Buying and selling veterinary and dental practices

At Simplyhealth, we work with a variety of businesses, from small and medium-sized enterprises, such as dental and veterinary practices, to large corporate partners. We understand the importance of keeping up to date with correct and relevant information and the value of guidance, support and advice. In collaboration with our legal partner, Knights PLC, we've put together a suite of business resources to help you through this challenging time.

What advice would you give to clients who are in the process of making/accepting offers to buy/sell practices when there is increased likelihood of a drop in turnover as a result of the COVID 19 situation?

Demand for healthcare businesses is likely to remain. There will be self-employed dentists and vets who have missed out on government support that are now looking to secure their future via practice ownership.  There will be principals who have been shaken by the impact the pandemic has had on business and are looking for an exit strategy and there will be lenders under government and public pressure to assist with rebuilding a damaged economy.  Naturally, there will be some uncertainty whilst the market recovers and buyers may want to consider deferring part of the purchase price with payment being contingent on practice performance once business resumes. There are a number of ways to structure this but an example would be the deferred proportion is reduced £ for £ if a turnover target is not achieved by the first anniversary of completion.

Average transaction times from agreement of terms to completion are around 6 months. The initial stages can be actioned with reasonably little cost (e.g. agreeing Heads of Terms and making/responding to due diligence enquiries). Therefore, we are still seeing buyers and sellers proceeding so that they can be ready to exchange/complete as soon as the market settles.

For clients who have sold or purchased already, is there any way to protect themselves because income targets won't be met to ensure that it is fair for both parties?

If a proportion of the purchase price was deferred and contingent on income targets, then protection will depend upon the individual terms included in the sale agreement and what the parties can negotiate between themselves now.

Some sale agreements may include a term that, in the event of suspension of trade, time is paused in relation to the turnover target and resumes once business commences again. So, the date for payment of the deferred consideration will be delayed by the length of time business is suspended for. And the turnover generated in the additional time will form part of the calculation for meeting the target. The example would be if trade at the practice is suspended for 6 months then the time for calculating the turnover will be the "relevant period" (as agreed in the sale agreement) + 6 months and payment based on turnover generated during the "relevant period" + 6 months).

Even if this had not been agreed in the sale agreement, parties could negotiate similar terms now. There is no obligation for either party to accept; however, we anticipate many will be open to discussions in the spirit of good faith and also to avoid loss of reputation.

One factor that will be open to interpretation is whether NHS dental practices have "suspended" trading despite continuing to receive their contractual payments and redeploying staff, as required. It could be argued that there is still suspension of business as any private element will be suspended, and those practices are not continuing in the usual course of trade. Again, this will be down to what the parties have agreed in the sale agreement/can agree now in separate negotiations.

What general changes may need to be made to the structure of the deal to ensure a reasonable position for both parties during/following the COVID-19 pandemic?

We would always recommend Heads of Terms are agreed and properly documented so that both parties have a clear understanding of the structure from the outset. These should document any deferred consideration.

If the Buyer pays an initial deposit, the terms for forfeiture/return of the deposit should also be carefully documented with terms specific to the current COVID-19 situation. For example, the Buyer should ensure they have the right to receive their deposit back if:

• The turnover of the target business falls by a certain percentage compared to the previous year, and the parties are unable to agree upon a revised purchase price.
• The ability to proceed to completion is materially impeded by:
  • the infection or suspected infection with the COVID-19 of:
    •  The Buyer
    • The Seller
    • Any of their respective legal or financial advisers involved in the transaction
    • Staff at the Buyer's funding bank who have a material involvement in the transaction; and/or
  • the target business being unable to operate at a normal level of trading (and "normal level of trading" is determined by assessing the level of trading for the same period last year, disregarding anything extraordinary or inconsistent with previous years) due to the COVID-19; and/or
  • the actions of the UK Government or other relevant governmental or regulatory bodies in relation to the Covid-19; and/or
  • compliance by any of the Buyer or the Seller with advice from the UK Government, the NHS or other health or regulatory bodies in relation to the Covid-19. 
  • The Seller changes any remuneration terms of employed or self-employed persons or engages or dismisses any staff without the prior written consent of the Buyer.

The sale agreement will also need to contain additional provisions to address risks resulting from COVID-19, such as:

• Ensuring the Seller has complied with all guidance issued by the government or regulatory bodies in respect of COVID-19 and has applied all recommended measures to protect the staff and patients/customers who attend the practice.
• An obligation to notify the Buyer of any employees being absent or needing to self-isolate due to COVID-19 between exchange and completion;
• An obligation on the Seller to disclose if the stock they hold is no longer adequate to meet the needs of the business or if they have had an indication from suppliers that the availability of stock will decrease.
• For NHS dental practices: appropriate apportionments to deal with any clawback repayments due to the NHS (underperformance for the contract year ending 31 March 2020 is payable over the financial year, with full balance payable by 31 March 2021. The basis of calculation of contract performance in the NHS year 2020/21 is still to be determined^[1].).  

As mentioned above, we anticipate most transactions will include an element of deferred consideration so that the Buyer can ensure performance picks up again before committing to pay 100% of the agreed price.  

Transactions are still progressing, but clients are either delaying exchange until there is more certainty or exchanging with protection built into the purchase agreement. What advice do you have to practice owners around how to gain sufficient detail through due diligence to understand the impact of the COVID 19 situation on that business?

It seems likely that it will be some months before practices get back to the normal levels of trade once regular business resumes. It will, therefore, be difficult to fully assess the financial impact of the COVID-19 pandemic on the target business immediately.

Accordingly, deferring some of the purchase price is likely to be a key term within many transactions to account for this. 

To assess the impact in other areas of the business, buyers should consider including the following areas in their due diligence investigation:

• Has the practice continued trading during the pandemic (if dental, have they operated as an urgent treatment centre? If vets, have they increased/reduced usual trading hours)?
• Check how self-employed staff and employees have been paid during the pandemic.
• Check if any contractual changes made as a result of the pandemic (i.e. to staff contracts, commercial contracts or operating policies).
• Have any NHS staff been redeployed^[2] or furloughed?
• Has the practice made any insurance claims concerning the pandemic?
• Has any rent not been paid? If so, has there been any communication with the landlord?
• Have any finance agreements (mortgages, lease, hire purchase, etc.) not been paid? If so, has there been any communication with the finance provider?
• Have debtors continued to pay the business in the usual way?  
• If you are buying shares:
  • Has the target company delayed payment of any tax?
  • Have all Companies House filings been made on time
• Has the target company applied for an extension in relation to filing company accounts with Companies House
• Has the seller (or target company if share purchase) applied for any loans or grants in relation to the business as a result of the COVID-19 pandemic?
  

Many sales agents are offering "desktop appraisals". These enable buyers to obtain a report giving them a general overview of the practice. Do note that site inspections, surveys and bank valuations will need to be postponed until social distancing restrictions have been relaxed.

References

[1] Preparedness letter for primary dental care - 25 March 2020.  Available via: https://www.england.nhs.uk/coronavirus/publication/preparedness-letters-for-dental-care/

[2] Redeploying the Clinical Dental Workforce to Support the NHS Clinical Delivery Plan for COVID-19.  Available via: https://www.england.nhs.uk/coronavirus/publication/preparedness-letters-for-dental-care/

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