The Practice Manager's Guide to Buying a Practice - McMasters ...

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It does not consider costs. Some practices will have a much more favorable costs profile thanothers. It seems sensible to take this into account by basing the valuation methodology on netearnings rather than gross fees. If this is not done different practices will be valued similarly justbecause they happen to have similar gross fees. For example, taking on an associate who billswhat he costs will increase value but will not increase net earnings. This is not sensible; andIt does not consider non-financial matters. For example, it does not take into account expectedfuture competition. A potential purchaser may well be cognisant of this but the valuationprocess will not highlight the problem.If this approach had been used in the above example the client would have paid too much for thepractice, as average gross revenue (and revenues for 2008) was more than $360,000 a year. Basedon a factor of 30% this would have valued the practice at $108,000. In our view that would havebeen too little. We believe this valuation approach is too simplistic, too rigid, and fails to take intoaccount all relevant matters that may affect value. McMasters’ does not recommend it to ourclients. Further information regarding valuation is available at appendix 5 at the end of this guide,and a sample of a valuation letter can be viewed at appendix 6 at the end of this guide.Capital gains tax and goodwillThe Australian Government has created a number of special concessions to reduce what wouldotherwise be the tax charge on capital gains that are connected to the sale of a small or mediumsized business. The rationale is that small and medium sized business are the engine room of theAustralian economy, employing more staff than each of the big business sectors and the governmentsectors, and generating more wealth for the economy.Small and medium sized business operators need incentives to encourage their efforts, andexempting capital gains on the sale of a business (provided certain conditions are met) is one way ofencouraging entrepreneurial efforts and energies.Small and medium sized business operators are also required to invest in the businesses, and thisoften means cash is short for superannuation and similar investment strategies. The CGTconcessions are seen as compensating small and medium sized businesses for not being able to usethese other tax concessions to build up wealth for retirement.Many books have been written on the question of capital gains tax and goodwill. It is a very complexarea, and doctors selling goodwill as part of a practice sale should make sure they accessexperienced tax solicitors to confirm that the receipt is a tax free capital gain, and is not taxed eitheras ordinary income or under the general CGT rules.Suffice to say:The CGT concessions are one reason why doctors are recommended to invest in their ownpractices. Doctors receive a large tax free cheque on the sale of all or part of their practice;Most doctors who sell practices for capital gains are able to treat the capital gain as a tax feecapital, under a combination of CGT concessions; andDoctors who sell their practices to, or otherwise contract with, large corporate service providersand then enter into a long term service agreement with the corporate service provider, may not26
e able to treat the receipt as a tax free capital receipt. The Australian Taxation Office hasissued a ruling, indicating in some circumstances these payments may be taxed as ordinaryincome. The ruling is private ruling 25443 and a copy of it can be downloaded directly from theATO’s website here: Private Ruling IT 25443.It is important to stress that there is no such thing as off the shelf tax advice, and each case must beconsidered on its individual merits. Any doctor contemplating selling their practice, or any similarrights, should seek specific legal advice about the CGT consequences, before proceeding with thetransaction.27
Page 1 and 2: The Practice Manager’s Guideto Bu
Page 3 and 4: The value of a practice, and especi
Page 5 and 6: On the other hand, buying into an e
Page 7: A purchaser will normally be intere
Page 10 and 11: that are not shown in the balance s
Page 12 and 13: If the new doctor is buying into a
Page 14 and 15: yields a maintainable net profit pe
Page 16 and 17: given to sharing the premises with
Page 18 and 19: ooyounger doctors do not see propri
Page 20 and 21: Whatever the motivation behind the
Page 22 and 23: BuyerSellerInformationInformationTh
Page 24 and 25: Step 2: Determine the value of the
Page 28 and 29: APPENDIX 1CHECKLIST FOR BUYING A PR
Page 30 and 31: Have you read the section in this m
Page 32 and 33: THIS AGREEMENT is made at 17 Brown
Page 34 and 35: Prescribed Occurrence has the same
Page 36 and 37: 3.2 ExclusionAll express and implie
Page 38 and 39: 5.1 Employment of staff(a)(b)(c)(d)
Page 40 and 41: (f)(g)(h)(i)(j)(k)(l)(m)(n)(o)this
Page 42 and 43: 6.4 Purchaser indemnityThe Purchase
Page 44 and 45: Each Party agrees, at its own expen
Page 46 and 47: SCHEDULEPURCHASE PRICEThe written d
Page 48 and 49: Appendix 3 Goodwill as a Component
Page 50 and 51: Appendix 4 Results of recent sales
Page 52 and 53: Sale 11 2008A married couple, both
Page 54 and 55: Appendix 5 Capitalisation of future

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