Buying a practice

Considerations

Areas you should consider or try to ascertain before buying a practice:

• Find out as much as possible about the structure, people, business, workload, current clients and their state of mind. Be objective, generally practices are built on in-house business-winning potential and good will (good will is an additional payment for a business over and above net assets, capturing areas like loyal customers, valued staff and the reputation of the business).
• Have your accountant look at the current financial accounts and recent financial history of the practice and determine the net asset value. It is important to understand the earnings of the current owners, the overall profitability and the expectation for continuity of work, in order to determine whether your investment will have a reasonable chance of success.
• Have your accountant assess the value of work in progress, ie work completed to date but not yet invoiced to clients – can it be billed and is there any liability or risk of unpaid fees.
• How will the valuation be agreed? Will you recoup your investment in the relatively short term or is it a long-term investment? Will the immediate proprietorship remuneration be adequate?
• What are the liabilities and obligations to external parties, eg is there a bank overdraft, is it secured and by whom? Will this continue or will you need to secure finance as part security? Are there any outstanding insurance notifications or claims?
• If a merger is proposed, will you have a say and influence in future business policies and decisions? Are you and the other owners compatible in terms of personality type, skills, ability to win projects etc?
• Be aware of your obligations, these may include, but are not limited to, the Architects Registration Board, the law (liabilities of company directors), staff, clients, your family etc.

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Agreement

You should have an agreement in place to set out the Terms and Conditions of the purchase or merger. Consider including the following points in the agreement:

1. Professionals

You may wish to engage the services of an agent who specialises in buying and selling businesses. You are likely to require the services of an accountant and you may also wish to engage a lawyer to draw up the agreement.

2. Entity structure

Is the current entity a sole practice, a partnership or a company? Will there be any change of entity from say a sole practice to a company? Speak to an accountant about the differences (Also see Acumen note Business structure and planning). You may decide to create a new entity or merge with the vendor’s entity or the vendor to merge with your entity. The new or amended entity, including details will need to be registered with ASIC.

3. Name of entity

Will the current name be retained, or amended to reflect both parties (if a merger is occurring) or be completely new? List the existing and new entities in the agreement, including details such as address, positions held, ABN, ACN, registered business name/s etc.

4. Projects

Obtain a list of projects you will be taking over or involved in:

• Current projects: ask for client references and documentation including Client Architect Agreements to confirm they are active, fee paying projects not just enquiries. Prepare a list of projects that you will be actively taking over.
• Recent past projects: obtain a list of projects that have been recently completed. While you may not be directly involved, there may be ongoing defects liability periods to address.
• Past projects: consider including a clause excluding you from responsibility for past projects you have had no involvement in. This way you do not inherit problems which are not of your doing. Particularly with recent regulations regarding the NSW Design and Building Practitioners Act, where liability may extend retroactively for ten years.
• Moral Rights: will past projects be included in future marketing eg website? If so, what is the agreed form of attribution?

5. Architectural services

If a merger is being undertaken, confirm who will be providing which services, should one party have more experience in one area than the other.

6. Insurances

Consider including as a condition that all parties are to retain Professional Indemnity Insurance. If the outgoing party plans to retire, they are to maintain their insurance for a particular run-off period. Further, the outgoing party may decide to re-take up professional practice in a different form.

As above, also consider a condition where the outgoing party indemnifies the incoming party for any past or future work you have not been involved in.

7. Finances

Obtain financial records for the outgoing business to check overall profitability and likelihood of being able to continue trading. You are likely to require the services of an accountant.

8. Professional registrations and associations:

• Board of Architects: check if the new entity or amended entity will need to be registered with the relevant Board of Architects (requirements may vary between states and territories). Consider also who will be the nominated architect.
• Australian Institute of Architects: to be notified of the change or the new entity, if a member practice. Consider who will pay membership fees etc.
• Other professional bodies.

9. Renumeration

Consider whether any payment is to be made for purchasing the business. Be it a lump sum or a percentage commission of fees. The outgoing party could be involved on a consulting basis, being paid at an hourly rate for specialist knowledge, attendance at client meetings, mentoring etc.

• Banking: consider which bank accounts are to remain, be renewed etc.
• Tax: any transfer of funds may have tax implications, obtain advice from your accountant.

10. Office premises and equipment

Consider your business premises. If you are taking over the outgoing business premises make sure to review the lease and check the conditions. As well as rent there will be rent review periods, insurances, outgoings, utilities such as electricity, internet etc. Should you be purchasing the premises, carry out your due diligence including inspecting the condition of the property, the sale contract documents and your mortgage documents.

Consider any equipment and software to be transferred. Write an inventory of:

• furniture items such as desks, chairs, bookshelves
• electrical equipment such as computers and monitors
• software such as office programs, antivirus, backup, drafting software etc
• staff, contractors, suppliers
• you may consider retaining current staff and would need to review their contracts
• contractors: you may wish to retain any contracting staff such as IT support etc and will require their details
• consider obtaining a list of suppliers, builders, subcontractors who are local to the area and have knowledge of how the company works.

11. Clients

• Consider how to inform current clients of the change in the business structure.
• The outgoing owners may offer to refer you should past clients contact them.
• Non-compete clause: Consider adding a non-compete clause should the current owner decide to set up practice in the vicinity. This could include a minimum radius for the current owner’s new premises and a period of time before this is possible.

12. Marketing

Consider a new or altered logo, website, office signage, business cards, graphics for letterheads, office signage, etc. You may consider a ‘company launch’ where clients, consultants, builders, etc are invited to meet and greet the new members. You may wish to continue any marketing platforms used. (See Acumen note Marketing and communications).

13. Sunset clause

Set out the timing and conditions for the current parties to depart the business. Also any terms for the new parties to wind down or close the practice.

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Summary

Buying or merging with another practice can be a very rewarding way to start or grow your business. Considering as many aspects as possible will increase your chances of success.

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See HR Hub for further information regarding employee entitlements and employer obligations when selling or buying a business.