John Grant from Goodman Grant Solicitors speaks about importance of carrying out effective, industry specific due diligence when acquiring a dental practice.
Due diligence is the process which is undertaken prior to the acquisition of any business or property. This process involves finding out as much information as necessary to assure the buyer that they will not encounter any problems or to ensure that they are aware of any issues and are happy that these can be dealt with satisfactorily, before they are legally committed to the purchase.
Solicitors often refer to due diligence as DD or ‘pre-contract enquiries’. The DD procedure can be divided into several sections, some carried out by the buyer themselves and others by professional experts.
Physical Due Diligence
As part of the investigations that are undertaken prior to purchase, any sensible purchaser will employ a surveyor to check that the property is structurally sound. In the case of a lease, a surveyor would also ensure that all repair obligations have been met.
Financial Due Diligence
A specialist dental accountant should be asked to examine the books and financial records to ensure that the practice is viable as a going concern. They should inspect the income of the practice, overheads and take any borrowing into account.
To highlight how important this is, take this example: I recently heard of a client who was looking at acquiring of a practice where almost 40% of the turnover was spent on the significantly higher than normal salaries. As a buyer would be unable to change this situation due to the Transfer of Undertakings Protection of Employment (TUPE) regulations, they would be obliged to take on the costs of these high salaries. Consequently the buyer did not proceed, as it was not a viable proposition.
A valuation is also part of due diligence. This involves looking at the figures and profile of the practice, its prospects and the demographic of the area to make sure that it is worth the asking price.
Firstly, a dental lawyer will send off the searches – this is very similar to the process that is used when buying residential property. Searches are legal questionnaires that are sent to official bodies such as the local authority, environment agency, water and drainage companies, if it’s a coal mining area, the coal board etc. The responses from these questionnaires give critical information on how the property is maintained and ensure that the buyer is aware of any major works due to take place.
In addition to these searches, there are standard pre-contract enquiries relating to the property that should be addressed. The questions are very technical and can often only be answered by a solicitor with access to the title deeds. The main reason for a dental solicitor to be employed for this stage is because the dental practices due diligence questions are, for the most part, specific to a dental practice.
It is imperative that dental solicitors are utilised to undertake DD of the business to cover the fundamentals for running a dental practice. This ensures that every area relating to the practice is examined extensively by those who know what they are looking for; a perfect example of this is when asking for the most recent inspection certificate relating to autoclaves. If a specialist dental solicitor was not employed, it is possible that a regular solicitor would not know what an autoclave was, or that they need to be inspected or how old these certificates should be.
A specialist dental lawyer will ask for a complete inventory of equipment as well as all the regulatory inspection certificates in relation to every piece of equipment at the practice, i.e. compressors, x-ray equipment. They will also obtain copies of policies and procedures, evidence and compliance of regulations such as CQC and HTM-01-05. This includes registration, inspection reports, action plans and all correspondence. There is also the NHS contract to consider and critically the UDA performance of the practice. A specialist dental lawyer will also explore the structure of the practice, employment contracts, share agreements and partnerships deeds, remembering that no single part of the process is more or less important. A thorough due diligence enquiry will pose up to 40 questions with around 80% of them being dental specific.
As well as using a specialist dental lawyer it is also a good idea to complete your own due diligence. Firstly, examine the way patient records are maintained, make sure they are kept properly. Inspect the records and x-rays and satisfy yourself that there has been no clinical neglect. This ensures that you do not inherit a record keeping nightmare or a whole lot of complaints and failed treatment. Next, sit in reception and get a feel for the practice and how it is working. Ask yourself if the staff are happy and if they deliver good customer service. Judge the atmosphere and assure yourself that the patients receiving good quality care before you are legally committed to the purchase of the practice.
John Grant of Goodman Grant Lawyers for Dentists – a Past Chairman of ASPD
For more information call John Grant on 0113 834 3705 or email [email protected]
ASPD and NASDAL MEMBER