When buying or selling a company that owns a dental practice, it is often agreed that the company will be “cash free and debt free”. In other words, the buyer will purchase the company with its dental practice and the seller receives the cash in the business but settles the existing debts. The sale price will therefore be the agreed price plus the cash in the business, less any debt.
Put another way, the agreed price covers the goodwill and the equipment and any other assets or liabilities on the balance sheet properly valued as at completion will be added to or deducted from the agreed price.
Price adjustment
As money constantly flows in and out of the company, it can be difficult for the buyer and seller to know precisely what the company’s financial position will be at completion of the sale. The solution commonly adopted is for the deal to be completed based on an estimate of the cash and debt position, produced shortly before completion. This is known as a pro forma net asset value statement.
Then, following completion and once the actual balance sheet value is known, the accountants will agree an accurate net asset value statement as at completion. There will then be a price adjustment to cover the extent that the pro forma statement differs from the accurate statement.
Incorporation Loan
A major debt may have arisen when the seller transferred the dental practice to his/her company. To illustrate how this would typically be dealt with in a dental company sale, I have created a theoretical dental practice owned by Priya through her company Dental Practice Limited (DPL).
Let us assume that Priya transferred the Practice to DPL two years ago and the Practice was then valued at £700,000. There was no bank debt. At that time, Priya would have transferred the business to DPL for a purchase price of £700,000. And as no money will have changed hands, DPL would, on completion of that sale, have owed Priya £700,000.
DPL made a profit of £125,000 a year in each of the two years following the transfer. To keep the maths simple, let us say that the corporation tax rate was 20%, so the Company will have paid £25,000 in corporation tax in each of those two years. It then repays to Priya £200,000 of the debt. It follows that, at the moment, Priya is still owed £500,000 by DPL.
Priya is now selling DPL for £800,000. A significant adjustment is achieved by technically reducing the purchase price of DPL to £300,000 (£800,000 less the £500,000 owed to Priya). This is still subject to the adjustments as mentioned above. The buyer will lend to DPL, on completion of the purchase, the sum of £500,000, which, on completion, DPL repays to Priya.
The effect of this series of transactions is that Priya is effectively paid £800,000 for the Practice (including the repayment of debt), and the buyer effectively pays £800,000 for DPL albeit described as £300,000 for the shares and £500,000 by way of a loan to DPL.
So we have now addressed the fact when you buy a dental company, you pay the headline price, subject to adjustments. We have also addressed the slight complexity that arises from the director’s loan.
This is a complicated area of the legal process. It is therefore important that you obtain advice from specialist dental corporate solicitors, working hand in hand with specialist dental accountants. If you would like help and advice on a dental company sale or purchase, we are happy to help.
Abrahams Dresden articles and guidance notes are for general information purposes only and generally state the law as at the date of publication. The information may not be relied upon as legal advice. We are of course always happy to advise directly on specific issues arising.