Sold STC - what happens now?
Hannah Burton explores the ‘subject to contract’ process.
Once the sale of a dental practice has been agreed, one of the most common questions I’m asked by both vendor and buyer is, “What happens now?” The answer is a series of steps which takes both sides through a process of fact-finding, negotiation, legal hoop-jumping and securing finance, which takes an average of six to nine months. This is known as the ‘sold subject to contract’ or ‘SSTC’ process and it continues right up to sale completion.
A practice is classed as SSTC once an offer has been accepted and the buyer has signed terms and paid a deposit with their broker. This binds their client, the vendor, to a period of exclusivity and takes the practice off the market.
For the buyer, the first thing they must ensure is that they have ‘indicative terms’ from a lender that they will consider lending the required funds. This is based on the financial circumstances of the buyer and their business plan, and the financials of the practice in question. They may have acquired indicative terms already before making an offer, but it should ideally be in place before solicitors are instructed.
For the vendor, ‘heads of terms’ are drawn up which outline the sale and the headline terms such as the price agreed, a proposed completion date and top-line details regarding the property, staff and business in general. These are then signed by the vendor as a basis on which negotiations can proceed.
Into the detail
Now solicitors are instructed by both sides and the detailed negotiations begin. At the same time, the buyer does a formal application to their chosen lender to get their credit approved and starts to gather all their documentation for their application to the Care Quality Commission (CQC) to take over the running of the practice.
All three of these processes are detailed and require diligence and care on the part of the professionals employed to facilitate them. This is why it is recommended for both vendor and buyer to instruct specialist dental solicitors who understand the exact requirements of a dental practice purchase. Using a specialist dental practice broker means they can access help with their CQC applications. It is also advisable for the buyer to approach a lender who routinely lends for dental practice purchases as their understanding of this type of property often proves invaluable.
The aim of the due diligence process is to make sure every aspect of the practice has been set out and understood. The buyer’s solicitor sends a detailed questionnaire to the vendor’s solicitor covering both the property and corporate sides, which includes freehold or leasehold contracts, planning consents, business accounts, employee contracts and so on. At the same time, property and local searches must be carried out. There is almost always more than one round of due diligence questions and in almost every case, further enquiries which can result in having to update evidence that has already been sent as it is out of date. It can be a lengthy process depending on how organised the vendor is, which is the reason we advise them to be as prepared as possible.
Meanwhile, the credit team of the buyer’s chosen lender will carry out credit checks which can take about a week to come through. Once credit is approved, they will ask the buyer to instruct a chartered surveyor (a surveyor who has been accredited by the Royal Institution of Chartered Surveyors [RICS]) to carry out a ‘business/property if applicable’ valuation, which is an independent valuation of the business and/or property on behalf of the bank. It can take about 10 days for the report to be returned to the credit team who will then go through a process of approving the credit again.
About two months into the SSTC process, and not before as it can be rejected if the planned completion date is too far off, the buyer must submit their application to the CQC to take over the running of the practice.
Putting it all in writing
Once the buyer’s solicitors have completed their due diligence and their credit has been approved, they move on to drafting the ‘sale purchase agreement’. This is a document which sets out every single detail of the transaction, including the information gathered during due diligence and the terms and conditions of the sale. This document will go back and forth between the solicitors several times before all the details have been agreed and it can take a number of weeks.
Once this process is underway, the buyer will normally be asked to attend a CQC interview. To pass this, they must be firmly on top of their business plan and aware of their responsibilities in running a practice. Usually within a week of the interview, they will receive a ‘comfort letter’ which confirms that the CQC have no objections to them running the premises and that they will await final notification of completion.
To the surprise of many a buyer, once the sale purchase agreement has been agreed, the bank then instructs their own solicitors to review the due diligence, sale purchase agreement and lease if applicable at the buyer’s expense. In essence, they review the due diligence already done by the buyer’s solicitors in order to be satisfied that the loan will be serviced and paid off in time. Only with all these processes complete can contracts be exchanged.
Exchange and completion
Exchanging contracts and completing the sale often happens on the same day for fully private practices. However, if there is an NHS contract, another month long process is required for the NHS Variation Notice. Most NHS contracts are in a sole name and they cannot be transferred straight across. Instead, buyer and vendor must go into a partnership. On exchange, they apply for this and then are required to wait for a 30- day notice period. If no objections are raised in that time, then completion can then go ahead.
At exchange, the buyer pays a deposit of usually about 10 per cent of the sale value which gives security to both parties that the sale is going ahead. Then any final loose ends are tied up before they complete the sale and the property and/or business changes hands.
Smoothing the transition
It’s a long and complicated process full of many potential frustrations on both sides. This is where an experienced dental practice broker can really help. The SSTC process can seem a daunting prospect to both vendor and buyer at the start, but working with professionals who work with it every day can make everything run much more smoothly.
Posted by: Hannah Burton on 11 Feb 2019