In this podcast, Amelia Jones, Medical tax specialist from DPM Financial Services and Josh Flett, Director at Fletcher Clarendon Lawyers, will be discussing the topic of taking over an existing medical practice, including what to look out for, the difference in purchasing the business and the business structure, things to know before buying into an established practice, any restraints that need consideration and much more.
Legal services are offered by DPM in partnership with Fletcher Clarendon Lawyers. DPM Financial Services recommends you obtain medical financial advice or legal advice concerning specific matters before making a decision.
This podcast is brought to you by DPM Financial Services, DPM is a specialist medical financial advice firm that aims to educate doctors of Australia to make the right financial decisions and achieve their financial goals. DPM Financial Services is all about you getting the right advice that suits your personal and professional needs and making sure you have confidence in your financial future. You can get in touch with DPM at hello@dpm.com.au or by calling 1800 031 039
- Transcript
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*As always, all in this PODMD podcast is intended for health professionals and the comments are of a general nature. Information given is not intended as specific medical advice pertaining to any given patient. If you have a clinical issue with one of your patients please seek appropriate advice from a colleague with expertise in the area.
The financial journey of a doctor is unique and complex. DPM Financial Services is a specialist medical financial advice firm that aims to educate doctors of Australia to make the right financial decisions and achieve their financial goals.
DPM Financial Services is all about you getting the right advice that suits your personal and professional needs and making sure you have confidence in your financial future.
Today, I’d like to welcome to the PodM studio Amelia Jones, Medical tax specialist from DPM Financial Services and Josh Flett, Director at Fletcher Clarendon Lawyers.
*We do hope you enjoy this podcast but please remember that the here is of a general nature and is not intended to serve as advice. The views and opinions expressed in this podcast are those of DPM and Fletcher Clarendon, not PodMD.
Legal services are offered by DPM in partnership with Fletcher Clarendon Lawyers. DPM Financial Services recommends you obtain medical financial advice or legal advice concerning specific matters before making a decision.Amelia and Josh, thanks for talking with us on PodMD today.
Amelia: Pleasure
Josh: Thanks for having meQuestion 1
The topic of today’s discussion is ‘What to look out for when taking over an existing medical practice’. For our listeners’ benefit, can you first set the scene for this discussion and explain to us what to look out for when taking over an existing medical practice?Amelia: Of course, it’s probably worth covering this because there are two options when acquiring an existing practice, you can purchase the business or you can purchase the business structure and the business within it. It’s important to understand exactly what you are buying, because the end result and the process can be very different.
We would be starting by asking a series of questions, including what exactly are you buying? Is it shares in a company or units in a unit trust? Are you purchasing a patient list or are you purchasing equipment? Other questions you might want to consider, how will you own this new asset? Are there other doctors involved now or in the future? And will you be the sole owner or will you be buying in with others?
Josh: All I would say is that they are really good questions, threshold questions that the answers to which will impact the advice that’s given by both your lawyer and accountant.
Question 2
Can you explain the difference between purchasing the business and purchasing the business structureAmelia: The least common option is the purchase of an existing business structure and the business within that. When this occurs, you get all the businesses history, the good, the bad, and the ugly. You purchase the obligations and responsibilities of all the employee entitlements, including super and payroll tax. This is where things can get messy and expensive.
If a previous owner did not comply with legislation, lodgement requirements, or payment obligations, you, as the now business owner, are fully responsible and liable for these. Doing your due diligence is so important, you need to know the history well, the current and historical financials need to be thoroughly reviewed. Often the better option is to purchase the business in a newly created structure, which in effect draws a line between the old and the new.
Josh: Thanks Amelia, I agree that it is certainly more common that clients are purchasing the business from existing structures rather than buying the structure themselves, for all those reasons you’ve you’ve mentioned, in particular, the latent liabilities that may exist around superannuation and payroll tax that can’t be necessarily identified as part of the due diligence.
So unless there are good reasons to acquire the actual structure that is conducting the business, and some of those reasons might be third party contracts that can’t be assigned, in which case you would need to buy the existing entity. Then it certainly is a better option to establish your own structure for the purpose of operating the business and then acquiring the business independent of the existing structure.
Question 3
So can you expand on purchasing a business in a new structure, and what else is involved?Amelia: Firstly, the structure itself. It could be an individual, a company, or a trust, and what kind of trust needs to be established? It’s important to consider the whole life of the business as this will help establish the best structure type for your needs and lay the framework for future of the business. Things to consider and discuss include, do you intend to bring in new business owners? How do the business owners leave or retire the from the practise and what is the purchase or sale price? Is it a nominal figure or evaluation method being used?
Josh: Thanks Amelia, that that is one of the threshold issues, once you’ve identified a business that you’d like to acquire and you’ve started the discussions with the existing business owners around the commercial terms you need to obtain advice and often specialist advice for medical clients around what is going to be the optimal structure for you to use to conduct the business if you proceed through and purchase the business.
And there are. A number of different legal structures that are available for operating these types of businesses, ranging from partnerships, companies, trusts, and individuals. Certainly the most common type of structure or way to conduct this type of business is through a trust, and it’s important that as merely pointed out that you get advice around your future objectives because that will affect the type of structure that’s recommended to.
Question 4
And once you know what structure is best for your needs, then what’s next?Amelia: It’s time to look at the assets and the agreements. Often businesses have agreements in place, including leases, software agreements and service agreements with other people using the practise. It’s really important that these are reviewed in detail and assigned across to the relevant new entity. Or new agreements established if the old ones are not going to sit well with the new objectives of the business. This is where Josh and his team are really good, they’ll do a thorough review of those and advise what else is required.
Josh: Thanks Amelia, that’s right. So at this point in time, when we’re negotiating the terms of sale, usually a business sale agreement is prepared and annexed to that agreement will be all of the relevant agreements that exist already for the business that need to be assigned across to the purchasing entity. As you pointed out Amelia, those include leases, they include the service agreements with existing practitioners that might be working in their practice under service agreements and various different equipment licences and software agreements that all need to be assigned to the new purchasing entity to enable that new entity to continue to conduct the business after settlement.
And those agreements will have terms and obligations for the new purchaser which need to be understood so that you can rationalise the risk around the purchase, so the role of the lawyer in reviewing these agreements is to explain obviously the terms, but also to identify where there might be risks that could be mitigated as a part of the business sale or purchase.
Amelia: Is it at this point that you would also look at restraints? Nobody wants to buy a business that from somebody to have them walk around the corner and set up and be in direct competition.
Josh: Absolutely so, depending on whether or not the principle of the practice is going to stay and continue to work in the practice, which sometimes happens and can be quite helpful for the new purchaser. If that’s occurring, then they would likely enter into some form of agreement with the new purchasing entity, which would come into effect after settlement. If they’re not going to stay on and work in some capacity within the business, then it would be absolutely critical that certain, restrictive covenants, restraints of trade are incorporated into the business sale agreement, which protect the legitimate business interests of the purchaser.
You wouldn’t want to be in that scenario where you’ve spent a considerable amount of money purchasing a business, only to have the principal who has a long history in the area for example, setting themselves up in close proximity to the business and potentially attracting some of the historical patients across to that practise. So it’s absolutely essential, they are commonplace in business sale agreements. They’re quite different to restraints that might exist in in an employee agreement or an independent contractor agreement, these are restrictive covenants or restraints of trade that exist in a business sale agreement.
It’s also important to understand how restraints are constructed, and they usually include two key elements. Which is a restraint area, so where in what area that restraint will apply and a restraint period, so a duration during which the relevant party will be restrained. And that is often a source of negotiation, or an area that is negotiated quite closely by the parties to the transaction and with the purchaser wanting to expand the area and the duration, and conversely the vendor wanting to limit the extent of that restraint.
Question 5
So if someone buying into an established practice with others, are there different issues to consider?Amelia: Usually yes. Yes, there are usually when buying into an established practise, the groundwork is already in place. Considerations often already been given to the type of structure that’s being used, and also how people will join or exit the practise. Legal agreements are often already established to set out the methods for these transactions, and making that makes the process a lot clearer for new parties to enter. That being said, it’s really important that if you are buying into an established practise that you get your own independent legal advice, even though those structures are in place, they may not work to your best advantage and they need to be looked at and reviewed to ensure that you are getting what you’re purchasing or what you’re intending to purchase.
Josh: Thanks Amelia, this is obviously the second, well probably the most common way that people start out on their journey of ownership of a practice, and that is buying into a practice or being admitted to an existing practise. They might have worked in that practice for a number of years and the owners have presented them with an opportunity to join, which is a milestone in that practitioners career. But it’s really important that they seek expert advice around the existing arrangements, because it’s usually very unlikely that they’ll be able to make an
So getting going through that due diligence process of having all of the existing agreements reviewed so that they understand what they’re going into, what their obligations are going to be moving forward, what historical risk may exist. So if the practice is operating in a certain way that presents some risk to the practice and for instance from a payroll tax perspective, then understanding what that risk is and doing what they can to mitigate it, but that being aware of what you’re going into is critical for these type of opportunities, the admissions to an existing practice. And that also means looking at what I’ve whatever the overarching agreement is for the practice the operational side of things. And usually if it’s a trust that will be a unit holder agreement.
If it’s a company, it’ll be a shareholder agreement, and that’s the agreement that regulates the relationships between the parties with the various different hats that they wear as business owners so those hats include being a director, being a shareholder of say trustee company, or being a representative of a unit holder and each different hat has a different responsibility and different duty or function to perform and also has different rights in terms of ability to vote on certain decisions, and they’re all included in that overarching agreement.
So having a very good understanding of the terms of those agreements is critical before you actually buy in to the existing business, and so that you know how you’re going to be able to influence the business moving forward and what rights you have. Those agreements also set out the process for retirement or exit from a practise, and I always tell my clients that they should always begin this journey with the end in mind. So having a clear understanding of how they will eventually be able to exit from the business is critical because you don’t want to leave that until when you actually make the decision to retire and be surprised around the terms of that exit.
Amelia: I think it’s fair to say Josh that from a tax point of view, we hold the very same view that looking at the end is as important as looking at the beginning, because that’s where the biggest tax consequences often lie, and there’s nothing you can do at the end, it needs to be considered upfront and planned for from day one.
Josh: Absolutely, and I think one of the benefits also love engaging with a lawyer and accountant that’s familiar with these types of practises at this point in time is that they might they can quite often identify issues with how the existing practises currently operating, which gives the new potential, admittee the opportunity to raise those with the existing owners and potentially resolve some latent liabilities, or at least identify them and do things, the practise can then do things to mitigate those risks. So that that is quite common where we’re engaged to assist someone with reviewing the structure, the practice and the agreements that we identify some issues and then the practise acts on that advice to improve how it’s operating.
Question 6
That all makes sense and thank you, but can you please tell us because some of our listeners might be wondering in the event of a doctor buying into an established practice but then wanting to go into practice on their own, what do they need to know? Do these restraints we talked about earlier apply, and what would be the main things to know in that?Josh: This happens commonly. Sometimes people will go into business with their colleagues and then shortly after that realise that it’s not going to work, because being in business does create some stresses and things around how those relationships work, so that then results in a party needing to look at exiting from group and so understanding how they can leave and exit from the group, but also considering what limitations exist as a result of those restraints that we spoke about earlier, so the restraints that will exist in the overarching agreement, whether that be a unit holder agreement and a shareholder agreement, they’ll need to be considered because that will affect where that exiting party can set themselves up as an independent practice or is it with their own private practise.
You’ll also need to give some consideration to any restraints that may exist in the service agreement, which is the agreement between the service entity and the individual practitioner, because quite often they do contain restraints now, they’re not necessarily restraints against the practitioner providing medical services, but usually their restraints against the practitioner setting up a competing service entity. So, a lot of consideration should be given to those limitations even before that decisions ultimately made to leave because the restraints will not only impact your ability to set up practice in the area that you’ve been working and then potentially establish your own presence and brand, they can affect or certainly there are usually provisions dealing with also the transfer of patient data and medical records in particular.
So understanding who owns those medical records is really critical, and they’re the common issues that come up at that point in time where a party wants to leave because that relationship hadn’t worked out, the business partners can’t work together, so usually there’s some strain on that relationship as well, which can affect how, whether or not the parties work together on that exit, and also how, what the approach that’s taken to enforcing those restraints?
Concluding question
Amelia and Josh thank you again for your time here today in the Pot MD studio to sum up for us, could you please identify the main key take home messages from today’s podcast on what to look out for when taking over an existing medical practice?Amelia: Sure, from a tax point of view, it’s really important to be clear on exactly what you’re requiring, and that way you can avoid hidden nasties down the track. The second thing that I would suggest that you take away from this is that no business is exactly the same and no structure is a size fits all, so you need to seek good tax advice to make sure that you get a structure that is right for you now and into the future.
Josh, from a legal point of view, what are your take homes?
Josh: Sure, I think they’re related to yours, the first one being to seek expert advice from your accountant and lawyer, but to seek it early. So even if you haven’t identified the specific business or practice that you’re considering acquiring. At that initial stage of even just thinking about buying a business, it’s a good idea to engage with your advisors so that you can understand what’s involved in that process and the timing and the costs of those that work.
The other thing would be to do very detailed due diligence, not only financial due diligence which is critical in terms of understanding the value of what you’re buying and reflecting on the historical performance of the practice, but also due diligence around the existing agreements and the risks and obligations that you’re potentially inheriting as a part of the acquisition.
Thank you for your time and the insights you have provided
Rob: My pleasure, thank you for having me
