Doctors Guide To Starting a Practice
Part 3: How to Buy A Practice
So, you've made the decision—or are almost there—to buy a practice. Now what? This section breaks down the next steps, giving you practical
tips to keep things moving smoothly. Whether you're the buyer looking for guidance or a seller wanting to understand the process, we've got
insights to help make the transition as seamless as possible.
Who Prepares the Sale Agreement?
Usually, the seller’s lawyer takes care of drafting the sale agreement for the practice. Then, the buyer's lawyer will review it, suggest any necessary changes, and make sure everything’s ready for signing. Having a solicitor guide you through this process is crucial.
However, a solicitor isn’t there to negotiate the deal—that’s something the buyers and sellers will do, often with input from their accountants or other advisors. The solicitor’s role is to make sure the terms of the agreement are properly documented and that the sale goes off without a hitch.
Key Considerations When Buying a Practice
"Buying a medical practice" can mean purchasing a share in an existing practice—as an associate acquiring practice rights, a partner buying into partnership assets, or a shareholder acquiring company shares. It’s usually assumed that the buyer will also take over any rights to provide management services, typically held by a separate service trust, as part of the assets included in the sale.
What Assets Are Included in the Purchase?
When buying a practice, it’s important to identify the assets being acquired. These typically include:
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Goodwill:
- Patient lists and records.
- Expected repeat business from existing patients.
- The reputation and name the practice has built over time.
- Relationships established by the practice's owners and staff with patients.
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Plant and Equipment:
- A detailed list of all equipment should be prepared.
- The vendor must confirm ownership and that items are free from charges or encumbrances. If any exist, the vendor should resolve them as a condition of the sale.
-
Leased Equipment:
-
If leased equipment is included, either:
(a) Part of the purchase price should be paid directly to the lessor to settle the lease.
(b) The purchase price should be adjusted to reflect the lease liability you’re assuming.
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If leased equipment is included, either:
-
Medical Supplies and Other Inventory:
- These are typically of minor value, but for larger practices, a detailed review may be necessary.
Staff Contracts and Provisions
When buying a practice, you’re essentially inheriting the staff contracts as well. This typically involves agreeing to take on all staff-related liabilities, including:
- Sick leave
- Annual leave
- Long service leave
These liabilities are usually estimated and deducted from the sale price. In rare cases, such as when the liabilities exceed the value of the goodwill, the vendor may even owe the purchaser money at settlement.
Careful assessment of staff-related costs is crucial to avoid surprises during the transition.
Is the Price Right?
Let’s assume the practice has been properly valued and all the financial checks are in order. One important question to consider: would it be more cost-effective to start your own practice from the ground up?
Negotiating is an ongoing process, so trust your gut, but don’t be afraid to get a second opinion to make sure you’re not rushing into anything. Take your time to weigh your options, and if you need more time to think things through, don’t hesitate to ask for it
Negotiating the Deal To Stay in Control
Think about the possibility of deferring part of the purchase price for a year or so. This could give you some peace of mind, as it allows you to withhold all or part of the final payment if the practice isn’t performing as expected—unless adjustments are made. Whether this is an option depends on the specifics of the deal, but it’s worth keeping in mind that once you’ve paid the full price upfront, your ability to renegotiate or make changes down the line is pretty limited.
Allocating a Price for Plant & Equipment
One area where negotiations often come into play is how to split up the purchase price, especially when there’s a lot of value tied up in plant and equipment. The seller usually wants to keep the allocation for plant and equipment as low as possible, since anything above its written-down value will be considered taxable income. On the flip side, the buyer typically wants to allocate more to plant and equipment to boost future depreciation claims.
There’s no set rule for how to break it down, but a common approach is to use the seller’s written-down values for tax purposes. The key here is to be reasonable. Over-inflating the values might seem tempting, but it could raise red flags during a tax audit, and you might end up losing out on part of your depreciation claim.
Don’t Overlook Zoning Permits in Your Practice Purchase
It might sound obvious, but checking zoning permissions is something that often gets overlooked—and it's a common mistake in business sales. Just because the practice has been operating in its current location for years doesn’t mean you can automatically assume everything is in order. Always make sure to get written confirmation from both the seller and the local council (or the relevant authority).
There’s actually a story about a large practice with seven practitioners that had a council permit for only one. As the sale deadline neared, it took some quick legal work to sort out, and the deal almost fell through. So, don’t take zoning for granted—double-check the regulations to avoid any unexpected hiccups down the line.
Navigating Vendor Debts: How to Protect Yourself
When buying a practice, be careful about taking on the vendor’s debts. If you’re purchasing shares in a small business, like a medical practice, you’re not just buying the assets—you’re also inheriting any liabilities that come with it. This could include things you might not see right away, like pending lawsuits or unpaid taxes.
That’s one reason why it’s pretty uncommon for one practitioner to buy shares in another’s practice. If you do decide to go this route, it’s crucial to get professional advice and make sure you're protected with guarantees or indemnities from the company’s directors. This advice applies to any business purchase, not just in healthcare.
A safer way to go is by transferring the assets into a new company and buying shares there. This can help you avoid taking on hidden liabilities, as long as you follow the proper tax rules—so be sure to consult with a tax expert.
In some cases, it might make sense to take on certain debts, like an equipment lease with good terms, if it helps reduce the purchase price. Just make sure the total price reflects the liabilities you’re agreeing to take on.
What to Do About Staff When You’re Buying a Practice
When buying a practice, you'll probably want to keep the existing staff on board—they're often a key part of the practice’s value and help maintain smooth operations, patient relationships, and systems. That said, there might be good reasons to let some staff go, like performance issues, too many employees, or if you prefer to hire someone else (maybe even a qualified family member).
Before finalizing the purchase, it's important to figure out which staff you want to keep and which ones might not be part of the plan.
You’ll also want to get a clear picture of any employee liabilities, like unused leave, sick days, or long service leave. If there’s any
uncertainty—for example, an employee with 13 years of service who’s about to become eligible for long service leave—you may need to adjust
the purchase price accordingly.
Why a Restraint of Trade Clause is Essential
A restraint of trade clause is an important part of any agreement when buying a medical practice. It helps protect the goodwill you’re paying for and stops the previous owner from competing with you. Without this clause, the seller could easily open a new practice nearby and potentially lure back former patients.
The restraint should cover a few key areas: what kind of activities the seller can’t engage in, where they can do it, and for how long. If part of the purchase price is deferred—say, for a year—it gives you extra leverage to make sure these restrictions are enforced.
Securing Your Lease
Making sure you have the right to use the premises is a key part of any practice purchase. It would be a huge problem if you’ve paid for the practice’s goodwill, only to find out the landlord isn’t willing to renew the lease. Without a guarantee in the agreement, there might not be much you can do to fix the situation.
To avoid this, the purchase agreement should make sure you have reasonable lease terms in place. If that’s not possible, the value of the goodwill should be adjusted to reflect the risk.
There are a couple of ways to secure tenure:
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Lease Assignment: If the seller is leasing the space, they can assign their tenant rights to you. The landlord’s consent is
usually needed, but it’s typically granted.
- New Lease: If the seller owns the property, you can arrange for a new lease, often for five years with options to extend.
Checklist for Buying a Practice
This checklist is a comprehensive guide for practitioners considering buying into a practice, whether as a principal, associate, or partner. It covers crucial considerations to ensure a smooth transaction and avoid potential issues in the future.
Professional Advice
- Have you consulted a solicitor and accountant with experience in practice sales?
- Have you spoken with your spouse or other key personal advisors?
- Have you spoken with a bank manager to discuss financing options?
Before You Start
- What are your motivations for becoming a principal?
- Have you considered the pros and cons of being a principal versus being an associate or employee?
- Are you suited to the responsibilities of being a practice owner?
- Do you have the financial stability to take on this role?
- What is the expected time commitment (hours) involved?
- How long have you known the vendor and the practice?
Assessment of Practice Value
- Have you consulted an expert valuer for the practice?
- How has the practice performed over the last 3 years, and how is it expected to perform over the next 3 years?
- Does the practice have untapped potential?
- What financial records (tax returns, accounting records) are available to support the practice’s performance?
- What is the value of the plant, equipment, and furnishings being included in the sale?
- Are there any comparative figures for similar practices?
- What is the level of competition in the area?
- Are there any key employees or associates?
- How long has the practice been established?
- How did the current owner acquire the practice?
- How has the practice grown under the current owner?
Premises
- Are the premises leased or owned by the current practice?
- Who owns the premises, and are there any security interests over them?
- How will you occupy the premises: as a tenant or owner?
- What does the lease look like?
- Have you conducted a title search for the property?
- Has an architect or building expert assessed the premises?
- Who is or will be the tenant?
- Will the premises need to be assigned to you?
- Are any restrictions, covenants, or easements involved?
- Are all rates, taxes, and other outgoings up to date?
Documents
- Have you seen a proposed contract of sale?
- Have you reviewed all proposed agreements (partnership, associate, service contracts, etc.)?
- Is there a restrictive covenant or restraint of trade clause?
- What are the payment terms for the purchase price?
- Are the provisions of the Estate Agents Act complied with for the sale of a business under $200,000 in Victoria?
General Considerations
- Have you read the relevant sections of the manual on legal structures, tax planning, and owning or leasing practice premises?
- Is the vendor bankrupt or in financial distress?
- Have you signed a confidentiality agreement?
- Will the benefit of any contracts pass to the purchaser?
- If the vendor is a company, do they have the power to sell, and are there any charges over the company?
- Are the directors and shareholders identified, and do any need to give guarantees?
- Are you being asked to buy shares in a company, and will you be responsible for its debts?
Other Key Matters
- Does the business name need to be transferred?
- Do any trademarks, logos, or intellectual property need to be transferred?
- Will staff be required? Are there any outstanding leave liabilities (e.g., long service leave)?
- Are new employment agreements required?
- Have you reviewed the patient files and determined the practice’s patient volume?
- Do you need to change telephones, inform specialists, or advise other health professionals?
- What medical services (e.g., pathology, radiology) are utilized by the practice?
- How will patients be notified about the ownership change?
- Are any plant and equipment leases subject to adjustments against the purchase price?
- Are any special licences or approvals required to operate the practice?
- Who will handle the collection of patient debts?
Final Checks
- Have all legislative disclosure requirements been met?
- Who is the vendor's solicitor and accountant?
- Who will pay for the sale documents and stamp duty?
This checklist helps ensure that all critical aspects of buying a practice are considered, facilitating a successful transaction and minimizing risks.
Want to learn more?
Please click on the links below to view our 4 part series on "Doctors Guide To Starting a Practice"
Part 1 : First Things First
Part 2: To Buy or Not to Buy
Part 3: How to Buy a Practice
Part 4: Location and Premises
Chris Tolevsky has extensive experience in the medical and allied health fields, with in-depth knowledge of both general and specialist
practices. He provides expert guidance on tax strategies, and building and protecting wealth focusing on individual practitioners and
their practices. If you’re interested in discussing how we can help you grow your business or professional practice or optimize your
financial strategy, please feel free to reach out for a complimentary consultation by clicking on the box to the right of the screen.
Disclaimer: This article contains general information only . It is not designed to be a substitute for professional advice and does not
take into account your individual circumstances, so please check with us before implementing this strategy to make sure it is suitable