Joining or Buying into a Practice Stuart Chan - Partner

AAPM NationalConference 2018

About Cutcher & Neale

Cutcher & Neale Overview

Specialist Chartered Accountants 65+ years of services to Medical Professionals Industry Leaders & Contributors Preferred partner of the AMA (NSW) Long standing Partner of AAPM Trainers to GP & Specialist networks Dedicated Specialised Medical Services Division

About Cutcher & Neale

Buying or Joining - what exactly are you getting yourself into?

Structuring - what am I buying? Background - Due Diligence Value - how much? Price - how to fund the purchase? Implications - what else do I need to know? Tips for Success

Agenda

At Risk – At Wealth

Doctor

Directors

Service Trust

SMSF

Investment Company

Family Trust

Which Business Structure?ISSUE SOLE

TRADER PARTNERSHIP COMPANY UNITTRUST TRUST

Complexity Simple Simple Complex Complex Complex

Tax Rate (Max) 47% 47% 30% * 47% or Beneficiary

Marginal Rate

Who Controls Individual Partners Director / Shareholder

Trustee / Unit Holder

Trustee / Appointor

Limited Liability No No – Joint &

Several Yes Yes if Company Trustee

Asset Protection Low Low Medium High High

Costs Low Medium High High High

Legislation No Specific Act Partnership Act Corporations

Act Trustee Act

Which Business Structure?

Complexity of Medical Practice Structures Considerations

1976 Phillip’s Case foundation of Service Entities1981 Original Incorporation of Medical Professionals1988 Expansion of IT 25 to all professionals1989 Payment of salary to professional in service entity1991 Principal’s verse employed Professional 2006 Service Trust Ruling – Fundamental Change

Tax Alert:Company tax cut

− 27.5% as at 1 July 2016 − 25% as at 1 July 2026

Caution:1981 Income Tax Ruling

− Retained profit rules for Medical Companies − Tax cuts relate to Companies carrying on business

Which Business Structures ?

Structuring – Best Practice

SERVICE ENTITY• Administration• Computers• Medical Supplies• Reception• Rent• Salaries

Service EntityService

feeRent

Beneficiary Property Trust/Super

Structuring – what am I buying?

GoodwillEquipment

Shares / Units Property

Each deal is different Different Risk v Reward profiles Rules of thumbs don’t (always) apply

Structuring – what am I buying?

Financial Information

Usually obtain last 3 years information Warning – financials can be biased

- Influenced by Tax - Influenced by the owners

Don’t always apply accounting standard Financials reflection of history Important but can’t be solely relied upon

Due Diligence

What the Financial Information doesn’t say:

Due Diligence

Work Environment, Cultural & Clinical

People & Culture

Systems & Processes

Capital Requirement

Marketplace &

Competition

Future Growth

Opportunities

DUEDILIGENCE

Due Diligence (SWOT) and what am I buying

Ownership interest in Share/Trust Business only – Goodwill & Equipment Profit share v Personal Income Stream Share of the Medical Rooms / Property Lease of premises Equipment

Due Diligence

Due Diligence (SWOT) and what am I buying

Business name Website, Facebook Freehold Leasehold Key staff members Capacity Patient demographic

Due Diligence

What else you need to consider:

Liability Risk Management Responsibility Career Flexibility Restraints of Trade Management & Control of the practice

Due Diligence

Market Value doesn't always equal Market Price Valuations are more Art than Science Theory is important – can lack application Purpose is important

Value – How Much?

Goodwill

Most difficult part of valuation- Intangible – arguable no value- Restraints - Location goodwill- Brand - Reputation- Reliance of Key Person

Gesture of Goodwill payment

Value – How Much?

Valuation Methods

Earnings Valuations - Capitalisation of Future Maintainable Earnings (FME)

Asset Valuations- Balance Sheet

Cost to Create / Start-Up Industry Rules of Thumb? In application – primary, secondary and even third method (cross

reference)

Value – How Much?

Asset Valuation (NTA Approach)

Value the Assets being sold Subtract liabilities Consider second hand value of equipment Significant level of Medical Supplies Hidden liabilities – employee entitlements?

Value – How Much?

Earnings Valuation – Capitalisation of FME

The most common Look at earnings or profitability

- Future Maintainable Earnings - Adjust for abnormal & non-business expenses

Consider appropriate Capitalisation rate- Risk versus reward - industry factors/risks- Discount for size, liquidity, maturity

Value – How Much?

Cost to Create- What is the cost to Startup (v buying)?- Age, remaining working life- Personal Finances – ability to borrow- Experience – ability to manage - Competition / Economic factors- Future prospects- Existing systems, staff

Other Valuation Approaches

A second marriage Breakups are costly & messy Agreements are key Outlines rights & obligations

Profit Share v Remuneration Reward for effort/labour Reward for investment risk Understand the arrangements

Group Practices

Vendor finance Personal Savings / Cash Bank Finance Structuring the Debt is critical Equipment Goodwill Fitout Interest Only v Principal & Interest Guarantors

Correct structuring can assist with cashflow

Finances – How to fund

Proper Due Diligence

Understand what your buying

Clearly document agreements/arrangements

Tips for Success

The material contained in this seminar is in the nature of general comment only, and neither

purports, nor is intended to be advice on any particular matter. Persons should not act or rely

upon any information contained in or implied by this seminar without seeking appropriate

professional advice which relates specifically to his/her particular circumstances. Cutcher

& Neale expressly disclaim all and any liability to any person, whether a client of Cutcher & Neale

or not, who acts or fails to act as a consequence of reliance upon the whole or any part of this

presentation.

Disclaimer