What would Dr Mo Lar do? Part 7
Over the course of an 11-part series, the 4dentists group explores ways to tackle a number of personal and professional challenges by providing advice and guidance to a fictional character Dr Mo Lar. In this seventh article of the series, Managing Director of the 4dentists group, Richard Lishman explains how Lar should go about purchasing a second practice to expand his business.
Among many other business ambitions, Dr Lar would like to expand his business by purchasing an additional practice. He already has some experience of practice acquisition, having gone through it once before, but there are a number of other factors that must be considered the second time round. As such, he will need to make sure that he has the necessary support before and during the process. Lar also needs to consider the impact of current market trends and think about having enough time available for the process before placing a bid, as one wrong move could jeopardise his overall financial goals. The location of the new practice is important as well, since too much travelling time between the two could have a direct impact on his ability to successfully run both businesses.
In order to secure funding for a second time, Lar has to be able to prove that he can afford the repayments. Detailed accounts and affordability tests are therefore imperative leading up to the bidding stage, as is the careful compilation of a business plan. As for the actual borrowing, he has the option of borrowing the entire sum of the money from the bank or releasing funds from his existing practice and then taking out a smaller loan. Say Lar has been making profits of £200,000 per annum for the last three years, but has only drawn £150,000, it would equate to a total increase in net worth of £150,000. If he wanted to, Lar could borrow that equity from the business. Of course, he should discuss both options with his Independent Financial Adviser before making a decision.
Interest rates are another important factor Lar should consider before purchasing his second practice. If he were to take out a loan with a different provider than the first time and they offer better rates, he could use this opportunity to move all his funding to one place. Not only would that simplify his repayments, but it would make them cheaper too.
Besides additional funding, Lar would be required to have the necessary critical illness and life cover in place, as all banks require purchasers to have the correct cover in the event of sickness, injury or death. With life cover already in place from his first acquisition, he would simply need to update his policy to reflect his additional financial responsibilities.
Considering business structures
When expanding a business, there is an opportunity to change its corporate structure. As it stands, Lar is the sole proprietor but, should he choose to, he could form a partnership, incorporate to become a limited company or register as a limited liability partnership. Purchasing an additional practice will change his tax structure, liability and tax burden so it is important that he chooses a structure that will make the business worth his while. In order to increase his income and save on tax, he will need to work closely with an accountant to weigh up his options.
Purchasing another practice will undoubtedly involve taking on more staff. As such, Lar should consider consulting a lawyer to put together the necessary contracts for new employees. The principle statement would need to clearly detail certain provisions, such as the legal names of the employer and the employee, the job title, the date of the commencement of employment, the details of compensation, the working hours and leave. Most importantly, he must make sure that all the terms of the contract are standardised across all members of staff; otherwise it could lead to allegations of discrimination.
For staff who are self-employed, his lawyer needs to draft an appropriate written contract detailing their arrangement, as there are considerable risks to dental practice owners associated with these agreements.
There really is a lot to consider before expanding a business or practice, which is why it is always advisable that someone in Lar’s position utilises the services of an expert team. Only then, can one guarantee that the process is executed seamlessly, with excellent results at the end.