Maximising Practice Sales: Safeguarding Your Employees and Ensuring Fair Entitlements Adjustments for Seamless Practice Transitions

Are you considering selling your practice? Let's talk about one crucial aspect that can often be overlooked: your employees and their entitlements. These dedicated individuals, especially your non-professional staff, play a vital role in creating a positive patient experience.

As you navigate the sale process, it's essential to ensure that you and the purchaser handle employee entitlements in a fair and compliant manner. Transferring employees, who are typically valued assets, can contribute to the continuity and goodwill of your practice.

Purchasers often choose to retain these employees after the settlement date, while others may opt for non-transferring employees. It's important for both vendors and purchasers to be aware of their obligations under Fairwork regulations.

One key factor in the due diligence process is the full and early disclosure of employee entitlements. Vendors should be prepared to provide figures for accrued long service leave (7+ years), contingent long service leave (4-7 years), annual leave (including loading), and personal/carer's/sick leave. Practices with long-serving employees who haven't utilised their accrued leave can have significant liability figures, which may come as a surprise if not properly advised or understood.

To illustrate an efficient approach, let's consider an example: Dr. P is purchasing Dr. V's practice for $750,000. There are three long-serving employees and one employee with 4.5 years of service. Dr. P intends to retain the three long servers as transferring employees, while the 4.5-year employee will not continue after settlement. Dr. V will pay out the owed entitlements directly to the non-transferring employee. The transferring employees have primarily used their annual and long service leave but have accumulated $40,000 in sick leave. The sale contract should specify that Dr. P is responsible for paying sick leave when it becomes due. However, the actual liability may never materialize if a transferring employee resigns shortly after settlement (as sick leave is not payable upon termination). Nonetheless, Dr. P and Dr. V should reach a fair agreement to account for this uncertainty. They can adjust the purchase price by deducting a percentage of the sick leave liability, shared between them to mitigate the commercial risk. The transferring employees will then have their sick leave liability transferred to Dr. P, who will pay the necessary sick leave as required during their employment after settlement.

Adjusting accrued long service leave is relatively straightforward, but contingent long service leave requires careful consideration, such as opening trust accounts for nominal time periods before they become live liabilities. It's advisable to negotiate a specific adjustment that satisfies both parties and resolves the matter at settlement. You can reach out to Whitehead Legal for a discussion on this matter.

Here are some key takeaways for both vendors and purchasers:

Vendors:

• Keep employee records updated and be prepared to provide information about their service dates, hours worked, rates of remuneration, and detailed figures for long service leave, annual leave, and sick leave.

• Understand that adjustments in the purchaser's favor may be necessary and disclose the figures early while warranting their accuracy.

Purchasers:

• Treat your transferring employees with care and respect during the practice changeover.

• Ensure your lawyer conducts thorough due diligence on employee entitlements.

• Work closely with your accountant to understand the figures and adjusted allowances in your favor.

• If the employee entitlement figures are not readily provided, don't hesitate to inquire further, as it may indicate a potential issue.

• Thorough due diligence is crucial to gaining a clear picture of employee entitlements' status and ensuring that purchasers don't face unforeseen expenses in the future.

At Whitehead Legal, we offer Due Diligence Compliance Checks that not only uncover any issues but also assist in finding solutions. Contact Julian Whitehead, partner at Whitehead Legal, to discuss.

The Power of Communication and Transparency in Practice Sale Negotiations and Sale Agreement Drafting

When engaging in practice sale negotiations and drafting a sale agreement, clear communication and transparency play a vital role. These aspects create a solid foundation for a successful transaction and establish trust between the parties involved. In this blog, we will delve into the importance of clear communication and transparency throughout the practice sale process, from negotiations to the finalisation of the sale agreement.

1.     Establishing Common Ground: Clear communication enables all parties to align their expectations and goals. By openly discussing their interests, needs, and concerns, both the purchaser and the vendor can identify areas of agreement and work towards mutually beneficial outcomes. Transparent communication fosters a collaborative environment, allowing for a smoother negotiation process.

2.     Preventing Misunderstandings and Disputes: Transparent and concise communication helps prevent misunderstandings that can lead to disputes. By clearly expressing terms, conditions, and expectations, the risk of misinterpretation is reduced. Regular and open dialogue allows for the identification and resolution of potential issues before they escalate into major disagreements.

3.     Building Trust and Confidence: Transparency builds trust and confidence between the purchaser and the vendor. When both parties openly share information, disclose relevant details, and provide accurate representations, it creates an atmosphere of trustworthiness. This fosters a sense of security, encouraging the parties to move forward with the transaction and build a solid foundation for their ongoing relationship.

4.     Facilitating Accurate Due Diligence: During the due diligence process, transparent communication is essential. The vendor must provide accurate and comprehensive information about the practice being sold, including financial records, legal documents and operational details. This allows the purchaser to make informed decisions and evaluate the practice's value accurately.

5.     Drafting a Comprehensive Sale Agreement: Transparent communication and openness are crucial when drafting the sale agreement. Both parties must clearly articulate their expectations, obligations, and rights to ensure the agreement accurately reflects their intentions. Transparent communication helps identify any missing or unclear clauses, avoids ambiguities, and establishes a solid legal framework that protects the interests of both parties.

Clear communication and transparency are fundamental to successful practice sale negotiations and the drafting of the sale agreement. By fostering open and honest dialogue, parties can establish common ground, prevent misunderstandings and disputes, build trust and confidence, facilitate accurate due diligence, and draft a comprehensive sale agreement. The result is a smoother transaction process that safeguards the interests of all parties involved. If you're currently engaged in practice sale negotiations or drafting a sale agreement, prioritise clear communication and transparency to maximise your chances of a successful and harmonious outcome.

The Crucial Role of Due Diligence in the Practice Sale Process

When selling or buying a practice, due diligence plays a pivotal role in ensuring a smooth and successful transaction. It involves a comprehensive examination of the practice's financial, legal, operational, and commercial aspects during negotiations and, predominantly, before finalizing the practice sale agreement (PSA). In this blog, we will explore the importance of due diligence in the practice sale process and how it directly impacts the terms of the PSA.

Understanding Due Diligence or “DD”:

• Due diligence is the process of conducting a thorough investigation into a practice before making an informed decision about its purchase or sale.

• It involves examining financial records, legal contracts, intellectual property, operational processes, patient/client/supplier relationships, and more.

• Due diligence provides crucial insights into the practice's strengths, weaknesses, risks, and potential for future growth.

  Importance of Due Diligence in the Sale Process:

• Minimising Risks: Conducting due diligence helps identify potential risks and issues associated with the practice, such as undisclosed liabilities, pending lawsuits (for example employee or patient claims), or statutory non-compliance.

• Negotiating Terms: The findings from due diligence inform the negotiation process, allowing purchasers to adjust the purchase price, payment terms, or other conditions based on the identified risks or opportunities. Therefore, as a vendor, it is critical to disclose due diligence early to your purchaser as it allows your purchaser’s lawyer to review the PSA clauses contemporaneously with the due diligence – for example, without a list of the practice’s employee entitlements, the purchaser’s lawyer is hamstrung when reviewing the PSA clauses related to employee entitlements.

• Ensuring Value: Vendors benefit from due diligence by showcasing the practice's strengths and value, instilling confidence in purchasers and justifying the asking price.

  Legal Due Diligence:

• Reviewing Legal Contracts: Examining contracts, agreements, leases, and licenses helps identify any potential legal issues or obligations that may affect the sale.

• Intellectual Property Evaluation: Assessing the protection and ownership of intellectual property rights ensures the purchaser is acquiring valuable assets without legal encumbrances.

• Compliance Check: Verifying compliance with laws, statutory, and industry standards ensures that the practice operates legally and minimises potential legal risks.

  Impact on PSA terms:

• Accurate Disclosure: Due diligence findings guide the disclosure process, ensuring that all material information is accurately and completely provided to the purchaser.

• Purchase Price Adjustment: Identified risks or opportunities uncovered during due diligence can impact the purchase price and payment terms, allowing for fair negotiations.

• Representations and Warranties: The PSA may include specific representations and warranties based on the due diligence findings, ensuring that the purchaser is protected from any misrepresentation or undisclosed issues.

Due diligence plays a critical role in the practice sale process, providing valuable insights into the practice's financial, legal, and operational aspects. It helps purchasers and vendors make informed decisions, negotiate fair terms, and mitigate risks. By conducting comprehensive due diligence, both parties can enter into a PSA with confidence, knowing that the terms are based on a thorough understanding of the practice's opportunities and challenges.

Common issues to avoid when negotiating a practice sale agreement

Negotiating a practice sale agreement (PSA) is a crucial step when selling a practice. A well-drafted PSA ensures that the terms and conditions of the sale are clearly defined and protects the interests of both the purchaser and the vendor. However, there are several common issues that can occur during the negotiation process, leading to potential legal and financial issues. In this blog, we will explore some of these common issues and provide insights on how to avoid them.

1.     Failing to Clearly Define the Sale Terms: One of the most significant mistakes in drafting a PSA is failing to clearly define the terms of the sale. Vague or ambiguous language can lead to misunderstandings and disputes down the line. It is crucial to include detailed information about the assets being sold, purchase price, payment terms, and any conditions precedent.

2.     Disregarding Due Diligence: Insufficient due diligence can be a costly mistake when drafting a PSA. It is important to thoroughly investigate the financial, legal, and operational aspects of the practice being sold. Failure to conduct due diligence may result in undisclosed liabilities (employee entitlements!), pending legal issues, or inaccurate financial statements. Incorporate a clause (including vendor personal warranties and indemnities) in the PSA that requires the vendor to provide accurate and complete information about the practice.

3.     Ignoring Legal and Statutory Requirements: Another common mistake is overlooking legal and statutory requirements during negotiations. Practices must comply with various laws and statutes, including licensing (radiation) and specific planning permits. Failure to address these requirements in the PSA may lead to serious post-settlement complications. Seek legal advice to ensure compliance with all relevant laws and statutes.

4.     Disregarding Non-Compete and Confidentiality Clauses: When selling a practice, it is crucial to protect its goodwill and confidential information. Overlooking non-compete and confidentiality clauses in the PSA (for a purchaser) can result in the vendor competing directly with the purchaser or, potentially, using sensitive practice information at a competing practice. These clauses restrict the vendor from engaging in similar practice activities or using confidential information for a specified period, safeguarding the purchaser's interests.

5.     Inadequate Dispute Resolution Mechanisms: Failure to include clear dispute resolution mechanisms in the PSA can lead to prolonged legal battles and significant costs. Include provisions for mediation, arbitration, or alternative dispute resolution methods to resolve any disputes that may arise. These mechanisms can help parties reach a resolution more efficiently and avoid inherently costly litigation.

Negotiating a PSA requires careful attention to detail and a comprehensive understanding of the health industry and its relationship with the legal and financial aspects involved. By avoiding common issues such as unclear terms, inadequate due diligence, non-compliance with legal requirements, neglecting non-compete and confidentiality clauses, and inadequate dispute resolution mechanisms, both the purchaser and the vendor's interests are better protected and balanced fairly/commercially. Seek professional legal guidance to ensure that your PSA is well-drafted, legally sound, and reduces the potential for disputes or complications.