Sellers and buyers and their legal advisers all share a common goal. All parties want the sale/purchase of a practice to proceed to a successful conclusion as quickly as possible, causing the minimum of stress to all involved. How a transaction unfolds is really down to the actions taken by the parties involved. In this article, I consider two areas that can often cause delays and I offer tips to minimise the risk of these matters becoming insurmountable hurdles.
The Due Diligence Process:
The due diligence process must be the biggest bane for sellers. One of your first tasks as a seller will be to complete a lengthy enquiry form about your business and the property from which it operates.
On receiving the form, many sellers will come back to us and ask “Do I really have to answer all of these questions?” The answer is YES. The buyer wants this information and his lender needs this information. Their Solicitor has not just put together the enquiry form for the goodness of their own health!
I spend a lot of time reviewing due diligence. It makes a huge difference when a seller has taken the time and effort to respond to the enquiries properly. It shortens the due diligence process and the overall transaction time.
A word of warning for those sellers who speed through the form either completely ignoring questions or providing nonsensical answers: be prepared to be in for the long haul!
The enquiries will not go away and the buyer’s solicitor will keep coming back until they get proper answers. We know that there are some questions, in particular those relating to the property that sellers may need assistance in answering. We are always happy to go through the enquiries over the telephone or to even send a trainee to your practice to help you go through the form and put together the supporting documents.
Sellers need to put themselves in the shoes of the buyer and consider what kind of information and replies they would expect to receive if they were the ones buying. Of course, there will be enquiries that seem utterly ridiculous, but sometimes the enquiries are outside of the control of the buyer and their solicitor and are being driven by the buyer’s lender. So the clear message is: “answer every question you can as fully and as honestly as you can”.
Don’t worry about making excessive disclosures. Our job is to cut down your disclosures if we feel that you are being too frank. On the other hand, if you are involved in a serious dispute with your expense sharer and you fail to disclose it, you could be facing a breach of contract or a breach of warranty claim a year or two down the line. So please do not be “economical with the truth”.
Sellers, please provide the documents that you are asked for. For example, if we ask for the signed contracts for each employee, please don’t just send us one template employment contract. We will come back to you looking for what we requested in the first place!
There are certain documents that a seller will need to provide in every transaction. If you are planning to sell your practice in the near future, you should start putting a bundle together. For example, you will need a copy of a fire risk assessment, legionella risk assessment, certified accounts for the last two years, employment contracts, commercial contracts, service/inspection certificates for equipment and, where applicable, the NHS Contract. You will also need to provide an Energy Performance Certificate and an Asbestos Report for the property. If you do not already have these, then you should arrange inspections soonest.
We are always happy to guide you, in advance of a prospective sale, as to the documentation you need to get in place when you put the practice on the market.
Dealing with Lender Requirements:
Buyers, I urge you to organise your funding as soon as possible, even where the bank is taking minimal security, for example just a legal charge over the Lease over the property. It still takes time to satisfy the bank’s requirements.
We will be required to submit a report on title to the bank confirming that the property has a good and marketable title. In many cases we will also have to include a qualification schedule, which may involve referring issues to the valuer. We do not want to do this at the last minute, as it will hold up exchange and completion.
More often than not, especially on a share purchase the bank will be taking a lot more security - debentures, a company guarantee, a legal charge, a personal guarantee and an assignment of a life policy. Please be aware that if you are asked to give a personal guarantee, you will have to obtain independent legal advice. This cannot be done via e-mail or over the telephone. You will have to attend a solicitor’s office. It is best to organise your appointment to sign the personal guarantee as early as possible. You do not want to be trying to squeeze in an appointment between seeing patients in the last few days before completion.
If the bank appoints their own solicitor, this means that there is an additional party that must review all of the transaction documents and the due diligence. This will add more time to the transaction. The bank will usually provide a buyer with a list of price quotes from solicitors on their panel. Please choose a solicitor as early as possible, so that the bank can issue instructions to them.
The banks are, increasingly, choosing to take security over other properties owned by the buyer. If this is going to happen, please let us know as early on in the transaction as you can. This has the potential to cause further delays. We will have to carry out additional property searches. If the property is already mortgaged, we will need to obtain the consent of the existing lender to the second charge. This is not something, we want to discover at the last minute!
This article has highlighted just two areas that can sometimes prove to be problematic. Obviously, no two transactions are the same and there will sometimes be issues that cannot be foreseen at the outset. However, addressing the issues set out above will help the transaction to move at a faster pace than would otherwise have been the case.
Joanne Fennessey, Solicitor, Abrahams Dresden LLP
Abrahams Dresden articles and guidance notes are for general information purposes only and generally state the law as at the date of publication. The information may not be relied upon as legal advice. We are of course always happy to advise directly on specific issues arising.