As published in the ADAQ Dental Mirror Spring 2019 edition.
Buying a dental practice is complex and involves legal, financial and operational investigation of the business. This process is called “due diligence” and helps you work out whether the practice is a solid investment. An experienced health lawyer can help you understand any legal risks and provide strategies to manage them.
This article provides an overview of legal due diligence process when buying a dental practice in Queensland. A follow on article will cover the steps leading from due diligence onto settlement where you take over the practice, including negotiating the sale contract. For each step, we outline what it is and why it’s important to you.
Step 1: Summary of the transaction – Heads of Agreement
This is a summary of the purchase and is important to make sure you and the seller have the same understanding of what is included.
It is common for the buyer and seller to agree the main parts of the transaction before getting lawyers involved. When doing this it’s vital to determine whether you’re getting value for money and if what you’re getting will enable you to fully run the practice. This involves answering questions like:
- Am I purchasing the whole practice business outright, or will others retain part of it?
- Will the purchase include the premises; existing clients; equipment; and staff?
- Will the seller remain as an employee/consultant and, if so, on what terms?
The summary is written in a Heads of Agreement, which should clearly state that it is subject to due diligence.
Step 2: Company/business structure
Most Australian businesses are run as a Sole trader; Partnership; Company; or Trust. Understanding the difference and how they are run will help confirm whether the seller actually owns/leases the premises and equipment, employs the staff and has the right to transfer these to you.
Where the business is a partnership, company or trust, due diligence will confirm whether you are:
- buying out all current partners/shareholders/unitholders (owners);
- buying out one or some existing owners with others remaining;
- buying in as an additional owner; or
- some other arrangement.
Regardless of the structure, your lawyer should review the organisational documents to confirm whether the way the business is run complies with applicable laws and is commercially sensible so you avoid buying a practice which may incur penalties or is not effectively run.
Step 3: Property purchase/lease
A practice cannot operate without the right premises so this step includes a review of any:
- Lease over the premises;
- Mortgages or finance; and
- Title searches to confirm who actually owns the property.
Reviewing the lease will reveal how reasonable the rent is, whether the landlord has excessive rights, how soon the lease ends and other practical matters.
Step 4: Planning and environmental approvals
Just because a practice has operated at a premises for many years, doesn’t mean it complies with planning and environment laws. For example, a busy practice with patients and cars coming and going from a converted house in a suburban street is unlikely to be compliant.
A review of government records will reveal whether any permits notices or restrictions apply to the property.
Step 5: Intellectual Property (IP) and Trademark
As well as a registered business name, the practice name, logo and catchphrase should be registered as a trademark. This step confirms whether the practice is infringing someone else’s trademark and whether the practice is protected from competitors using the same or a similar mark. It is also important to review all existing contracts to confirm who has the IP rights in the documents being used by the practice.
Step 6: Employee/contractor issues
All staff contracts should be reviewed to check for reasonable salary, work hours, compliance with practice policies, rights to terminate and lawful restraints after resignation. This step also checks that all staff are correctly treated as employees or contractors as this will influence superannuation and leave entitlements and your insurances.
Step 7: Other Material Contracts
Established practices will have a range of contracts with providers including IT, practice management, equipment loan/lease, consumables, office supplies, utilities (incl. medical gases), HICAPS and “preferred provider” insurers. Reviewing them confirms if they can be easily transferred to a new owner, when they expire, if fees are reasonable, if you can terminate if you’re unhappy and if they restrict how you run your practice.
Step 8: Regulatory authorisations
Dental practices need to comply with a range of regulation. As you are aware, all professional staff need to have current AHPRA registration and you will want to consider any conditions, undertakings or reprimands that apply. This step will also include a review of all licencing and compliance with radiation safety, infection control, working with children, medication safety and health insurance laws as you don’t want to manage previous non-compliance as a new owner.
Step 9: Litigation
A vital search of court files for any litigation involving the practice is conducted here. The seller is asked to disclose any previous, current or potential disputes, including complaints to AHPRA, the Health Ombudsman and the Dental Board of Australia so you are aware of any associated risks or patterns of behaviour.
Step 10: Insurance
Finally, you will want to review the practice insurances to ensure they provide adequate cover at reasonable premiums. This step will include asking the seller to provide copies of all certificates of currency and policies and to notify you whether there are any recent events which are likely to lead to a claim.
In summary, the earlier you engage an experienced health business lawyer the more likely you are to save time and stress in what should be an exciting experience. In addition to legal due diligence, you should have a specialist dental accountant review financial management and viability of the practice.
Disclaimer: 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.