Buying a new practice – should I purchase the existing company or just the business assets?

Introduction

Most Australian businesses are run as a Sole trader; Partnership; Company; or Trust, with the majority run as a company.

Many dentists looking to buy a practice for the first time are not sure whether it is better or worse, and whether it is legally sound, to buy an existing company of the seller that owns the practice assets or to buy the practice assets individually and leave the original company with the seller.

The short answer is that is legal and possible to use either option.  Whether you should or not will depend on the circumstances but this article summarised the common considerations.

Before you decide the way in which you will purchase the practice, and whether to buy at all, your lawyer and accountant should thoroughly review the organisational documents, contracts, employee arrangements etc to confirm that the way the practice business has been run complies with applicable laws and is commercially sensible. This is necessary to avoid buying a practice which may incur penalties or be difficult to run for a profit.

Benefits of buying the existing company outright

Assuming all of the property, equipment, staff, contracts and other essential practice items are owned or engaged by the company, buying the company is as simple as buying all of its shares.

Both before and after the purchase, the same company:

  • engages the staff;
  • owns or leases the premises;
  • contracts with IT, utilities and other service providers;
  • holds all insurances; and
  • and owns or leases all of the practice equipment and consumables.

This offers a simple process and less potential interruption to the practice.

Possible disadvantages of buying the existing company

This option carries the risk that, as you will now own and operate a pre-existing company, you will be responsible for the consequences of any poor management by the sellers. This may range from tax treatment to meeting their obligations to suppliers, employees and regulators.

Thorough due diligence and negotiation should reduce the risk of you taking on negative consequences, however, not all poor management is obvious from available investigations so it is important to consider this risk.

A further consideration is that, if you have already worked with your accountant and lawyer to set up a company (and possibly a trust) that is ready to buy a practice it probably doesn’t make sense to take on the extra layer of complexity and cost that an additional company will bring.

Benefits of buying the practice assets

When you buy the practice assets, you individually sign up to new arrangements with the staff and suppliers and individually buy/lease the premises, equipment and consumables. While there is likely to be more work and negotiation in this process you will only be responsible from the time you sign the contracts and have the opportunity to negotiate to improve the terms and conditions where you have identified concerns during pre-purchase investigations.

Also, if you already have a company structure in place, you don’t need to add another company and the associated time and costs of managing its affairs and tax arrangements.

Disadvantages of buying the practice assets

The key disadvantage of buying the practice assets is the initial workload in signing up all of the various separate arrangements, which can be quite time consuming and possibly more costly.

Conclusion

This article describes the common considerations but you should be aware that the individual circumstances of each practice will provide further reasons for and against buying the existing company or its assets.

Disclaimer:  Any information provided in this article is general only and is not legal advice.  If you are buying a new practice, don’t hesitate to contact us to discuss how we can help you.