If you’ve found the right practice and had an offer accepted, the free cash flow shows the investment is worthwhile. But what other financial matters do you need to consider?
Ryan Beacall, Client Manager has outlined below other financial matters that you need to be aware of whilst going through the process of purchasing a dental practice.
Over to Ryan
Purchasing a dental practice- whether its your first or another addition to your business is an exciting time. However there are financial aspects that you need to consider after you have had an offer accepted. Below I’ve outlined what you need to know when purchasing a dental practice.
Financial and Tax Due Diligence
You’ve had your offer accepted, appointed a solicitor and all parties have agreed a target date for completion. It can take many months for the purchase to go through, but there is a considerable amount of due diligence that needs to happen.
From a financial point of view, you want to ensure that the practice financials set out in the sales agent’s prospectus are accurate. This includes financial performance since the date of the financial information on the prospectus has stayed at the same level or increased, and if you are buying shares in a limited company, to make sure you aren’t taking on any nasty surprises!
At an early stage, we would liaise with your solicitors and request financial information to carry out the financial and tax due diligence. The purpose of the financial due diligence is to ensure you are buying the practice you expect from the information already received before making the offer and you aren’t taking on any financial shocks upon purchase.
Financial due diligence documents may include:
• Several years of financial statements.
• Management accounts information since the last financial accounts were prepared.
• Detailed information on revenue generated by the practice over the last few years.
• A detailed look at practice expenditure.
• Analysis of the NHS performance at the practice and plenty more.
Now let’s look in more detail at a couple of areas of financial due diligence.
Company net assets
If you are purchasing the shares in a limited company, you will be taking on the assets and liabilities of the company on purchase. It is important that during financial due diligence you understand what assets and liabilities the company has and may have in the future. Some of these will be variable throughout the year, such as trade debtors (such as income due from the NHS or patients) and trade creditors (such as amounts due to suppliers, HMRC etc).
However, there will be some assets and liabilities that may not be included on the latest financial statements. An example may be business rates reimbursements from the NHS. These are subject to audit every few years but the rates reimbursement percentage is based on out-of-date financial information (for example, the rates reimbursement application for 2023-24 may use financial information for 2021-22). If the practice turnover has varied over a number of years with regards to NHS to private turnover mix, with private fees increasing year on year as a percentage of overall turnover, the rates reimbursement paid by the NHS may be too high. On audit by the NHS, this could result in clawback from the company. If this happens when you own the dental practice, you will be liable to the clawback!
Another example would be NHS patient charges at the completion date. The NHS scheduling programme for each monthly pay statement has a deadline for FP17 form submissions, which is usually within the 3rd week of the month but in December 2023, the processing cut off date is 16th December 2023. If the practice is purchased on 31st December 2023, there are two things that need to be considered. The first is the UDAs performed to 31st December 2023 that don’t appear on the December pay statement, but the other is the associated patient charges. These will have been collected by the dental practice but not yet deducted on an NHS statement and are therefore a liability of the company at completion. Depending on the size of the practice, this can be a significant liability.
There are several assets and liabilities specific to dental practices that need to be reviewed during the due diligence process and without expert guidance, these can be missed, resulting in potentially significant unknown liabilities taken on by the buyer on purchase.
CPSE form
A much-hated form for many accountants, this is usually the last form seen by the buyers accountant as the correct completion of the form is misunderstood. This form may not seem too important but without section 32 being considered appropriately, significant tax savings can be lost to the buyer.
Section 32 looks at the capital allowances claims for the property. We regularly see this filled in incorrectly, with accountants sending information on incorrect assets, entering not applicable to all questions, or stating the value of the fixtures is £1.
With proper guidance, a s198 election may be made and agreed between both parties that enables capital allowances to be claimed by the buyer that weren’t able to be claimed by the seller. There won’t always be capital allowances available on every deal, but it is important that this option is explored.
If capital allowances are available, the value of these capital allowances (which can be tens of thousands of pounds) are able to be deducted from future profits, saving a sole trader up to 47% of the capital allowance value in tax or a limited company up to 25% of the capital allowance value, depending on the business profits.
Here to help
Our dedicated specialist dental team is here to help you with any questions you have regarding purchasing a dental practice. To speak to our team on how we can assist, give us a call on 0151 348 8400.
