Having incorporated your dental practice the natural assumption will be that when the time comes to sell, and hang up your drill, you will sell the company that now owns and runs your dental business. It’s as simple as that.
Or is it?
Well actually, it isn’t. One area of negotiation we often encounter on behalf of our ‘incorporated’ clients at an early stage in the transaction is whether we are buying/selling the shares in the company or buying the assets from the company. The question is – what difference does it make?
And the answer is……….. it’s complicated!
Let’s assume that the practice in question “Dentist Ltd” is being sold to Dr Dentist. On the one hand, Dr Dentist could purchase all of the shares in the company Dentist Ltd, the company would continue to own and operate the practice, and Dr Dentist would own the company. On the other hand, Dentist Ltd could sell the equipment and goodwill of its practice to Dr Dentist – on completion Dr Dentist would personally acquire the assets of the business and the seller would continue to own the company Dentist Ltd.
Undoubtedly, the first consideration for NHS practices is whether or not the seller would be able to transfer their GDS contract to the buyer. If the company is the party contracted to provide treatment under a GDS contract, the chances are that the GDS contract cannot be transferred directly to the buyer. Therefore the buyer would look to acquire the shares in the company and no transfer is required.
Both the seller and the buyer are well advised to discuss matters in detail with an appropriate accountant (ideally one with a depth of dental accounts knowledge!). There can be significant tax implications to this decision. For example, let’s imagine that your practice is marketed at a purchase price based on a share sale, if the buyer insists on buying the assets from the company you may find that you are out of pocket by the time the company pays tax on the proceeds and you pay tax as a shareholder when the proceeds are distributed.
Equally, there may be other benefits or reliefs either one or both parties can enjoy which could significantly alter the value of the transaction for that party.
From the buyer’s point of view, the concern with purchasing the shares as opposed to simply the assets is that you will acquire the company ‘lock stock and barrel’ (potentially 2 smoking barrels!). That is to say, you take the company subject to all liabilities. This is where we work closely with your specialist accountant to ensure that sufficient warranties and indemnities are in place to protect the share purchaser.
This starts right at the beginning of the transaction. Given the additional risk, we must ensure that appropriate and detailed enquiries are made of the target company. We will carry out far more extensive due diligence checks – not only into the dental business, but also into the financial, commercial and legal position of the target company. This will enable us to prepare the share purchase agreement with the relevant protection against these risks (warranties, tax warranties, indemnities, tax covenant, etc).
For the share seller it is equally important to ensure that a thorough disclosure process is implemented to limit the seller’s liability under the more detailed and extensive warranties by excluding all matters that have been disclosed.
To sum things up, is there is no right answer. It really is subject to the specific circumstances of the company and both the buyer and the seller. Furthermore, it is a point of negotiation in the transaction and should be considered alongside all other terms of the agreement to buy/sell the practice.
To save any wasted costs, it is important to seek appropriate advice at an early stage. If you are selling your incorporated practice, or looking to buy one, please give us a call and one of our experts will happily talk you through the process from beginning to end.