The importance of correctly drafted heads of terms – Kate Beech Goodman GrantFeatured Products Promotional Features
Posted by: The Probe 3rd February 2019
When they decide to sell or buy a dental practice, dentists are often presented with a document known as heads of terms. This should set out the agreed terms on which a dentist has agreed to sell and buy. However, it is so often the case that the heads of terms signed by the dentists reflect very little about the practice being sold and bought.
The key term in the heads of terms is the price. Whilst it is quite simple in theory, the price offered by a potential purchaser is often based on a number of assumptions. Those assumptions tend to be financial. For example, it may be the case that three dental nurses, one receptionist and two associates are paid as detailed in the sales particulars, and there is ample evidence to demonstrate this by way of a contract of employment and pay slip. Yet, so often, a buyer will find in due diligence that the sales particulars have the wrong staff costs and this can affect the value of the practice. The offer made for the practice would then need to be looked at and, possibly, reduced.
Another important term to consider is whether or not the practice is operated by a limited company or by an individual. The number of heads of terms documents that I have encountered that state the practice is owned by an individual – even though the vendor has produced accounts in the name of a limited company – is staggering.
In a similar vein, incorrect assumptions are made on the ownership of the property, which is also often overlooked. Vendors are listed as owning the premises but, actually, it is the vendor’s personal pension (SIPP) that owns the premises, and those pension companies will have different requirements in respect of the property. It might be the case that the heads of terms list that a lease can be put in place with a third party landlord, yet no contact has been made by the vendor with the third party landlord to enquire about a new lease, on terms that would suit most purchasers.
Many involved with the sale and purchase of a dental practice wish for a deal to proceed quickly, yet the first document produced is usually provided without legal information. A clear set of heads of terms that reflect the actual transaction (rather than a blanket set produced by a sales agent) can set the path clearly for all parties, and help to address key areas as early as possible.
If they are either buying or selling a practice, it is important for clients to consider setting out how the offer was formed, and to list out the information it was based on. To reassess the example above, there is no harm in having an anonymised list of staff attached to the heads of terms listing out pay hours and benefits, for example.
Again, obtaining a copy of the property title and lease, if required, and attaching that to the heads of terms makes ownership of the property clear from the very start. Such information is readily available and a matter of public record. A positive obligation on a vendor to contact a landlord in the heads of terms would assist everyone. Providing details of the landlord in the heads of terms would clear the way as well for contact to be made early on.
Likewise, whilst NHS schedules are often provided as part of the sales particulars, it tends to be left to a purchaser to work out whether or not there is any under-performance issues. If that can be set out and detailed in the heads of terms, again, it will make it clear for both vendor and purchaser to agree from the off how it will be handled (whether that is in a price reduction or a retention).
As well as looking at the terms, it is important to look at the legally binding elements of the heads of terms. These tend to relate to the costs of the transaction and exclusivity. This is the grant of a period of time in which the vendor agrees to take the practice off the market and cease negotiations with any other interested parties. A usual exclusivity period is about 6 months, but the key is to ensure that the exclusivity period comes to an end earlier, if the buyer withdraws. A number of vendors sometimes find themselves tied in without realising what they have signed.
Here at Goodman Grant, we can prepare bespoke heads of terms that reflect the transaction, and we would fully advise both vendors and purchasers to review the heads of terms before signing. Correctly drafted heads of terms that reflect the deal from the off will not only save you time, but also costs.
Kate Beech of Goodman Grant Solicitors – contact on firstname.lastname@example.org
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