Thinking of buying a dental practice? Ross Martin is an expert on practice purchases and offers some tips for buying a dental practice.
Ross Martin blogs:
1) Don’t be afraid to do your homework
With prices now regularly exceeding £1m, you absolutely need to know what you’re getting into. For some associates it’s their first exposure to running a serious business. With an increasingly consumer driven market, and employees and associates livelihoods dependent on you, it’s an often overlooked aspect of being the principal in a practice.
Also, I’m not saying it happens all the time but, in what appears to be such a buoyant market, vendors and their agents should respect your need for a due diligence process. You will, after all, be handing over a large sum of cash.
2) Have a deposit saved
On the flip side, I can understand how frustrating it can be to a vendor to open up their business to investigation, only for it to fall apart when the potential purchaser finds out that the bank will not lend them 100%. When I tell clients a “minimum 10%, ideally 20%” I can almost hear them register the benchmark at 10%. I genuinely feel a business owner needs to be committed to make it a success and 15% – 20% of their own hard-earned cash achieves that nicely.
3) Buying the Shares or Assets
If the vendor owns the practice through a limited company, then I can’t under-emphasise the importance of this aspect. There are simply too many complexities to include here but, it is disappointing to see so many associates not engaging proper professional advice. Be sure to look for clarity on this matter in the sale particulars (and I would expect to see a lower sale price for shares than assets). Because of the asymmetry of tax, even though the rules have changed very recently – on more than one occasion I have been brought in half-way through the transaction and highlighted how the purchaser can save £100k with no loss to the vendor.
4) Should I buy through a Limited Company or Sole Trader?
The age-old tax question. Generally speaking, a limited company offers the best environment for tax saving, both on the purchased asset, and with ongoing trading profits. Of course, from (3) above you may find you buy the vendor’s company in any event, but there is a further mechanism you can implement to minimise some of the tax damage here.
4 1/2) Can I buy an NHS contract through a Limited Company?
NHS England has always seemed to have a reluctance to letting businesses service contracts through a company, so instead advisers had simply found work-arounds – the ‘partnership’ method previously being the favoured method to initially acquire the contract and subsequently transfer the contract to the purchaser’s company.
The reason being this “two-step” process then allowed the company to claim 20% ‘goodwill’ tax relief not claimable by a sole trader. This rule was tweaked in December 2014 though and has just come to the surface with a few acquisitions who were not aware of the subtle changes it caused.
But, hold on to your hats… in another savage attack in the Summer Budget 2015, unfortunately the taxman has now completely abolished this tax relief!
The loss of this 20% tax relief is a major cashflow impact to most small businesses acquisitions and it seems to us that new owners have yet to fully appreciate the severity of the loss in their business (which can easily be £200k+). With high rates of taxation of easily 42% – 47% in a sole trader though, despite the government also increasing dividend taxation, a corporate vehicle opens up viable planning opportunities simply not available elsewhere. In our opinion, it is of even more importance now to make sure tax losses that are out of your control are mitigated wherever possible.
5) Know what to be focusing on at the right time
Unfortunately this only comes with experience, but you will (hopefully) be carried along with a wave of excitement. The danger is you will be overwhelmed by only the exciting bits and/or those shouting the loudest for your attention. Knowing what to prioritise will help you keep your sanity.
6) Know that you simply have to increase income
Where purchasing using loan finance, it is a truism that increasing prices mean an increased financial burden. An £800k loan these days, spread over 15 years, will cost you approximately £60k per annum. With the average profit we have seen of a purchased practice being £175k, after allowing for taxes at say 30%, you can see that you are probably no better off than before. In my opinion, someone purchasing these days needs to be aiming for at least £1m turnover (otherwise why would they take on the stress and risk to be no better off?) Naturally that comes along with it’s own challenges, particularly whilst you are hoping to find your feet settling into a new practice. I tell most people to also factor in a £50k marketing budget in Year 1, it doesn’t pay to scrimp on your marketing.Today’s practice purchasers are much more entrepreneurial than yester-year’s. They don’t have a choice.
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