Establishment, systems and succession: The 3 legal considerations when entering into, operating, growing and exiting a private practice

Establishment, systems and succession
Zac Herps

Zac Herps

Managing Director at Hillhouse Legal Partners

Investing in your practice establishment and operation is fundamental to the viability of your business and your future options.

It can be tempting to simply set up using the cheapest and easiest structure and systems (or not do so at all), but by doing this you can cost yourself in the long run as you may lose tax effectiveness, growth and scalability.

Regardless of the practice’s size, it is essential the structures are in place to ensure effective management and compliance, and in turn allowing doctors to focus on their core business of caring for patients and practising medicine.

You need to ensure your business is prepared and protected before considering expansion or sale.

Some of the basics that need to be considered before opening a new general or specialist medical practice include:

  1. The areas you will need consultants in – accounting, tax, IT, recruitment and the law
  2. The structure under which it should be formed and associated documents governing the parties relationships within the chosen structure – for example, shareholder agreements and service agreements
  3. Accounting, tax and real estate
  4. Utilities and other suppliers
  5. Accounting software
  6. Insurance – for what and how much
  7. IT systems and practice management software
  8. Staffing requirements

If you are joining an established practice, some basics you need to consider are:

  • What is the structure of the business – is it a trust, associateship, partnership or company (or a combination)?
  • What are the business liabilities and what will you be liable for when you join?
  • Have you obtained legal and accounting, including valuation, advice and due diligence?
  • What are the profit-sharing mechanisms, service fee arrangements and services provided by the practice and those which you have to arrange for yourself?

SYSTEMS AND GROWTH

There are some questions you should ask yourself now that you have your business established to ensure that you secure your practice, reputation and business moving forward:

  • Is the structure of your business effective both from an asset protection viewpoint and is it also tax effective?
  • How long since you’ve looked at your management of cash flow and liabilities?
  • Do you have employment or independent contractor/locum agreements which provide sufficient protections and clarity?
  • Have you protected your brand, system of work, your intellectual property and referral bases?
  • Now that you have this significant asset, do you have a valid will, insurance policies and an enduring power of attorney?

Structure and asset protection

A strong business structure can protect you and support the long-term success of your practice, but it involves more than simply incorporating a company or establishing a trust.

For example, what asset protection do you have? Are you sure your family home is protected under the current business structure? Is that structure also the most tax effective for you?

Has consideration to appropriate levels of service fees and rent been considered and arrived at?

What is your cash flow and where is your exposure?

It’s worth taking the time to consider how service fees are paid, who is obligated to provide which services and how you distribute costs and profits among unitholders, shareholders or beneficiaries.

Remember, the processes you put in place when establishing your practice may now be outdated.

For instance, medical trusts were common trading entities a decade ago, but many doctors now trade as sole-traders. Service entities were commonly trusts but company structures are now on the rise.

What is your employee/contractor roles and expectations?

Another key area to consider within your practice is the need for clearly defined roles, expectations and agreements with your employees and contractors.

Once again, the agreements you put in place during the early days may now be outdated – especially with changes to workplace legislation. This area of the law moves incredibly frequently and frequent updating and review to keep pace and have best practice and compliant standards is a must.

Are your policies and procedures adequate for things such as dealing with employee leave, discrimination and sexual harassment, bullying, IT and security, Workplace Health and Safety, performance management and handling of complaints?

Have you considered your IP?

This is one of the main things that sets your brand apart from your competitors and failing to protect it can leave your business vulnerable to a competitor using your business name or logos.

In this day and age, it is also important to know your websites and patient data are protected.

Generally, this is an inexpensive process, especially compared with the risks of a competitor using your intellectual property or patient data being compromised.

Online patient forms, bookings and so on are changing the way patient data is collected and accessed so clear terms and conditions of use and storage are vital to protect you and your practice.

Do you have a valid will and EPA?

Having a valid will ensures your estate is protected from certain claims or people; your family is looked after and your superannuation and insurances are distributed as you wish.

There are also potential tax advantages that can be gained through a will properly drafted by a lawyer.

Apart from anything else, there can be substantial costs incurred to administer your estate if you die without a valid will.

Subject to the structure of the practice, your practice itself can form part of your estate. Consideration should be given to how other partners may buy out your interest, or clear mechanisms provided for how a practice is sold.

SUCCESSION

What are your options?

  1. Passing the business on to family (assuming they are in a position to operate the practice);
  2. Selling to existing employees or partners; and
  3. Selling to a third party.

No matter which path you consider, there are some common issues that you should address. 

We have considered some of these critical considerations and condensed them into seven key areas. 

What are the key considerations for practice succession?

Start early

Depending on which route is most appropriate, there may be a number of issues which need to be dealt with, including finance, premises, suppliers and patients, before you can successfully transfer control of your practice.

Prepare the business

No matter which method of succession you are considering, the best method will always be to prepare the practice as though you are selling it to a third party with no prior knowledge of its operation.  

This means:

  • properly document everything;
  • ensure that all systems and key agreements are in writing;
  • have your accounts in a form that are readily understood by third party accountants. Normalising of accounts to account for any family/ unique costs and other matters also takes time to occur and should be commenced early.

Consider the sale structure

There can be drastically different tax, duty and ongoing risk implications for both you and the transferee depending on the structure that you have in place and whether you transfer the practice itself or transfer ownership of the entire underlying structure (such as shares in the company or control of a relevant trust). 

Consider alternative funding structures

Regardless of who you sell your business to, there will be risks and you should obtain prudent advice to ensure that you document these arrangements properly and that you are not exposing yourself to undue risk if a buyer does not have the capacity to pay when it is time. 

Warranties and indemnities and guarantees should never be given lightly, and it is prudent to seek expert advice about all such matters.

There are a wide variety of options available, such as secured vendor finance, issue of different classes of shares, staged buyouts and many more that can possibly provide you with a superior result or fit better within your plans than a straight sale for cash.

Consider more than the purchase price

Sellers of practices may become blinded by an attractive initial purchase price discussed by a purchaser which, in turn, may see them reluctant to properly consider other issues such as warranty risk, earn-outs, retentions and restraints of trade. 

In many instances, a seller may be better off taking a slightly lower price but with drastically reduced warranty risk and little to no earn-out requirements.

Document the deal properly

Even if you are transferring the practice to people you know and trust and who know and trust you, it is important that you properly document the transaction in its entirety and then undertake the transaction in accordance with those documents.  

This process will give both parties the most clarity around the transaction and should provide the most protection to the parties if they have been properly advised during the negotiation and drafting of the transaction documentation.

Work with advisors who communicate

Well-performed practice succession requires that you take a holistic approach to the process and consider all the relevant issues.

By sitting down at first instance with all of your advisors to properly understand your current legal and tax positions and align that with your financial and life goals, you stand a much better chance of having a smooth and cost effective practice succession. 

Going into private practice is not a set and forget decision.

Having a good team of lawyers, accountants, IT providers and financiers will enable you to minimise risk and focus on what you do best and make growing/operating your business a more financially and personally rewarding process.

 

This article contains general information only and is not intended to constitute legal advice. Any information provided or conclusions made, whether expressed or implied, do not take into account individual circumstances. It should not be relied upon as a substitute for professional independent legal advice. Any views expressed in this article are opinions of the author at the time of writing.

The Private Practice Magazine


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