What is one of the most valuable assets in your business but nearly always overlooked? No, it’s not you this time, but your property.
When acting in sales of veterinary practices, owners are frequently unconcerned with how their property is held or maintained. This may be because they see their practice, property and themselves as one entity.
Typically, the company being sold legally holds the property out of which a practice operates, although this is not always the case. More often than not, the sellers wish to retain ownership of this asset, and where it does not sit with the correct party, there are delays and tax implications as well as a loss of buyers because the business’s property affairs are not in order, or the property is in a state of disrepair.
Types of sale
There are two common types of sale. The first is an asset sale, where the purchaser “cherry picks” different parts of the practice (eg management, contracts) and the company retains the liabilities; in this case, the property may be leased or sold separately. The second is a share sale, where the purchaser buys the whole issued share capital of the business and effectively steps into the seller’s shoes.
In the case of a share sale, if the title to the property is vested in the company being sold then the property would also transfer upon the sale of those shares. However, it is not as simple as transferring the property or properties back to the practice owner(s).
When an offer is made to buy the entire practice, this often includes the property. If significant value is extracted out of the business, the seller is required to put an equal amount back in, usually in the form of cash consideration. Unfortunately, not every practice has cash reserves representing the value of their property to pay back into the business prior to a sale.
How to avoid common pitfalls
At the point of purchasing the property, make sure the title to the property is bought as an individual or individuals so that the legal proprietorship is separate from that of the business. Upon the sale of the business, it is not unusual to find that the sellers will lease their property back to the acquirer in order to retain a capital income, and this arrangement allows for that to apply.
Prior to marketing the practice, ask a solicitor to provide an up-to-date copy of the registered title from Land Registry to ascertain ownership. Sellers could also obtain this themselves. This will allow appropriate tax advice to be obtained and should sort out any funding arrangements prior to making any transfers, and well in advance of any heads of terms being agreed or offers being accepted.
Incorporate a new company (often known as a Special Purpose Vehicle) to purchase the property, which would hold the legal title separately from the business and would not form part of any sale.
Do not purchase investment property through the company, as this too would become difficult to extract (transfer) out of the company.
Make sure any historical charges are removed (these are noted on the legal title to the property when there are borrowings from a bank, for example) and loans have been repaid. These can also cause a delay to transactions and should be rectified sooner rather than later by contacting the relationship manager or the bank’s securities team.
If looking to lease your property back to a buyer, make sure any repair and dilapidations works are carried out in good time and the property is in a good state of repair; purchasers will often require the production of a schedule of condition.
For more information, please contact Qess at:qali@hcrlaw.com
