Kindly provided Leicester Gouwland, (pictured below right), from Findex Financial Advisory and Accounting Services
If you’re thinking of buying or selling a practice, there is an easily identifiable 10-step process you can follow to ensure a smooth outcome.
- This is the initial introduction of the potential buyer and seller. It could come through word of mouth, an advertisement or an unsolicited approach.
- The buyer and seller agree they would like to explore the possibility of a sale and purchase and enter into a non-disclosure agreement (also known as a confidentiality agreement). This agreement primarily ensures that commercially sensitive information provided by the seller is protected, particularly where there is more than one buyer interested.
- A limited amount of information is provided to the buyer. The information is usually high level financial and other information such as details of the lease, employees, equipment and technology.
- The buyer undertakes their initial due diligence on the information provided and decides whether they wish to proceed further or walk away.
- Having considered the initial information, the buyer makes a non-binding offer to purchase the practice. The offer will not only contain the price but also any other key terms and conditions. For instance, it might be conditional on the lease and employees being transferred, obtaining finance, or obligations on the seller to continue to work to transition the practice to the buyer after the sale
The offer can then be negotiated. The idea is to reach an understanding of each parties position, before either party spends significant time and cost on the transaction.
- An initial non-binding agreement is reached. Or, if the parties can't agree, the parties walk away. There may be some binding clauses in the initial agreement, for instance a period for exclusive negotiation.
- A formal and binding sale and purchase agreement is negotiated and signed. This contract contains all the finer details of the sale and purchase. It often requires significant negotiation.
It’s likely there will be conditions still to be met, usually the detailed due diligence and obtaining finance. There can be significant cost in preparing and negotiating the formal agreement. Each party will usually want to be the one to prepare the initial agreement, as it is the opportunity to get the clauses you want in the contract, which is easier than having to negotiate a number of changes.
Often though, standard template agreements are used, to which specific clauses can be added, which reduces the cost of preparing the agreement. Template agreements work well where uncomplicated businesses are being sold.
- The final due diligence is undertaken; finance is obtained, and the other conditions are met. Often a buyer will want to do detailed due diligence before the formal sale and purchase agreement is signed. This is because they want to avoid the cost of preparing and negotiating the agreement
The order of whether detailed due diligence or a formal sale and purchase agreement is entered into will often depend on which party has the upper hand. For instance, where there is only one buyer, the seller may let the detailed due diligence be done first, to ensure they don't scare away the buyer.
- The agreement becomes unconditional when all the conditions have been satisfied, such as finance being obtained.
- The final stage is settlement - where the purchaser pays the agreed price and the seller transfers the practice to the buyer.
If you’re either buying or selling a practice, please get advice. For buyers, this is essential to avoid buying a poor practice, and for a seller; to maximise the price, particularly where the sale is going to form a significant part of their retirement fund.
College practice ownership guide
In 2016, the College produced a general practice ownership guide. Click here
to view it.
Any information in this article has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material. While reasonable care is taken in the preparation of this information to the extent allowed by legislation, Findex Group Ltd NZBN: 9429036869831 (Findex), accepts no liability whatsoever for reliance on it.