Healthcare practice financing with NAB Health

7 essential tips when buying a healthcare practice

Buying a medical, dental, or veterinary practice – and in some cases the property out of which it operates – is a significant investment. From the structure of the transaction, to how you’re going to run the business from day one, there’s a lot to consider.

NAB Health has compiled a list of useful tips to set you on the path to success once you’ve identified a healthcare practice you’d like to buy.

1. Assemble your team

Seek out industry specialists who have the experience to support you. This is an ideal first step when expanding or starting a practice in the health sector. For example, you may need professional legal, tax and financial advice during the process. 

Speak to a specialist business banker with experience financing healthcare practices like yours.

2. Understand the business and its value

Before you finalise any agreements or apply for healthcare finance, research the business and any property included in the purchase. This might mean ensuring the seller has good title to the tangible assets including the current fit-out, such as equipment, furniture, and design. You may also need to obtain a building inspection if the purchase includes a business premises.

Benchmarking within industry norms is another crucial factor. Comparing the practice's performance metrics, such as patient volume, revenue and expenses, with industry standards helps evaluate its financial health and growth potential. Importantly, if the practice is being purchased from an outgoing or retiring professional, it's important to consider how their departure will impact the practice. The loss of long-term patients and the transition period may affect your revenue.

It can be helpful to utilise an expert valuer to determine the value of a practice, but it’s an added cost. NAB Health doesn’t always require a valuation to provide finance if your accountant completes due diligence. You should discuss the best approach for your transaction with your advisers.

It’s often overlooked, but you need a council permit to run a medical practice. Ensure your solicitor checks with the local council that the permits are in order. Just because there’s a practice there right now doesn’t mean they’ve been operating with a permit. Also, permits may need to be amended from time to time.  

3. Consider cash flow

The purchase price is just one of the costs when you’re buying a practice. Other common expenses include stamp duty or GST (if it applies), solicitor fees and staff costs. If a new fit-out, renovations, or updated signage is required, estimate the costs for these updates or replacements.

All these items should be factored into your budget. It’s also vital to assess the practice’s existing cash flow (if relevant) to avoid any hidden surprises, such as upcoming outlays for things like equipment or building infrastructure.

When assessing business cash flows, consider what could happen in future – both on the upside and the downside. Future performance of the business is an important consideration in negotiations.

4. Negotiate the terms

Putting together a purchase agreement is a complex matter and is often initiated by the seller’s solicitor. NAB Health recommends you work with your own independent legal adviser.

There are many details to negotiate. This includes the contract of sale, when and how money changes hands, and if there’s an associate or partnership agreement required. Stock and how it is treated, along with plant and equipment, is another important consideration.

If there’s a lease, you’ll need to understand it’s duration, extension options and negotiate whether this is transferred to you. If a renegotiation of the lease is necessary, it’s important to consider the potential costs and terms, as these could impact your overall operating expenses. Typically, a bank guarantee is required to support the lease obligation. Remember to include this information in your application for funding.

You should consider whether the contract of sale should include a non-compete or restraint of trade clause. These clauses are designed to ensure the purchaser gets the benefit of the goodwill they’ve paid for. For example, you don’t want the seller to open a new practice down the road a week after the sale. Your legal adviser will be able to help you with this.

5. Structure the purchase correctly

The way you structure the transaction can affect how you’re taxed in the future, so it’s important to get this right.

The purchase price should include tangible assets, such as equipment and furniture, and intangible assets, including the practice’s goodwill such as its brand and patient lists.

As the buyer, you may want to maximise the tangible asset portion for tax reasons, and to secure the best finance rates currently available. The seller may want the opposite treatment for their own tax-related reasons. This can make it difficult to negotiate the way the price is split.

It’s common for the goodwill portion of the deal to be purchased in the individual practitioner’s name, while the assets will be purchased in the business name. This can have benefits from a capital gains tax perspective.

It is worth seeking taxation and legal advice on how to get the best outcomes from the deal.

6. Consider staffing requirements and payroll tax

If you buy an existing practice, you may have the option of taking over existing staff contracts. This continuity may help with retaining patients but it’s important to assess the existing staff abilities and liabilities you may be taking on, such as annual leave, sick leave, and long service leave. You should arrange for these liabilities to be adjusted at settlement.

Payroll tax is one of the top issues for general practitioners to deal with, so you should ensure all requirements have been investigated. Legislation differs by state, so seek localised advice when appropriate.

7. Risk insurance cover

It’s an old adage in business: plan for the best but prepare for the worst. When you’re buying a practice, it’s wise to have a plan for how you will keep things running smoothly if unexpected events arise, such as key management changes or a business partner becoming incapacitated.

Setting up insurance cover from the beginning can help mitigate risk, as can maintaining buy and sell agreements if you’re buying with others. Your advisers can help you identify what best suits your individual situation.

About NAB Health

NAB has been supporting healthcare business owners to buy, set up and maintain medical practices for over 160 years. We know healthcare businesses need truly local support, combined with financial solutions that work together to make their lives easier.

NAB Health, Medfin and HICAPS are all part of the NAB Group. We have a team of dedicated healthcare banking specialists on the ground right around Australia to help with all your personal banking, business banking and health claim processing needs.