What is Deferred Consideration?
There’s a process in dental practice sales called deferred consideration, where a portion of the purchase price is held back post-completion and only released if the business performs to a pre-agreed level. In some instances, deferred consideration can help to secure a better financial deal, but as there is an element of risk and uncertainty it can be difficult to gauge suitability. Here are some of the factors to consider:
With deferred consideration deals vendors are often required to stay on in the practice part-time in an advisory role or as an associate post-sale. While this likely won’t be a problem if you’re not in a hurry to give up work, you will need to remember that the circumstances of the contractual agreement will be somewhat different to that of a self-employed associate. Any days off sick or fluctuation in performance would have no other impact than less take-home that month. If you were to stay on as an associate as a result of deferred consideration, however, you might be liable for underperformance – not just on an individual level, but practice-wide.
Indeed, there have been instances where dental corporates have imposed strict tapering clauses, whereby for every £1 in turnover lost, £1 of the consideration has been removed. Should you end up in a similar situation you run the risk of a reduced pot at the end of the pre-determined time period. Or worse still, you could leave without any of the remaining funds if the buyer was to impose a clause that if performance drops below a certain level then all the consideration is removed and there is no further tapering allowance.
For that reason, it is always advisable to negotiate a deferred element deal that is associated with individual turnover rather than the practice’s combined turnover or Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). That way, associates’ retention and performance is the responsibility of the buyer. Alongside this, you could ensure that protocols are in place to protect you against illness and underperformance. Alternatively, if you are worried about the knock on effect of underperformance or quite simply you want to avoid this scenario, it may be that deferred consideration isn’t for you.
It’s also worth considering what would happen in the event the business were to fail or the buyer was unable to borrow any more money from the bank. Where would that leave you financially? Luckily, there are ways and means to mitigate this risk. For instance, arranging to personally take charge over assets until the deferred consideration is paid off, or if the buyer has other directors, use the sale agreement to make them personally liable if obligations aren’t met.
Talk to the experts
For expert advice and support when selling your dental practice, speak to Dental Elite today. Give us a call on 01788 545 900 or contact us for a free valuation report.