During the sale and purchase of a dental practice, there are a number of legal and regulatory hoops to jump through. In addition, all the parties need to put in place a robust set of contractual documents to protect both themselves and to accurately document the key terms of the transaction. The buyer will be keen to minimise any identified risks and to protect the goodwill and profitability of the business, whereas the seller will be looking for a clean exit with limited exposure to on-going liability.
It is important that the parties negotiate a sale and purchase agreement (SPA) that not only allocates risk fairly between the parties, but also considers the complex regulatory framework within which a dental practice operates, ensuring the proper transfer of the practice's NHS contract (if applicable) and compliance with the requirements of regulators such as CQC.
Before the SPA is drafted, a thorough due diligence exercise should be carried out by the buyer. Due diligence is normally legal, operational, clinical and financial, in order to cover all key aspects of the practice.
The information obtained from due diligence will help the buyer to decide whether to go ahead with the purchase, identify liabilities and risk areas as well as identify any third party consents that may be required.
Once the due diligence is well progressed, the parties can turn their focus to the SPA.
The SPA is the main contractual document setting out the terms of the sale and purchase and the obligations and liabilities of each party. If poorly drafted, it could lead to an increased risk of financial loss for either party, as well as unnecessary disputes. This will almost inevitably result in a breakdown in the relationship between the parties, which is particularly detrimental where the seller is still working in the practice as an associate after completion.
A well drafted SPA should include the following.
- Purchase price: how the purchase price is to be structured. For example, will part of it be deferred and/or retained? And if so, when and how is the seller paid that deferred amount?
- Completion conditions: consents that must be obtained, or conditions that must be satisfied before completion, particularly relating to the transfer of the NHS contract, compliance with the requirements of regulators such as CQC and any other agreements to be entered into at completion.
- Dental specialist areas: provisions dealing with apportioning uncompleted treatment and advance payments from patients, the transfer of any private capitation scheme, apportionment of monthly BSA payments, protections against the seller's underperformance of target UDAs and remedies for patient complaints for defective treatment carried out at the practice prior to completion.
- Restrictive covenants: certain restrictions on the seller's future activities to protect the goodwill of the business and prevent the seller from setting up in competition with the practice. Particular care is required in this area because unreasonable restrictions will be unlawful.
- Warranties: these are a set of contractual assurances from the seller about the historical running of the practice, covering its key regulatory, legal, clinical, financial and operational aspects. To the extent that any of the factual circumstances of the practice are inconsistent with the warranties, the seller makes disclosures about these inconsistencies in what is known as a 'disclosure letter'.
- Liability limitations: these limit the seller's liability in relation to breach of the warranties, by imposing certain financial, time and other limits and exclusions. This ensures the seller is not essentially providing an open cheque book in terms of liability.
The parties need to differentiate between employees and self-employed individuals working at the practice. Dentists, hygienists and therapists are normally self-employed, whereas other individuals are generally employed.
As part of the transaction process, employment contracts will automatically transfer to the buyer in accordance with the Transfer of Undertakings (Protection of Employment) Regulations 2006 (commonly referred to as 'TUPE'). This should be covered in the SPA and the buyer and the seller will need to ensure compliance with their respective obligations under TUPE to inform and consult with the transferring employees about the proposed sale.
The contracts with the self-employed individuals do not transfer to the buyer under TUPE, which means the buyer will need to engage the self-employed individuals under new contracts. The timing of this is sensitive. A buyer will be keen to talk to the self-employed individuals as soon as possible, but a seller will be keen to delay this until the parties have exchanged the SPA.
The precise terms of the contracts will vary depending on whether the self-employed individual is a dentist, hygienist or therapist. However, in terms of a dentist's associate agreement, consider the following points.
- Financial arrangements: how is the dentist's pay calculated? Is it based on the amount of NHS treatment performed and a percentage of private fees earned? How are laboratory fees and other shared costs to be apportioned?
- Performance targets: is there a set NHS or private income target (or both) and what happens in the case of underperformance?
- Practice hours, time away and locum cover: how many days and hours will the associate work at the practice? If the associate wishes to take leave, how much notice should be given and who is responsible for organising a locum? Particular care is required in drafting these provisions to make sure that the dentist is not seen to be an employee.
- Restrictive covenants: how are the associate's future activities restricted to prevent them from working in a competing practice? Are the restrictions reasonable?
- Defective treatment and retentions: what happens if the associate leaves and it transpires that certain treatment provided by the associate was defective? Does the agreement provide that the practice owner can retain a sum of money when the associate leaves? How is this calculated and when is it returned to the associate?
When embarking on a practice sale or purchase, it is essential you seek advice from a dental specialist solicitor who is familiar with the above issues to ensure that you are not exposed to unnecessary risk and liability.
Great news for DDU members – as part of the new DDU associate contract checking service, if you do need to take a contract dispute further, we’ve negotiated a competitive rate with Hempsons, specialist dental lawyers.