Before commencing discussions or negotiations for what could be the most important transaction of your life, there are 5 key areas to be across to help execute a smooth and successful transaction.
1. UNDERSTAND THE VALUE OF YOUR PRACTICE:
There are two types of value:
Market Value:
Market value is the estimated monetary worth of an asset on the open market at a particular point in time, based on the most valuable use of the asset and the amount for which the asset would sell for between a willing buyer and a willing seller in an arm's length transaction.
Market value for a medical practice in Australia is typically determined by utilising the Capitalisation of Future Maintainable Earnings ("FME") valuation methodology, which at a high-level involves capitalising the FME of the business by an appropriate acquisition multiple.
To obtain the FME of a business, you usually assess the normalised earnings (usually Earnings Before Interest Tax Depreciation and Amortisation, or EBITDA) over a period of say 3 years (sometimes shorter or longer depending on trading history and the impact of any macro issues on the business e.g. COVID restrictions). Determining the normalised earnings requires making adjustments for one-off or abnormal items and any non-business related income (e.g. sale of equipment) or expenditure.
The FME should be assessed based on the intended post-sale fee for service model (fee split) to be utilised, assuming you are intending to work in the practice post-sale.
Strategic Value:
Strategic value is additional or special value over and above the market value, which a buyer may be willing to pay for a business given strategic benefits (e.g. revenue or cost synergies, less market competition etc.) available to a buyer by acquiring it. A buyer often provides strategic value to the seller in the form of either a higher capitalisation multiple, or an earn-out incentive.
It is important to understand the market value of your practice prior to entering into any sale discussions or negotiations. Having a robust understanding of your medical practice's normalised earnings upfront will also make the due diligence ("DD") process smoother and reduce the risk of 'price chipping' by the buyer following DD.
Further, if you are in discussions with a buyer, before reaching any agreement on price / value (even if non-binding in nature), you should endeavour to assess potential strategic value available to the buyer and bring such value to the attention of the buyer as part of the price negotiations.
2. TRANSACTION STRUCTURE:
Ensure you have a good understanding of the structure of how your business is held and operated (e.g. how is the equipment owned, do you utilise a service entity etc.) and what sale transaction structure is required to minimise tax payable on sale.
The two types of transaction structure are a Business & Assets Sale and a Share / Unit Sale.
Your Tax Accountant should be able to advise which transaction structure is most tax beneficial in your circumstances.
Getting structure of your medical practice right ahead of time can save you time, money and stress when it comes to selling your medical practice.
3. CONSIDERATION STRUCTURE:
There are two elements to consideration structure: type and timing.
Type - a buyer may offer cash, scrip (rollover equity) or a combination of the two. If equity is offered, it is important to do your own DD on the target to assess the share price on the scrip component is reflective of market value for the shares and understand the terms and any restrictions associated with holding the shares.
Timing - the baseline is that consideration is all paid on completion; however, in practice, a buyer may include a deferred consideration component. Deferred consideration could be contingent on certain targets being achieved, generally known as an earn-out, or it could be non-contingent, such as a hold-back which is paid when certain contractual obligations or a time anniversary are met.
Maximising the percentage of consideration paid on completion lowers your risk in the transaction; however, be open to considering any earn-out offered by a buyer, as it may deliver you extra value / upside.
With earn-outs, understanding when earn-out consideration might be taxable up-front (that is, on completion) is key to ensuring you don't have a tax bill before receiving the associated consideration.
4. DISCLOSURES, WARRANTIES & INDEMNITIES:
Once a non-binding indicative offer or letter of intent has been agreed, the next key phase of the sale program is to appropriately manage your disclosures.
Being thorough with responses to the DD request list / questionnaires, and with disclosure of information to the buyer in general, is key to avoiding warranty claims post-sale.
Similarly, spend enough time reviewing the seller warranties as proposed by the buyer in the draft sale agreement, to ensure you are comfortable providing the warranties and determine if it is necessary to:
Negotiate out any warranties on the basis that they aren't appropriate;
Water down any warranties to a weaker position for the buyer; and
Disclose against any warranties to avoid a breach of warranty.
Understanding the risks / issues in your business prior to commencing DD, will allow you to manage disclosures, and negotiate warranty and indemnity provisions in the sale agreement to protect the value of your practice as negotiated in the headline purchase price.
It is strongly recommended that you seek the guidance and advice of your legal counsel, financial advisor and tax advisor, where appropriate, during the disclosure and warranty / indemnity negotiation process.
5. POST-SALE OBLIGATIONS:
Spend time getting comfortable with the proposed post-sale obligations on the seller during the non-binding indicative terms negotiation stage, as it will be difficult to have the buyer flex on their position during the negotiation of the long-form sale documents, as these obligations would have been factored into the value / price negotiated.
These obligations may include a requirement to practice for an agreed period of time, restraints on practice after termination of any services agreement, non-competes / restrictive covenants from an ownership / investment perspective, and obligations under a Shareholders Agreement if the consideration includes rollover equity.
Having a dispute with the buyer post-sale in relation to obligations is likely to be a costly exercise and a drawn out process, so understanding all relevant obligations and respecting those obligations is recommended.
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