MediEstates - ASK ALISON: Should vendors take a larger lump sum and lower remuneration, or vice versa?
ASK ALISON: Should vendors take a larger lump sum and lower remuneration, or vice versa?

Ask Alison: Should vendors take a larger lump sum and lower remuneration, or vice versa?

Following a sale, it is common for a principal to remain working at the practice, providing the clinical treatments they love, but without any of the management responsibilities. Quite often buyers prefer principals to stay on post-sale to provide continuity and ensure that the goodwill tied to that dentist can be retained post-sale; this is particularly important for private and specialist practices if a corporate is involved. In this case, it is more likely than not that the ex-principal will be required to stay working at the practice for some time. Therefore, an agreement as to remuneration will need to be made prior to the sale.

Most principals expect to be paid a fairly high remuneration post-sale to reflect their experience and seniority, and they will probably want at least the amount that other associates in the practice are paid, if not more. However, vendors should be careful as this route can prove to be a costly mistake in the long run.

Taking a lower lump sum makes financial sense
At MediEstates, we often advise principals to take a lower rate of remuneration and part of my job is to explain why this route is best for them.

When we value a practice, we are not just looking at the current trading performance of the business but considering how that will be affected under new ownership, including how income will be generated post-sale and the associated cost of this.

The profit a business makes currently and how that profit will change under new ownership are calculated using an adjusted EBITDA method - Earnings Before Interest, Tax, Depreciation and Amortisation - a metric used to evaluate a company’s ongoing operating performance. This profit figure is then multiplied to produce the valuation.

Due to the use of a multiplier, the final valuation figure can be significantly impacted if the principal is paid more after the sale. A lower profit is going to equal a lower valuation because that lower profit is multiplied a number of times over. On the other hand, if they take a lower rate of remuneration the practice becomes more profitable and the extra profit is multiplied again.

So, the vital message for all principals selling their practice is although you might be tempted to earn more for a number of years after the sale, it actually makes more financial sense to have that money up front. The reality is that many principals are looking to work short-to mid-term, for three-five years post-sale which makes it far more beneficial to have a lump sum than to continue earning at a higher level but over a longer working period.

A higher lump sum saves on tax overall
Another important point is that not only do you get more up front, but there is also an implication on the tax that you pay. When you sell a business, you can qualify for Entrepreneurs’ Relief on your capital gains tax, and consequently will pay only 10 per cent tax on the sale of the business.

By comparison, if you earn more post-sale, then obviously the money that you’re earning is going to be at your normal rate of income tax, which is a much higher rate. So, not only are you getting more money up front by taking a lower post-sale rate, you will have a lower overall tax bill, providing a double benefit.

MediEstates guides the sales process
When it comes to post-sale remuneration, a lot of dentists feel that because they have been the principal they should be paid more than the associates because of their experience. In this situation, it can be difficult sometimes to see the bigger picture and that’s why it’s important for vendors to liaise with experts like MediEstates throughout the sales process.

We put all the complex financial issues into commonsense language, so that our clients can understand that they are going to get more, by taking less post-sale. We are not only here to advise how to maximise value but to also do so in the most tax efficient way.

Posted by: Alison Bates on

General Buyer Terms 

This agreement is in relation to MediEstates Limited whose registered office is at 1st Floor, Pacific House, Stanier Way, Wyvern Business Park, Derby, DE21 6BF acting for and on behalf of our clients ("the Vendors"); and yourself (Buyer's Name) in relation for an introduction to a prospective sale of a business as a going concern. By registering through this agreement I agree to all terms set out below:

  1. Definitions
    In this Agreement the following terms and phrases shall have the following meaning unless the context otherwise requires:

    Dental Practice business providing dental care. This business is under the MediEstates Ltd sale terms.
    Confidential Information
    Means the actual Vendors identity and all confidential information in respect of the Business, including, but not limited to, any ideas, business methods, prices, accounts, finance, marketing, research, development, manpower plans, processes, market opportunities, intentions, design rights, product information, customer lists or details, employees’ details, trade secrets, computer systems and software, and other matters connected with the products or services manufactured, marketed, provided or obtained by the Vendor, and information concerning the Vendor’s relationships with actual or potential clients or customers and the needs and requirements of such clients’ or customers’ operations.
  2. Obligation of Confidentiality
    The Prospective Purchaser agrees to treat as confidential, information supplied by or on behalf of the Vendor in connection with the sale of the Business.
  3. Exclusions
    The obligation of confidentiality set out in clause 2 does not apply to:
    1. any information received from a third party who was legally free at the time of disclosure to disclose it;
    2. any information which was already lawfully in the Prospective Purchaser’s possession prior to receiving it from MediEstates Ltd on behalf of the Vendor; and
    3. any information which is in its entirety already in the public domain.
  4. Duties of Prospective Purchaser
    1. The Prospective Purchaser shall take such a reasonable security measures to protect the Confidential Information and trade secrets.
    2. The Prospective Purchaser shall not, without the prior written consent of the Vendor, permit any of the Confidential Information:
      1. to be disclosed, other than in confidence to its legal or professional advisors;
      2. to be copied or reproduced;
      3. to be commercially exploited in any way;
      4. to be used for any purpose other than in connection with the prospective purchase of the Business;
      5. MediEstates is registered under the Data Protection Act 2018. Upon Signing this agreement you agree to follow the legal obligations of this act to protect the details of the information supplied to you, with it no to be passed outside of the control of you the prospective purchaser.
    3. The Prospective Purchaser agrees to keep a record of Confidential Information received.
    4. The Prospective Purchaser will return to MediEstates or the Vendor all documents containing Confidential Information and all copies of those documents on demand at any time which are in its possession or under its control, and for this purpose the term “documents” includes computer discs and all other materials capable of storing data and information. The Prospective Purchaser agrees that such documents remain the property of the MediEstates on behalf of the Vendor.
    5. The Prospective Purchaser must not jeopardise or re-direct the sale under any circumstances.
    6. The Prospective Purchaser must not contact the Local Area Team or CCG regarding any practice sale, by any means of media unless written permission is granted from the Vendor.
    7. To carry out own due diligence on practice purchases and accepts that any information MediEstates has supplied is information provided by the vendor and is not responsible for its accuracy or completeness.
  5. This Agreement
    The existence of this Agreement and its terms are confidential and neither MediEstates nor the Purchaser may disclose anything about this Agreement or its subject matter or implementation to any person other than in confidence to their legal or professional advisers.
  6. Duties of Prospective Purchaser
    When buying Dental practices, finance is normally needed. Our organisation operated over more than one of the MediHoldings brand, by completing this from you agree that the information can be shared to our other organisations to avoid the need to register independently and provide the best possible service.

    MediEstates will refer you to the specialist dental lending team and MediFinancial who will contact the necessary banks, whom have preferential healthcare lending rates in some cases, to ascertain which funding is available to you.
    By signing this agreement you do not have to use any of the banks MediFinancial contact, it is just another service which we provide.
  7. Deposit for Dental Practice
    If you are interested in putting forward a formal offer in for a practice, once the offer is accepted there will be a deposit required to secure the practice sale which is dependant of the practice size. This deposit is held in a client account and will be returned to the buyer on completion of the practice sale. You the buyer, will be required to sign a deposit schedule which will cover the buyer and the seller in the event that the practice sale does not proceed.
  8. Changes to this Agreement
    Any changes made to this agreement must be authorised and signed by one of MediEstates Ltd Directors.
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