Investment into a medical or dental practice can cost hundreds of thousands of dollars and in some cases, millions and although it is a rather secure investment (most of the time), there are various factors that need to be considered – from how much you should be paying for your investment/ownership share, to structuring for asset protection and tax minimisation to other legal, ongoing bookkeeping/accounting and tax planning considerations.
The aim of this blog is to give you a quick guide to factors you should be considering before you invest.
What is the practice worth?
When investing large sums of money, you need to have confidence in your decision. The best way to minimise the risks associated with a business acquisition is to be in a position to make well-informed decisions regarding the merits and risks associated with your investment. There are two key factors that infuse a business’ valuation; being risk and growth. Risk refers to how likely is it that the profit will vary from what is expected in the future – i.e. is the business’ profitability rock solid? Growth refers to the likelihood of the business’ profit growing (increasing) in the future.
So, how is this done? Engage a professional to provide due diligence services to give you a detailed insight into your proposed acquisition. The process involves conducting an investigation into the commercial, financial and tax affairs of the entity. How? By reviewing and verifying historical financial information, identifying and analysing trends, reviewing forecast financial information, reviewing commercial factors (such as the quality of customers, products and assets) and a review of internal processes. It is important that the professional undertaking this due-diligence has a detailed understanding of the medical/dental industry.
The information provided will allow you to make a decision with confidence and will allow you to put a value to what the practice is actually worth.
How should you structure your investment?
A particular structure not only determines one’s susceptibility to a wide range of financial risks but it can also help businesses succeed and reach their financial goals. Each structure (Company, Trust, Unit Trust, SMSF) exhibits its own advantages and disadvantages. The decision of which type of entity to operate from will not only have impact on how profits are taxed annually but also far reaching implications such as asset protection, disposal or succession planning.
This is not a one size fits all scenario. You must seek professional advice to understand your current situation and goals to be able to guide you to the most appropriate structures to suit your investment.
Additionally, the ATO imposes certain guidelines and restrictions as to how medical and dental professionals can conduct their affairs. The provision of medical and dental services is considered Personal Services Income (PSI) – meaning all profits derived need to be paid as wages. However, by utilising Service Trusts to attend to certain tasks for the practice, such as merchandising, administration and payroll, you can direct profits from the practice itself to individuals/entities who are at a lower marginal tax rate. Strict guidelines regulate Service Trusts and you must seek professional advice before you implement this structure. Undertaking other activities such as employing hygienists (for dental practices), for example, can assist in reducing the amount of PSI you generate. This is why it’s important to deal with an advisor that knows the ins and outs of your industry.
Legal considerations
It is crucial to obtain independent legal advice to review Heads of Agreements, Contract of Sales, Lease Agreements, etc. Without proper legal counsel, you expose yourself to potentially taking on liabilities you were unaware of.
That said, it is important to deal with a lawyer that is commercial in their approach. Otherwise, you could end up getting bogged down in lots of immaterial issues and spend endlessly on legal fees.
Ongoing bookkeeping and accounting solutions
When operating your practice, you will be required by law to meet regular reporting obligations – BAS, IAS, payroll, EOFY Income Tax Returns, etc. This can be tedious and time consuming. To ensure the timely nature of these reporting obligations, we recommend that you have the appropriate systems and processes in place.
As a starting point, we recommend the implementation of software to manage your day to day practice needs. The software must have the capacity to manage bank reconciliations, payroll, superannuation, bills and invoicing.
At ProSolution, we provide a tailored medical and dental package to streamline bookkeeping and tax compliance processes so you can focus on your practice and not get bogged down in tedious compliance. We use technology to provide you with accessible, timely and accurate financial information – allowing for more accurate advice and tax planning opportunities. We work with you side-by-side using our business optimization process to develop strategies which identify growth opportunities and areas for improvement. This approach saves you money (in lower bookkeeping and accounting fees) and a lot of time.
We are here to help
There are a variety of additional issues that should be considered in any practice acquisition. It can be a complex transaction and you need to make sure you complete adequate research, understand the risks and have received the right advice. It is crucial to engage the right people and rely on them. Nobody can do everything on their own, and there are experts in an area for a reason. Good professional advice is always worth far more than it costs – it pays for itself. It would be foolish to make an enormous commitment without spending a relatively small amount to ensure the right pair of eyes are involved in helping to direct you toward success.
If you are considering purchasing a medical or dental practice and would like some help, please do not hesitate to reach out to us today.
