Are you an associate in a professional practice, for example a lawyer, accountant or vet, thinking of buying in to the business? If so, we set out, below, some key points for consideration, together with some questions that you should ask of the current owners, before you decide whether to become a business-owning practitioner or not.
Like any investment, it is imperative that the purchase of a share in a professional practice is made on an informed and open basis. Accordingly, before drawing down any investment monies and handing it over to your new business partners, be sure that you have thought about the following:
What is the business in terms of its corporate structure? Is it a private limited company, a limited liability partnership (LLP) or a traditional partnership? And, therefore, what will you be buying: shares, an interest in the LLP or a share in the rights and liabilities of the partnership? It seems obvious but you must be clear on the corporate structure that you are being asked to invest in. Each has its own advantages and disadvantages, some of which will be driven by tax, and you need to understand the repercussions of investing in a particular corporate setup.
Please note, where we refer to Partners in the remainder of this article, we mean the business-owners of a professional practice irrespective of the corporate structure that has been adopted by them.
How much are you being asked to pay for your share in the business and how has that sum been calculated? Does the valuation account for any increased outgoings and liabilities? It may be that the decision to invite you to invest in the business is driven by a large capital outlay, i.e. the purchase of new premises that will cost more in terms of rent, outgoings and staff. Has the valuation of the business giving rise to your buy-in price taken these increased costs into account? You must be entirely comfortable with the valuation and the valuers who have undertaken the valuation exercise. It is, of course, open to you to get an independent valuation.
How will the voting rights held by the Partners in the business differ if you do buy-in, and which business decisions will you or the other Partners be able to veto by virtue of the percentage of voting rights that you and they will hold? A detailed review of the constitutional documents governing the company, LLP or partnership (as the case may be) should answer this question. You don’t want to put your house on the line and only then find that your profit share, for example, can be determined unilaterally by a few of the controlling Partners.
Once you invest in the business, you will be in partnership with all of the existing Partners and any other newbies buying in at the same time as you. Think about the personalities involved. Will anyone dominate the operation and management of the business?
Is it a share in the business alone or a share in the business and the premises that the business occupies? It is common for some or all of the business-owning Partners to also own the freehold of the premises that are occupied by the business. Such premises are commonly owned by one or more of the Partners directly or through a separate private limited company or a self-invested personal pension. Whatever the setup, if you are an incoming Partner that is buying an interest in the business and not in the investment vehicle that owns the premises occupied by that business, your interests with the property-owning Partners will not always be aligned. In its simplest form, the business (as the tenant) will want to pay a low rent for the premises while the landlord (and all of the Partners that comprise the landlord) will, in all likelihood, want to receive a higher rent. This may not have been an issue in the past if all of the Partners in the business also owned the premises (directly or indirectly), but it could become a point of contention if and when they are not one and the same, particularly if the business needs to relocate when dilapidations also become an issue.
How are the profits shared amongst the Partners? This is the big question; you need to draw a profit. If and when you make the move from employee to business-owner, your profits will be dependent on the performance of the business and are no longer guaranteed. Furthermore, you are likely to have borrowed money in order to fund the buy-in and will, as a consequence, have loan repayments to make. Instruct your own accountant to look over the books of the business. Are there any big outlays anticipated in the short to medium term, for example lease renewals, redundancies, equipment purchases or hardware updates, that will bring about a material change in the available profits of the business? Try to think about all of the expected and unexpected capital outlays of the business and how they will impact on its cash reserves and, potentially, flow over into its distributable profits. Don’t be afraid to ask financially sensitive questions. The existing Partners should all know the answers. It is your money on the line so make sure that you are comfortable with the information being relayed to you.
Do the Partners have limited liability? Have they signed personal guarantees or indemnities to support the business’ borrowings? Will you be expected to sign any documents that can be called upon if the business gets into financial difficulties, i.e. guarantees in favour of the bank or other financial institutions, or surety covenants in favour of the landlord.
Finally, check the buy-out provisions for retiring Partners. If one particular Partner owns a majority stake in the business and he or she were to retire, what would be the implications for the continuing Partners? Would they be forced to buy the share of the retiring Partner quickly and, if so, would they have the resources to do this? What potential is there for succession planning amongst the junior people in your business? Equally, how quickly will you get your money back if you decide to leave? And will you be able to work afterwards or will you be bound by onerous covenants which mean you have to relocate?
This is not intended to be a comprehensive list of all matters to be considered ahead of a partner buying into a business. There may, for example, be regulatory issues specific to each industry.
If you require any advice in connection with the above, please contact a member of our Professional Practices Team: Samantha Billingham and Chloe Vernon.