Investing in a practice in the medical profession is an exciting opportunity that warrants special attention for both investors and medical practitioners.
We've prepared this guide to assist both medical and non-medical practitioners in navigating critical legal and other issues when considering investing in a practice.
Key Takeaways
Whether you are investing in an existing practice, taking over an established one, or starting from scratch, there are critical legal, financial and practice management considerations you need to be address. The best way to navigate these complexities is to assemble a team of experts.
At Avant, we offer consultations on financing, legal and practice management matters. For further information, please refer to our webpages:
- Avant Law: https://avant.org.au/law/practice-legal-services
- Avant Finance: https://avant.org.au/finance/practice-finance
- Avant Practice Solutions: https://avant.org.au/practice-solutions
To start a new practice, or to buy into or acquire an existing practice – that is the first question...
The first question you need to ask yourself as a new investor is whether you want to start a new practice from scratch or buy into or acquire (take over) ownership of an existing practice.
There are certain obvious advantages to buying into or acquiring a practice – namely, that there is an established business with goodwill, assets, staff, consulting doctors, and patients. However, there may also be downsides, such as attempting to implement new changes, dealing with known or hidden liabilities, and managing negative online reviews. These challenges are why some investors prefer to start from scratch.
Do Your Due Diligence!
Every investor will undertake some form of due diligence before making an investment.
Here are some of the usual matters to consider when acquiring or starting a new practice:
- Finance
- Approvals, licences, and accreditations
- Business registrations and insurances
- Business structuring
- Purchase and other transactional documentation
- Staff and consulting doctors
- Management fees and patient billing
Finance
Investing in a practice is a significant financial commitment. Often investors will need to secure financing from a lender. Lenders will conduct their own due diligence on your background and financial capacity. The benefit for medical professionals is that lenders will consider their substantial investment in professional skills and intellectual property, recognising that they have the relevant experience to transition more easily to both the business and clinical aspects of a practice.
The type of financial loans available to investors will depend on whether they are buying into or taking over an existing practice (such as a practice goodwill loan) or starting a practice from scratch. It is important to obtain specialist advice about these terms and conditions, including legal considerations.
For more information about how Avant Finance may assist you in financing your practice, visit the website here: https://avant.org.au/finance/practice-finance.
Approvals, licences and accreditations
The first step is to ensure that the property where the medical practice will be situated and operating has been approved for use as a medical centre. You will also need to consider various planning and development approvals (including approvals for advertising signage) permits, and licencing approvals for operating a private health facility.
Depending on the nature of the practice, you will also need to determine the applicable accreditations for safe and quality of healthcare delivery. Some permits and licences are transferrable from the existing owner to the new business owner, but in other cases a new application may be necessary.
Business Registrations and Insurances
Your practice will need an Australian Business Number (ABN), Tax File Number (TFN) and/or Goods and Services Tax (GST) registration as required.
A registered business name can be linked to your ABN. You may also want to consider registering your brand through a trade mark to protect the business against unauthorised use by others. Although the ABN is not transferrable to a new owner, the business name and trade mark can be transferred through a simple online process.
Your business will also need to ensure it has the necessary insurances, including Medical Practice Indemnity Insurance, Public Liability Insurance, Business Insurance, Cyber Insurance and Workers' Compensation Insurance. For more information about applicable and available insurances for practices, visit the Avant website.
Business Structuring
Choosing the right business structure for your practice is one of the most important decisions you will make, whether you are starting your own practice or acquiring an existing one. If you are buying into a practice, you will be entering an existing ownership arrangement.
The different structures available for practices include:
- Sole trader
- Trust, including hybrid trust, unit trust, or discretionary trust or
- Company
- Partnership or associateship
Each business structure has its own advantages and disadvantages. Important factors to consider include:
- Personal circumstances
- Asset protection
- Effective profit distribution
- Growth strategy
- Tax implications
- Succession planning and exit strategy
Purchase and Other Documentation
The purchase and associated transactional documents are critical to the acquisition process.
Regarding the purchase agreement, the transaction is generally either an asset or a share purchase. For example, if you are buying into an existing practice, there will be other owners who may have an ownership agreement among themselves to govern their relationship. This could be a unitholders or shareholders agreement, and as the new owner you will be subscribing for shares or units (as the case may be) to join as an owner.
If you are taking over the business from another owner, purchasers often prefer to buy the assets, (and potentially land) of the business using their own business entity (such as a company or trust) to start fresh. This approach allows them to the ongoing goodwill of the practice, including the patients, employees, consulting doctors, and of course the existing premises and other facilities.
Other important transactional documentation may include sale of land contracts, the assignment or transfer of any existing property leases or equipment hire purchase agreements, and the transfer of business names, permits and licences (as discussed above), and/or deeds of accession for becoming a director, shareholder, and/or unitholder.
There are important legal considerations in deciding between an asset purchase and a share purchase, depending on your type of investment. These considerations include:
- Ownership type and arrangements – single owner vs multiple owners
- Level of due diligence and issues concerning liabilities, indemnities and warranties as part of the purchase transactions
- Existing third-party agreements and arrangements (e.g. medical suppliers)
- Employees and consulting doctors
- Tax treatment
You will need to seek specialist legal and financial advisors to determine which option is most appropriate for you.
Staff and Consulting Doctors
For an investor buying into a practice, as a shareholder or unitholder, the practice will already have employees and doctors in place. However, this does not mean there are no existing or contingent liabilities associated with those relationships, such as disgruntled employees, workers compensation claims, or workplace disputes.
An investor acquiring a practice will need to undertake due diligence on existing staff and consulting doctors to determine whether to retain those relationships as part of the new business. Specifically, regarding employees, they will need to decide whether to offer ongoing employment following settlement, and manage negotiations with the seller about recognition for employee entitlements (e.g. accrued leave, long service leave, and personal leave) and whether the purchase price needs adjustment to account for these entitlements.
If you are starting the practice from scratch, our Avant Practice Solutions may assist you with practice administration (such as reception and general administration services) and practice management consultancy. See our website here for more information: https://avant.org.au/practice-solutions
The relationships with consulting doctors will differ from those with employees. Licenced and registered doctors often enter into service agreements with the practice as independent (non-employee) practitioners conducting their own medical practice. How the relationship is defined between the consulting doctors and the practice will be critical for assessing tax and superannuation liabilities, professional and public liability insurances, and termination rights and obligations.
At Avant Law, our commercial and employment teams are highly skilled and experienced in preparing and reviewing employment and practitioner service agreements. There can be significant consequences if the relationships with staff and consulting doctors are not appropriately documented.
Management Fees and Patient Billing
The "business" operations of the practice are distinct from its clinical practice activities. Typically, the business is managed by a service entity, a separate legal structure established by the owners in private practice. Generally, a service entity will be a company or trust (usually with a corporate trustee) responsible for:
- Providing premises and services for patients and consulting doctors, whether as the owner of the freehold or as the tenant under a leasing arrangement
- Employing staff and engaging with consulting doctors
- Collecting service fees from consulting doctors
- Collecting patient fees as an agent for the consulting doctors
- Negotiating lease and sub-lease arrangements
- Purchasing and providing equipment and supplies
- Incurring all the usual expenses for the daily operation of the practice
Patient billing will be based on private and/or bulk billing. There are important regulatory requirements for bulk-billing so it is essential to ensure that consulting doctors have the necessary approvals and Medicare provider numbers.
Further, each consulting doctor will have their specific billing practices. For practice owners, calculating the appropriate service fees for the service entity is critical for managing both cash flow and relationships.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
