What deferred consideration might mean for those selling dental businesses
Author: Kerly Chacon
Key contact: Jon Lawley
In this article, we take a look at deferred consideration in a dental practice sale, and what this might mean for those selling their dental business.
When selling a dental practice, a seller may, on occasion, come across a financial arrangement known as “deferred consideration”. This refers to a portion of the sale price that is agreed during negotiations to be paid to the seller at a later date after completion. For example, an overall purchase price of £1 million could involve a payment of £500,000 on the day of completion and two deferred payments of £250,000 on the first and second anniversary of completion.
In some cases, payment of the deferred consideration can be conditional upon certain criteria or financial targets being met after completion. This is primarily used where the seller is a key revenue generator for the practice and is remaining as an associate after completion for a certain number of years. This allows the buyer to manage any post-completion risks (such as concerns over NHS contract performance) and to incentivise the seller to maximise the performance of the practice after completion.
Deferred consideration carries inherent risks for the seller and spreads the risk profile for the buyer. Unlike the sale proceeds that are paid on the completion day, there is no guarantee that the deferred consideration amount will be paid by the buyer, even if they are contractually obliged to do so.
Preventative measures for the deferred payment
Protective measures can be included by a seller to reduce the risk of non-payment by the buyer. The following are some that can be incorporated into a Sale and Purchase Agreement (SPA):
- Clear terms: specify the amount to be deferred, the dates when payments are due, and/or the conditions that must be met for payment.
- Interest: applying interest on any late payments to prevent delays in payment of the amount owed.
- Accelerated Deferred Payment: if the buyer fails to make payment within a specified time frame, provisions can be included to make any outstanding amount immediately due.
- Guarantees: a seller may wish for a person or entity connected with the buyer to guarantee the payments, so that if the buyer does not make payment when required, the seller can turn to their guarantor to make payment instead.
- Audit rights: if payment depends on meeting certain financial conditions, provisions can be included that ensure the seller will have access to the practice’s relevant financial records after completion.
Preventative measures do not guarantee payment
Including clauses in the SPA can provide the seller with more comfort, but it does not guarantee that they will make the payments; for example if they do not have the funds to do so. If this occurs, the seller may need to pursue enforcement action to recover the deferred consideration.
If a seller has not received the owed deferred consideration or has met the agreed conditions and has not been paid, they may need to consider instructing solicitors for legal advice on how to obtain the payment.
Deferred consideration is common in dental practice sales and can be an effective tool for buyers to spread risk and maximise performance. A seller should consider the risk if, for example, the buyer fails to pay or the agreed conditions are not met. Including protective clauses in the SPA can help safeguard the Seller’s position and encourage the Buyer to make payment – but it does not guarantee payment. If payment is not made, the seller may need to take legal action at their own expense to recover the amount due.
If you are considering selling or purchasing a dental practice, please don’t hesitate to get in touch with a member of our Dental team). If you are currently experiencing difficulties in receiving your deferred consideration payment, our Litigation team can assist.
