Selling and purchasing a practice

Mr Paul Redmond outlines the main issues involved when a GP decides to sell their share of a practice, both from the selling and purchasing perspective

Most medical centres are owned by several GPs who are in partnership within the practice together. When GPs approach retirement, many will consider the possibility of selling their share within the practice. In some cases, there may be a son or daughter to succeed their parents’ position, but this is not always an option.

Once the decision is made to sell on their share there are important questions to be asked. What is a fair price for this share? How is this valued?

Medical centres have both private income and GMS income, and the profits are distributed equally between the GPs who own the practice. The ‘goodwill’ of the practice represents an intangible asset of a business that includes the value of the practice’s brand and reputation, solid patient base, stable staffing and systems and procedures within the practice to manage the running of the practice daily in an efficient manner.

Practice goodwill is generally the most subjective and variable asset in valuing a medical practice. This can prove to be a contentious issue and requires the expert knowledge of your accountant or tax advisor.
An EBITDA model is often used as the best approach to valuing the goodwill of a medical practice.

This stands for ‘Earnings Before Interest, Taxes Depreciation and Amortisation’ and is a metric used to evaluate a business’s operating performance. The EBITDA looks at the practice’s profitability before considering non-cash items, such as depreciation.

A valuer can take an average of the last three years from the practice accounts. When using this model for valuation purposes, an appropriate multiplier will be applied to the EBITDA. For medical practice, this would be decided upon depending on the turnover levels, the split between private and GMS income and the consistency of performance over the previous three years. The greater these are, the greater the multiplier.

Another area to consider is the split between private and GMS income; generally speaking, the private practice income would receive a lower multiplier than the GMS income as the GMS is more sustainable and guaranteed.

This will help to arrive at a figure to begin the negotiation process. One thing to also bear in mind is that when a GP is selling their share of the practice, they will also be leaving the practice, so their expertise and knowledge will need to be replaced along with the cost of replacing a GP. An option that the retiring GP remain as an employee on a part-time basis might be considered whilst the practice adjusts.

Purchasing

Once a fair valuation is decided and agreed, what options are available to GPs to finance this purchase? As with purchasing any business, finance is usually required for some or all the purchase price agreed. There are options available to assist GPs with this from the pillar banks and other financers.

One area that is particularly worth investigating is the Future Growth Loan Scheme, which is offered by the Strategic Banking Corporation of Ireland (SBCI) with the support of the Department of Enterprise, Trade and Employment, the European Investment Bank, and the European Investment Fund.

This scheme benefits from a guarantee from the European Union and the funding is made available through several financial providers including AIB, KBC, Ulster Bank, and most recently, Permanent TSB.
The features are as follows:

• Loan amounts from €25,000 to €3 million, unsecured lending up to €500,000.
• Interest rates between 3.5 per cent to 4.5 per cent.
• Terms from seven to 10 years.
• Optional interest only available in certain circumstances.

The process involves applying to the SBCI to confirm the eligibility. This is done by completing the online eligibility application. Once successful, an eligibility letter is issued. This will enable a GP to engage with their own bank and begin the loan application process. The eligibility letter is not a guarantee of finance and bear in mind, any loan over €250,000 will require a business plan.

Once the eligibility letter is issued, a GP can apply to several finance providers. The advantage of this is that the options are not restricted to one lender. The disadvantage is the time that goes into several full applications.
The capacity for this scheme is being increased regularly, with the recent introduction of Permanent TSB and their promise to provide €50 million to this scheme. By providing this option to all SMEs, including GPs who want to invest in their future, the idea and dream of purchasing their own medical centre may be closer than they realised.

Mr Paul Redmond (CPA,QFA, FAIA) is Managing Partner of RDA Accountants Limited. He is a member of the Institute of Certified Public Accountants. He is also a Fellow of the Association of International Accountants and a qualified financial advisor