Long established custom in commercial transactions has placed the onus on the buyer to ensure that the prospective purchase is what it appears to be and that the price is fair, but today’s sellers also need to be aware that the buyer may be a wolf in sheep’s clothing.
There is at present much activity in the dental practice transfer market, driven in part by the corporates’ determination to increase their market share, and many dentists are now encountering the professional negotiators employed by these corporate bodies. I was recently asked for an opinion, fortunately before the papers had been signed, on one such transaction.
At first glance the figures seemed reasonable. The principal was keen to sell his mixed practice, operated by himself and three associates, which had a nominal turnover of £700,000. The initial offer of £420,000 was not overly generous in the current climate, but given the location of the practice and other limiting factors was at least worthy of consideration.
However, under the contract the initial price to be paid was only 80% of the agreed total, i.e. £336,000, with the remainder being paid in instalments over a three year period subject to the practice achieving year on year growth of 11%. Effectively, after three years of hard work by the principal, anticipated turnover would rise to £957,340, thus reducing the percentage paid for goodwill from 60% of turnover to 43.8%. Suddenly the deal is not looking quite so attractive.
Naturally the prospective purchaser promised high powered management support and other assistance to develop the practice, but, as they say, ephemeral promises butter no parsnips. Even supposing the promises were kept, no one could guarantee the results.
Closer examination revealed that the principal’s personal earnings were a gross of £180,000 and the practice’s net profit was £140,000. At the end of the three years he would become an associate paid 45% of his present earnings, or £81,000 before tax compared with the £145,000 current net profit within the business, representing a personal loss of earnings of £192,000. If the 11% growth is not achieved, deducting £192,000 from £336,000 means that in effect the principal will receive only £144,000 for the goodwill.
A further issue emerged regarding the associates. If the deal was agreed the existing associates’ percentage of growth-related earnings would be reduced immediately the practice was sold. Our vendor and principal would have entered a commitment to achieve 11% year on year growth in a practice where his trusted and experienced associates have arbitrarily suffered a pay cut, and will almost certainly leave. Although the purchaser would be responsible for finding replacements, in real terms the vendor could not possibly fulfil the earn out provisions within the contract without continuous chair occupancy. .
Appearances and first impressions can deceive. Whether buying or selling, study the small print!, or risk getting caught in the strings that may be attached.