Consider this scenario: you find a great dental practice to buy and shake hands on a purchase price of £745,000. lt takes a few weeks but you eventually raise the finance- just. Things proceed until days before completion and you're told a further £80,000 is required from you. Somehow you find the money, but a few months into your ownership you get a large corporate tax bill followed by clawback on the NHS contract. How could this happen? The answer is 'quite easily'. Admittedly l've painted a pretty bleak picture, to make the point, but if you buy an incorporated practice without taking expert advice such disasters could be lying in wait.
Let's backtrack a bit. lncorporation is increasingly popular- certainly NASDAL members have handled a lot of them in recent years. As you know, incorporation means transferring a dental practice from private ownership to a limited company. lt must be done correctly otherwise problems can arise when it comes to selling the practice.
Equally, buying an incorporated dental practice requires specialist help if the transaction is to be successful and the problems outlined above are to be avoided. The key thing is that the agreed purchase price on which you shook hands may well not be the price you eventually pay. This is because incorporated practices have assets and liabilities, which must be taken into account and will affect the purchase price. A significant liability will be the company's tax bill, which may not be payable until some months after completion of the sale, but the profits were made prior to the sale, so it's still a liability.
So, you agreed to purchase Dental Limited (as l'll call it), an incorporated practice, for £745,000. To work out what adjustments must be made (up or down) to this purchase price a set of Completion Accounts must be drawn up. Within these accounts will be a balance sheet showing the assets and liabilities of Dental Limited at the anticipated completion date.
The sorts of things included on the balance sheet will be cash in the bank, general creditors, book debts, employee claims, fees due to associates, hire purchase liabilities, stock, goodwill, NHS clawback and tax liabilities. It will also include the cost of preparing the Completion Accounts-who does them and how, being agreed beforehand by the two parties to the transaction.
Tax will be due on the profits made prior to the sale but the tax bill will not be payable until after completion so the whole amount is a liability. What if Dental Limited is an NHS practice or is mixed NHS and private? First, when it was incorporated, a new NHS Contract with Dental Limited will have been issued. Some PCTs insisted on a clause requiring their approval when company shares are sold so you may only be able to buy Dental Limited with the permission of the (new abolished) PCT - now NHS England. Under your ownership, Dental Limited will need a new NHS Contract and this may be on different terms in respects of UDAs.
Then there's clawback arising from under performance against the contracted UDAs. In a similar manner to the tax liability, the under performance by Dental Limited could have occurred in the period of its previous ownership but the financial clawback may well become due after completion.
There are further potential complications, On incorporation Dental Limited may well have been lent money by the original, owner in order to 'purchase' the practice. It will be repaying this debt from annual profits after tax, but at the time of this sale money may well still be owed.
This is resolved (in simplistic terms) by you taking over the (amount outstanding) on the loan made by the owner of the practice before incorporation. There are a number of tax consequences arising from the transactions to achieve this and the services of a tax specialist will be required.
So, we are now (almost) at the 'bottom line' - the total of pluses and minuses on the balance sheet (the balancing sum) that will raise or lower the purchase price agreed initially. Your solicitor must create a proforma Balance Sheet that anticipates the Assets and Liabilities position in the Completion Accounts. This should assist the parties to agree, contractually, the adjustment likely to be required.
Your solicitor should also agree an upper limit. So, if the balancing sum actually comes to £38,000 but an upper limit of £20,000 has been agreed, this is all that will be paid and you know you need to raise a maximum of £765,000 to complete the purchase.
So, there are three messages here. Firstly, buying a dental corporate requires a good deal of legal preparation. Secondly, it is crucial that your accountant carefully reviews the financial position of the company before you get too deeply involved in the purchase. Lastly, the Sale Agreement must be prepared in a manner that easily and clearly allows for the preparation of Completion Accounts and the adjustment that are required to flow from them.
Russell Abrahams, 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.