment, and disclosure of staff remuneration and benefits - common pitfalls that often become apparent only after completion has taken place but that can be avoided by careful pre-completion preparation and drafting.
Reconciling NHS contract performance
It would be fair to say that exceeding the NHS contract performance target has been less of an issue during lockdown. Nevertheless, as a potential transaction pitfall, overperformance remains something that needs to be covered off in the business sale agreement.
The pitfall arises from the fact that, in the absence of any provision to the contrary in the business sale agreement, a seller will not be paid for any overperformance of the NHS contract target, and overperformance does not usually become apparent until the NHS statement has been produced and reconciled, which may be up to six weeks after completion.
So, the first part of the solution is to ensure that the business sale agreement properly defines what the completion calculation includes and excludes. Buyers are likely to want only accepted pre-completion UDA submissions counted in the completion calculation. Sellers are likely to want all submitted pre-completion UDA submissions included, as well as a 2% contingency allowance to reflect NHSE policy. The definition in the business sale agreement needs to clearly reflect what the parties agree on this.
The second part of the solution is to ensure that the business sale agreement properly defines how the contract value is to be apportioned on completion, and how adjustments are to be made once the NHS statement has been produced and reconciled. A worked example in the business sale agreement can sometimes be useful. So, let’s assume a dental practice has an NHS contract like this:
Contract year: 1 April to 31 March
Contract value: £600,000
Contract target: 24,000 UDAs
UDA value: £25 (i.e. £600,000 ÷ 24,000 UDAs)
If completion were to occur on October 31, a straight-line apportionment of the contract value would show 14,000 pre-completion UDAs (i.e. 7 months @ 24,000 UDAs for the year) and a corresponding pre-completion contract value of £350,000 (i.e. 7 months @ £600,000 for the year). If it subsequently transpires that 14,500 pre-completion UDAs had been performed, the seller will want the buyer to pay an additional £12,500 (i.e. 500 UDAs @ £25 per UDA).
By anticipating and dealing with this issue in the business sale agreement, a time-consuming and potentially costly dispute can be avoided.
Restrictions on friends and family treatment
Most sellers of dental practices have treated friends and family in the past and are unaware of a potential pitfall of continuing to treat them following the sale of their dental practice. As registered patients, the treatment of friends and family forms part of the patient goodwill of the practice and, therefore, part of the assets being sold to the buyer. Continuing to treat friends and family at another location post-completion is likely to be in breach of the restrictive covenant normally contained in a business sale agreement, designed to protect the value of the business being paid for by the buyer. Breaches of such restrictive covenants leave the seller open to claims by the buyer for damages for breach of contract, and potentially injunctive remedies. The solution is to carve out friends and family patients from the sale. It is also wise to limit the period of restrictive covenants, so that only patients treated at the practice within a reasonable period (say, the last 24 months) are covered by them.
A related issue occurs where a seller agrees to continue with the practice post completion under an associate agreement and expects to be able to continue treating friends and family at cost. Even where friends and family have been carved out of the sale, the seller’s associate agreement will only usually allow the seller to access the surgery at certain times and carry out specific treatments. This time must be accounted for and must be for the benefit of the practice. The solution is to recognise this issue, agree how the arrangement is to work and cover this off in the terms of the associate agreement.
Disclosure of staff remuneration and benefits
Failing to disclose to a buyer the accurate details of current and committed remuneration and benefits of employees and self-employed contractors is a common and sometimes costly pitfall in the sale of dental practices. Material errors discovered post completion can leave sellers open to claims for breach of contract, even when they are innocent oversight, for example, where a transaction has been going on for some time and reviews have taken place since the information was first provided.
The solution is to ensure information disclosure is checked and made immediately before completion or, if exchange and completion is split, immediately before exchange and with suitable adjustment provisions in the business sale agreement. Buyers should not simply rely on a claim under the warranties in the business sale agreement as most agreements contain monetary thresholds and time limits for warranty claims.
In the hands of specialist transaction lawyers, these solutions will build in protections for both parties to a dental practice sale and purchase, reduce the level of disputes between them and, importantly, ensure that they maintain a good relationship post transaction.