Medical Practice Mergers and Acquisitions: The Fundamentals

There are many reasons why General Practitioners and GP Practices may want to consider a Medical Practice Merger or Medical Practice Acquisition. 

In some cases, partners and GP Practices are attracted both by the efficiencies which a larger practice unit may bring and the ability to create a more professional management structure.  For some single-handed or smaller GP Practices, partner age profiles and recruitment issues will mean that finding someone to take over is the only option to maintain a viable business.  If that option fails, then folding the business may be the only option with all the stresses, strains and financial downside that brings[1].

Whether the drivers are triggered by necessity or by strategic planning, careful and diligent preparation is key to achieving successful outcomes.  As part of this, there are fundamental considerations which GP Contractors need to take into account.

The purpose of this article is to highlight some of those fundamental considerations for General Practitioners and GP Practices operating in Scotland and set out a GP practice merger and acquisition checklist.

Legal Structures

• How are the respective businesses structured?  Most practices are structured as traditional partnerships with unlimited liability, although increasing numbers are limited liability partnerships[2].  A tiny handful are limited companies.
   
• Does the GP practice merger or acquisition involve the transfer or combining of the physical assets of the business, or does it involve the transfer of the actual legal entity?  With a transfer of the physical assets there will be a business transfer agreement.  Where the actual legal entity is being transferred there will be a Partnership Purchase Agreement in the case of a traditional partnership or Limited Liability Partnership (or Share Purchase Agreement in the case of a limited company).
   
• Following the merger or acquisition, will the respective businesses continue to be run separately (say with common ownership and using centralised back office functions) or will they be run as one?
   
• Is a completely new legal entity being created which will run the business going forward or will one of the existing legal entities be used to run the business?

In this article when we refer to “New Business” we mean whichever legal entity is going to run the business.  It may be an entirely new business, or may be an existing business.

Property

• What premises do each Practice currently own and/or use in connection with the business and will these premises continue to be used following the acquisition or merger?
   
• Where premises are owned, will legal title be transferred to the New Business? If not, how and on what basis will the New Business occupy the premises?
   
• Where premises are leased from a third party (such as a health board or a private landlord), what steps require to be taken to transfer the premises to the New Business?
   
• What condition are the premises in and does consideration need taken of historic maintenance or dilapidations liabilities?
   
• How is any secured lending to be treated (e.g. bank borrowing or Sustainability Loans)?
   
• What are the tax consequences, particularly for Land and Buildings Transaction Tax?

Employees

• All staff are likely to be protected by the Transfer of Undertakings Protection of Employees Regulations (TUPE) and their employment will transfer to the New Business.
   
• TUPE requires that employees are consulted about the transfer.
   
• A complete understanding of the terms of employment and any potential liabilities, be that in terms of claims or pension responsibilities, should be fully understood.
   
• Who is responsible for any pre-existing employment claims?  Whilst these will transfer to the New Business, will the employer pre-merger or acquisition indemnify the New Business against such claims?

Regulatory Contracts

• For any GP Contractor the GMS (or PMS) Contract is essential for trading. Ensuring that the GMS (or PMS) Contract can be transferred or novated to the New Business is very important. 
   
• Will the Health Board agree to transfer or novation without the need for re-tendering?  The answer to this question may dictate fundamentally how the GP practice merger or acquisition is structured.
   
• Has each GP Contractor complied in all respects with its GMS (or PMS) Contract?
   
• Who is liable for pre-existing claims or liabilities?

Outstanding Claims including for Clinical Negligence

• Is there a complete understanding of any potential liabilities?  Often this will be dealt with in the acquisition or merger agreements with key issues being warranted subject to express disclosures.
   
• Are pre-existing liabilities to be met by the New Business or will the previous businesses or their principals be liable? 
   
• Are pre-existing clinical negligence claims (including latent claims) to be treated differently?
• What is to happen to defence union insurances?

Finance

• How will the New Business be funded?  Is additional working capital required and where will this come from?  Normally it will either come from partner equity or from bank lending (either secured or unsecured).  
   
• Are any Personal Guarantees required? And if so, are the partners willing to give these?  Individual partners may wish to take their own personal advice on such requirements.

Supplier Contracts

• Will the New Business take over all supplier contracts?  If so, what are the processes for that?  Who is going to take responsibility for implementing those processes?
   
• What happens to duplicated contracts?
   
• Where contracts are to be terminated, can this be done without significant penalties?

Data Protection and IT Integration

• Are appropriate policies and documentation in place to securely transfer all confidential information?
   
• Are IT systems compatible?  Are they to be integrated and if so, how will this happen?

This is not an exhaustive list of all key considerations.  As well as legal advice, all parties will want to take accountancy advice to understand the tax implications of what is proposed and also the impact on the position of individual partners.  The latter must include the inter-relation with superannuation and the NHS pension scheme.  Legal structures may also give rise to the need to consider issues of Value Added Tax and Capital Gains Tax.

At Davidson Chalmers Stewart, we are very experienced in guiding businesses across many sectors through the pitfalls of business disposals, acquisitions and mergers.  We bring in-depth commercial insight and understanding to the circumstances at hand, particularly for those in heavily regulated sectors such as GP Practices.  

If you are a General Practitioner or GP Practice considering disposing or acquiring another GP Practice, merging with another GP Practice or want to scale up your own business, we have the expertise to help you and would welcome the chance to speak with you about how we can assist.  To take this forward please contact a member of the Healthcare Team.

Disclaimer 
The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers Stewart LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.