Moving from contract to settlement – what else do I need to consider when buying my new dental practice?

As published in the ADAQ Dental Mirror, Summer 2019 edition

Buying a dental practice is complex and involves a range of commercial investigations (due diligence) and planning. The first article (see Spring edition) covered due diligence, checking all of the existing parts of the practice. In this next article I will walk you through the steps after due diligence up to settlement and opening your practice!

After reading these articles you should have an understanding of the legal process when buying a new practice and be prepared for the types of discussions you’ll have with your lawyer.

Step 1. Reviewing the sale contract
Working through the Heads of Agreement with the seller confirmed what you will buy from them and the due diligence process may have identified some specific items to negotiate with the seller. With this knowledge it’s important to ensure that the final contract accurately records what you have agreed.

Your lawyer will confirm that details of the premises, lease, any vehicles, website, email, consumables, goodwill, agreed periods of seller employment/handover and employee entitlements are recorded as you have negotiated.

Your lawyer should ensure that an accurate asset/equipment list has been included and that the allocation of the purchase price (eg. between assets and goodwill) is as agreed as this can have significant tax implications.

Finally, you should consider including a “restraint“ on the seller’s ability to open another practice nearby. While this must be reasonable, a sensible restraint will protect you against losing income through the seller opening another practice down the street and taking all their patients with them.

Step 2: Reviewing the Premises Lease
During due diligence you will have reviewed any existing lease. Provided you’re not buying the premises you may receive a new lease or a transfer of the existing lease. In either case, your lawyer will need to review it to ensure it includes lockable access to your space, sufficient parking and a reasonable term (duration) with options to extend to give you stability. You may also want the ability to sub-lease if you choose (eg. To pathology or other health providers).

Leases commonly include restrictions on the tenant’s allowed activities. Your lawyer’s role is to ensure that none of these stop you operating the practice the way you want to so you can provide quality patient care and make a profit.

It’s quite normal for you, as tenant, to contribute to rates, body corporate levies, common area cleaning and other outgoings, in addition to rent. But you should ensure the amounts are reasonable and that they are included in your practice finances.

It is also common, especially with attractive tenants like dentists, for the landlord to give you a lease-free period and/or contribution to fit-out to relieve some financial pressure until you get the practice up and running. These incentives are often reflected in a higher rent so your lawyer should work with the landlord to negotiate a competitive rent as well.

Step 3: Assessing and paying Transfer (stamp) Duty
Depending on your business structure, you will likely have to pay stamp duty. To calculate the amount due, you need to combine the values across all dutiable contracts involved, even if they are separate, as stamp duty is based on the total value. Payment is due 30 days after the contract becomes unconditional regardless of when it settles. So, if you have a long settlement (eg. 90 days) be prepared that you will need to pay duty before settlement to avoid paying interest.

Step 4: Business Structuring
There can be advantages (eg. asset protection and tax) to operating your practice through a company/trust. To avoid unnecessary time and cost down the track you should set up your structure before buying your first practice. While plans change over time, you should consider your future (ie. do you plan to buy many practices or diversify your business) so that your structure is as flexible and headache-free as possible.

Step 5: Existing restraints of trade on you
If this is your first practice purchase you are likely currently an employee. Many employment contracts include restraints on your ability to open a practice within a set radius and time. Before you commit to purchasing your new practice you should carefully review your employment contract to ensure you don’t breach it. If in doubt, get advice from a specialist health business lawyer.

Step 6: Policies and Procedures
Your new practice needs a suite of policies and procedures so that staff know how to consistently perform their roles. Policies and procedures, if linked to employment contracts, are then your way to manage poor employee performance. For more information you can read the following article on the Health Law Solutions website: https://healthlawsolutions.com.au/why-does-my-practice-need-an-employee-policy-and-procedure-manual/

Step 7: Trademarks
I recommend you read the Trademark section from our article in the Dental Mirror Spring Edition and consider registering any logos and taglines if they aren’t already to protect against someone trading off your logo and reputation.

Step 8: Settlement
You may have arranged a premises inspection earlier in the process but in the last days before settlement you should request a further inspection to confirm that the equipment, consumables and all other items on site are as expected. If seller handover is to happen before settlement, this should also be arranged. At the same time your lawyer will be preparing a settlement statement to allocate the seller’s and your share of expenses to be adjusted on the settlement day. You and your lawyer will need to keep in touch with your bank to ensure settlement funds are available on the day and in the form required (eg. cheques, EFT). Settlement itself will be quite brief with documents being exchanged as all the hard work has been done beforehand. You can be there if you like but may collect keys and other items from the landlord or practice broker instead.

Legal processes can be worrisome and tedious but if managed properly you can get all of the administration sorted well before settlement and focus on being excited about becoming a new business owner!

Note: Any information provided in this series 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.

About the author:
Chris Setter
Director and Principal Lawyer
Health Law Solutions Pty Ltd
w: www.healthlawsolutions.com.au
e: chris@healthlawsolutions.com.au
m: 0477 211 732