As you approach retirement, and even before, you will likely need to consider what will happen to your private practice when you retire. Can you sell it? Who could buy it?
Alec James, Partner, looks at ways your private practice could be sold, ways of improving the business viability for someone purchasing the business and alternative options to selling
Selling practices is the norm in other professions such as accountancy or legal practices.
The valuation of these businesses will include something called ‘goodwill’ as these businesses typically have limited tangible assets.
Goodwill is an intangible asset and represents things such as brand reputation, recurrent income stream from customers or clients, staff knowledge and expertise.
In medical practices, things are a little different.
Most specialties will not have regular, repeat patients. Those patients may come back to you in the future if your expertise is required, but as your expertise and skills are not sellable, it is unlikely that someone would pay for good-will related to historic patients.
For specialties where you do have patients with longer-term conditions that will require repeat treatment, it is more likely that you have some goodwill to sell.
In other types of businesses, the business name is often what carries significant value, rather than a particular owner or member of the business team.
In private practice, the brand is usually you and your expertise that you have developed through years of training and practising. This is often the draw for patients to the practice and therefore if you are no longer personally involved, the brand value of you as the expert is lost.
Handing on the baton
As you are approaching winding down in private practice, you may have colleagues who are just starting out.
This could present an opportunity for both parties, as they will not yet be familiar with the business model of carrying out private practice and working together would enable them to potentially gain a head start.
In this situation, it is difficult to value this and many may draw on their own experiences of starting out, which could mean that you would not be comfortable receiving payment when someone may have taken you under their wing in the past when you were in the same position.
For those who agree to work more formally as a handover, a bespoke price acceptable to both parties needs to be reached.
For those who are selling their business, it is common for the business and possibly assets as well to be acquired by a new business, usually another company rather than buying the shares in your existing business if it is a company. But there may be reasons why acquiring the shares of an existing business is preferable.
If you have a limited company, it is likely that your company will have sizeable reserves. Reserves are the post-corporation tax profits which have not yet been distributed to the shareholders of the business.
If you were to sell your shares, the reserves of the company often form part of the valuation driving a much higher price of the shares. Because of this, a fellow consult-ant buying your shares off you and continuing the business is uncommon.
There is also the liability for previous work that the purchaser would not want to inherit.
Instead, they may offer to purchase the assets of your business. This is only really likely to be beneficial if you or your business has developed their own clinic from which they operate from.
Other assets such as medical equipment are likely to be fairly modest in value. The tax treatment will depend on the assets sold and taking advice prior to any sale will help you understand the associated liabilities.
Marketing your business for third parties
If a third party is interested in your business, the valuation is usually taken by taking the Adjusted EBITDA – the abbreviation for earnings before interest, taxation, depreciation and amortisation – and multiplying it by a factor. In a nutshell, your annual profits before writing off assets and corporation tax.
Usually, your business will show higher profits, as you will usually choose not to take a salary from your company, instead drawing dividends or utilising other tax-efficient strategies for your circumstances.
A third-party owner will there-fore not achieve the level of profits without replacing your hours and, as such, they adjust the EBITDA to factor in a doctor’s cost.
There may be other adjustments depending on other factors. The EBITDA is then multiplied by a factor which is negotiated based on the specialty.
Buyouts like this are rare and often require the consultant to remain with the business for a certain number of years post sale to ensure continuity. There may also be price adjustment clauses if the business acquired is not as expected based on set criteria.
To increase the likelihood of the business being sold, changes can be made to your business which help third parties see how the business could run.
It can be worth considering involving other consultants within your business and them seeing the practice patients too. Any business which functions without the owner having to actively contribute to the business too much will carry a higher value and this shows a third party that they won’t need to invest much time.
Own premises
Following Covid and the reduction many consultants saw in terms of access to private hospitals, there is a growing trend that private practices are operated out of consultants’ own premises.
These businesses often carry a higher value, again as the buyer can see continuity of the business and is not reliant on other parties.
When making significant changes to your business, you should ensure you have forecasts to see how the changes may affect your business profits and cash flows.
Regular management accounts may also be beneficial, as these will give up-to-date information rather than waiting for the annual accounts.
In order to find prospective buyers of the business, you may wish to appoint the services of a broker. These brokers will generally take a percentage of the proceeds of your business.
Negotiations will often include whether you need to remain in the business for a period of time, whether you will receive all the cash at the point of sale or whether some will be deferred to the future. There may also be targets set for the future, the outcome of which affects whether or not you receive the full deferred payment amounts.
Lump sum payments to you are usually regarded as a capital payment and would therefore normally be subject to capital gains tax. Capital gains tax is usually at 20%, but, providing certain strict criteria are adhered to, Business Asset Disposal Relief may apply which reduces the capital gains tax rates from 20% to 10%.
It is important that you obtain advice on the tax structure of any sale, particularly if there are deferred payments and milestones to the deal.
If you are required to work in the business for a period of time after the sale, these payments are normally paid as a salary and therefore follow the usual income tax rates.
Before any sale or making changes to your business, you should always seek the advice of a specialist medical accountant so that you understand the impact of the changes or sale.
Repurposing your business
While not selling your business, it is worth considering whether you can repurpose your existing business into a new type of business.
This is particularly relevant if you have invested in creating a Care Quality Comission-registered premises. Rather than selling the property or terminating the lease and face dilapidation costs, you may be able to generate income by subletting the rooms to other consultants.
A company could also be repurposed into an investment company, owning things like managed investment funds or property.
These options could potentially provide additional income into retirement.
Written for the Independent Practitioner Today, February 2024 Issue.
