|Blog Article|||||By Knights PLC||23 July 2020|
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.
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.
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.
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 sale agreement will also need to contain additional provisions to address risks resulting from COVID-19, such as:
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.
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:
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.
 Preparedness letter for primary dental care - 25 March 2020. Available via: https://www.england.nhs.uk/coronavirus/publication/preparedness-letters-for-dental-care/
 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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