One aspect of practice purchase (or sale), that isn’t often considered is the leave entitlements for employees and their transfer to the new owner.
There are quite a few aspects to this but it is important that you use a good commercial lawyer for a purchase transaction as there are a multitude of factors that need to be considered to protect your interests. We won’t goto into the specific legalities of this in this blog post.
From a business perspective, you need to probably consider three main things.
1. how are entitlements treated post sale?
Normal conventions dictate that for all accrued entitlements, the employee is either paid out upon sale or the entitlements are transferred to the new owner as a discount off the agreed upon sale price. If you decide on a $1,000,000 purchase price and employee entitlements are $20,000 – then you only pay $980,000 at settlement. Usually, only 70% of the employee leave entitlements are transferred over. The rationale for this is that the other 30% will be a tax deduction for the new owner when they eventually pay the entitlement.
2. Long service leave entitlements and other leave entitlements NEED TO BE BUDGETED for!
When you are buying a practice that has multiple employees and there is lots of leave entitlements, often new owners do not set aside these entitlements when they are transferred across. If you have significant leave entitlements transfer and you get a significant reduction in sale price, ensure you set aside these provisions. That money is not yours. It’s owed to employees and when they leave or if they want to claim the leave, they will need to be paid out. Further, if the leave is not used and you want to sell the practice, the leave accruals need to be transferred to the new owner.
In extreme cases, I have seen practice owners struggle with cashflow when they have not properly accounted for leave entitlements.
3. Hidden entitlements
I mentioned I won’t go into legalities but one area that needs proper expert legal input is sham contractor dentists. I deliberately use the word “sham”. Contracting arrangements in dentistry are largely illegal.
If you’re buying a practice that has contractor dentists and particularly if they have been working at the practice for a long time, you, as the new owner, could be liable for huge payouts if your lawyers have not properly accounted for leave entitlements.
I’ve seen lawyers who are not well versed in dentistry or in commercial matters, not even consider the liabilities that a contracting dentist brings.
When you purchase a practice and a dentist has been an independent contractor for 10 years – if they decide to take legal action (claiming to be an employee NOT a contractor) for unpaid entitlements like superannuation, long service leave, annual leave etc and they are successful, you will be liable for all these payments (not the previous owner). Including ATO fines etc, this could total to approx $200,000.
We refused a purchase of a dental practice approx 3 years ago because of this exact liability. Someone else ended up purchasing the practice and they did not consider any of the risks because the lawyer they used was not on top of it.
The key lesson here is to to ensure you analyse everything and do a proper due diligence when buying a practice. Use commercial lawyers that have experience in similar transactions to protect your interests!
We discuss many aspects of practice purchase and startup in much more in detail at our practice ownership seminars. Our next seminar is coming up in Brisbane on the 15 and 16 August, 2020. There are still a few places remaining so please register ASAP.
We also offer expert guidance in various areas of practice ownership and will do this analysis for any potential purchaser of these medium sized practices through our practice purchase assessment. Please see the below link for more information.