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Buying a practice? There’s plenty to consider.
Purchasing a medical practice, and in some cases the property it sits upon, is a significant business and investment decision. There is a lot to consider, from the purchase through to how you’re going to run it on day one. Seeking out specialist advisors who have the experience to support you is a great first step towards success.
At Medfin, our finance specialists have been helping Australian healthcare professionals purchase, set-up and maintain practices for over 20 years. This experience means we know what you should be thinking about when it comes to your practice purchase, so we’ve compiled a list of things to consider.
1. The structure is key
We’re not talking about checking the bricks are in good shape – but that’s also important. In this case, we’re referring to the way you structure the purchase of the practice. One portion of the final price will be for the tangible assets like equipment and furniture - ensure the seller has good title to these. The other portion will be for the practice’s goodwill which includes intangible assets like its brand and patient lists.
This can be difficult to negotiate, because in some instances you as the purchaser will want the asset portion to be higher for tax reasons, and to secure the best finance rates, while the seller will want the opposite treatment for their own tax related reasons. How you make the purchase could affect how you are taxed later on. From a capital gains perspective, it is common practice to purchase the goodwill portion in the individual practitioner’s name and the practice assets in the business name. You should consider consulting your tax and legal advisors.
Whatever direction you take, Medfin has a range of finance solutions with varying repayment options to cater to the way you choose to structure your purchase.
It’s often forgotten about, but you need a council permit to run a practice. This is even the case if you’re purchasing an existing practice - just because there is a practice there right now doesn’t mean they have been operating with a permit. Also, permits may need to be amended from time to time. So make sure your solicitor checks with your local council.
There can be a perception that you always need a valuation before buying a practice. Valuations (working out the value of a practice) by an expert valuer can be important but also expensive. Medfin does not always require a valuation, provided your accountant completes due diligence. Once again this is something to discuss with your advisers.
4. Government grants
There is a lot to think about when purchasing a practice so this means buyers can forget about the variety of grants available to practices in Australia. There are a lot of grant opportunities for general practices and the dental industry. Speak to a Medfin specialist to find out more about the opportunities.
5. Accounting for all costs and cash flows
You should think through all the costs of a practice purchase because there can be a lot. From stamp duty or GST (if it applies), to solicitor fees and staff costs. It’s also vital to assess the practice’s existing cash flow (if relevant) because the last thing you want to do is take ownership, not anticipating unexpected outlays for things like equipment, building infrastructure etc.
6. Thoroughly discussing the transition process
There are many things that need to be negotiated in a purchase and the transition. Putting together an agreement is a complex matter and often initiated by the seller’s solicitor. Some things that may need to be considered include a contract of sale, when and how money changes hands, whether there is a lease, if there is an associate or partnership agreement, and more.
Also consider whether your contract of sale should include a non-compete or restraint of trade clause. These are designed to ensure the purchaser gets the benefit of the goodwill they’ve paid for. For example, you don’t want the seller to go and open a new practice down the road the week after the sale! Your legal advisor will be able to assist you with this.
If you are purchasing an existing practice , you may have the option of taking over the existing staff contracts. This can be beneficial from a patient retention perspective, however it’s important to assess the existing staff abilities and liabilities such as annual leave, sick leave and long service leave (and then arrange for these liabilities to adjusted at settlement).
8. Negotiating terms
Negotiating an agreement is a complex matter and often initiated by the seller’s solicitor. Some things that may need to be covered include a contract of sale, agreement on when and how money changes hands, if there is a lease and negotiating the transfer to you or even a totally new one, if there is a non-compete clause and more. Medfin recommends you to work with your own independent legal advisor.
9. Risk insurance cover
Many new business owners don’t consider this initially, but especially if you’re buying in conjunction with other people/partners, it’s important to set up insurance cover right from the beginning. It’s worthwhile looking into how you will mitigate your risks through things such as business insurance, buy/sell agreements and arrangements for partner incapacitation. There is little more destructive to a business that dealing with a grieving relative who is involving emotions with the smooth operation of a practice.
Any advice in this article has been prepared without taking into account your objectives, financial situation and needs. Before acting on this advice, you should consider its appropriateness to you and seek independent professional advice. Medfin Australia Pty Ltd ABN 89 070 811 148, Australian Credit Licence 391697 (Medfin). For Personal Loans, Home and Residential investment loans for individuals, Medfin is a credit provider, as agent for National Australia Bank Limited ABN 12 004 044 937, AFSL and Australian Credit Licence Number 230686 (NAB). Medfin is a wholly owned subsidiary of NAB and part of the NAB Health specialist business.