The Sale of the Century – or is it?

Say no to DIY

When selling your practice, it is not the most desirable time for practice owners to demonstrate their “Kiwi DIY” ability. For many they are selling their second most valuable asset beside their home. You wouldn’t attempt to sell your home without professional advice, so why would you sell your business without professional advice from both your chartered accountant and lawyer?

Surprisingly many attempt to go it alone. Almost 100% of the time these heroic efforts come unstuck, often resulting in greater professional costs for both seller and buyer, let alone embarrassment and stress for the seller. If you sign up to an agreement to sell, you are legally bound by the terms unless the buyer is benevolent enough to agree to an alteration. In many cases a buyer will not agree to variations if it means greater cost to them.

Many believe that the biggest hurdle to overcome is agreeing a selling price. Whilst that maybe the case, make sure you enter negotiations fully armed with sufficient knowledge of what your practice is really worth. Time and time again we hear of practitioners assessing the value of their practice based on what their neighbour sold theirs for. Unless you have an indepth knowledge of the financial position of your neighbour’s practice we would not suggest using the local rumour mill as a reliable database of practice values. Typically practitioners often rely on anecdotal information of what practices may have been selling for five to ten years ago and fail to get up to date information on the current value of their own practice.

The second most common mistake is failing to understand exactly what you are selling. This may sound surprising, however a large proportion of practices are owned under complex structures which can mean that the “sale of your practice” is not as straight forward as perhaps first thought. For example, your personal company may own the goodwill and yet the chattels may be owned by a company involving all the practitioners in a group. The lease of premises may also be under the group company. In fact, you may well have to get the permission of your fellow shareholders before you can even contemplate closing the deal of the century. When thinking about selling, it might be a good time to revisit the shareholders’ agreement signed so many years ago, and remind yourself of what your obligations are.

If the chattels, goodwill and lease are not all held by the same entity, you will be dealing with more than one transaction, ie two or more sale and purchase agreements. Not surprisingly, that is a good time to call your chartered accountant and lawyer to make sure everything goes smoothly. The next question is usually, “am I selling a going concern?” Most people automatically assume they are. However in our experience given the complexity of many practice structures, more often than not, they are not selling a going concern for GST purposes. The impact of that can be significant, particularly for the seller if the wording of the agreement does not give you the ability to seek the GST retrospectively from the buyer. You could be left handing over one ninth of the sale proceeds to the Government.

What else can go wrong?

No lease in place for the premises or having the lease in the wrong name. The transfer of the lease will be key to qualifying as a Going Concern for GST purposes.
No management services agreement between practitioner’s own company and group entities which may employ staff and provide facilities.
Lack of employment contracts; failing to consult with staff.
Failing to give adequate notice to locums who may have significantly longer notice periods than a typical employee.
Taxable depreciation recovered arising on sale of chattels.
Landlord won’t agree to an assignment of the lease to the buyer.
Some of the chattels being sold are subject to charges arising under finance leases or HP arrangements.
Loss of imputation credits due to a significant change in shareholding of a company.
Loss of Loss Attributing Qualifying Company status (LAQC status) due to failing to re-elect LAQC status and failing to notify change in shareholding to IRD within the required time period.
Losing ability to carry forward tax losses as a result of a significant change in shareholding.
Not understanding what circumstances a Deed of Accession and extension of insurance cover is required.
Lack of clarity around ownership of any monies owing to the vendor by either the PHO, ACC or patients at time of transfer.
Failure to get a prospective buyer to sign a Confidentiality Agreement to cover your privacy whilst you are disclosing confidential business and financial information to them. Remember that not every approach will result in a sale, so you need to protect your confidentiality.
Finally, remember that if a company sells goodwill to an associated entity that can also create unwanted taxation consequences, hence the need to consult early on any proposed sales.

Getting your chartered accountant and lawyer involved during the sale process is key to minimizing stress for yourself and maximizing the final sale price that can be extracted. Engage the professionals to do what they do best and then you can get on with ensuring the transition process for patients and staff is as smooth as possible.

Further enquiries, please contact:

Pam Newlove
T (09) 308 2579
F (09) 3084892
E pam.newlove@nz.gt.com