Buying a Professional Practice: Every Cost You Need to Fund

Start with the full cost picture

When buyers first discuss a practice purchase, the conversation tends to centre on the price. In practice, the price is only one of several costs, and underestimating the others is one of the most common reasons acquisitions become stretched in their first year. A lender will want to see the whole picture, and so should you.

• Goodwill, and any other intangible value such as a client or patient list.
• Tangible assets: equipment, fixtures, vehicles, IT.
• Stock, particularly in pharmacies, opticians and veterinary practices.
• Work in progress and debtors, particularly in law and accountancy firms.
• Premises: a freehold purchase, a lease premium or the costs of a new lease.
• Professional fees: legal, accounting, valuation, and lender’s costs.
• Regulatory and insurance costs, including any run-off cover.
• Working capital to trade through the first months.

Each item can be funded in a different way. The skill in structuring an acquisition is matching each cost to the most suitable form of finance, so that the overall package is affordable and the main loan is not carrying costs it was never designed for. See practice acquisition finance for the core funding options.

Heads of terms and why they shape the funding

Heads of terms are the non-binding outline of the deal agreed before the legal work starts. They normally cover the price and how it is split between goodwill and assets, whether it is an asset purchase or a share purchase, what is included and excluded, how WIP, debtors and stock are dealt with, whether any consideration is deferred, the seller’s role after completion, restrictive covenants, and the target completion date.

These points matter to lenders because they decide what security is available, how much the buyer must fund on day one, and how much risk is left with the seller. An asset purchase and a share purchase are different transactions: in a share purchase you buy the company with its history and liabilities, which means more due diligence and often a different lending structure. Taking finance input before heads of terms are finalised can save renegotiation later.

It is worth asking a broker to review draft heads of terms. We are not your legal advisers, but we can point out where the structure is likely to raise questions with lenders.

Valuation basics: goodwill, assets, stock, WIP and debtors

Goodwill is usually valued by reference to the sustainable profits of the practice, and the method varies between professions. Lenders will want to understand how the figure was reached and will normally expect a valuation from someone with experience of the sector. See goodwill finance.

Tangible assets such as equipment and fit-out are usually valued at their current worth rather than their original cost. Old equipment that needs replacing soon is worth planning for rather than paying for twice.

Stock is significant in pharmacy, optician and veterinary practices. It is normally counted and valued at completion, which means the final figure is not known until the day. Buyers should agree the valuation basis in advance and have funding that can flex.

Work in progress and debtors are central in law, accountancy and some architectural practices. Some deals include them in the price; others leave them with the seller to collect, which affects the buyer’s cash flow from day one. If you are buying WIP and debtors, there are funding options designed for them, including WIP finance and facilities for lock-up and aged debt.

Deferred consideration and earn-outs

Many practice sales include deferred consideration, where part of the price is paid after completion, either in fixed instalments or linked to performance (an earn-out). For the buyer, deferral reduces the funding needed on day one and keeps the seller engaged in the handover. For lenders, it can be positive because it shares the risk with the seller.

Lenders will, however, look closely at how the deferred payments rank against their loan. Most will expect deferred consideration owed to the seller to be subordinated, so that the lender is repaid first if the practice struggles, and they will factor the future payments into their affordability assessment. Whether any vendor loan is secured, and what triggers early payment, are important points to settle before heads of terms are signed.

Earn-outs linked to fee income or client retention can create disputes if the terms are unclear. Your solicitor will advise on the drafting; from a finance point of view, the key is that the payments are affordable under a reasonable downside scenario.

Premises

Buyers generally face one of three positions. The seller may own the premises and offer them for sale, in which case the property is usually funded with secured lending that has its own valuation and legal process. The seller may own them and offer a new lease, which keeps the upfront cost down but creates a new rent commitment. Or the practice may already be leasehold, in which case the lease must be assigned or a new one granted, often with landlord’s consent.

Lenders care about premises because the goodwill in most professional practices depends on being able to trade from a suitable location. A short or restrictive lease can limit what a lender will lend on the goodwill. See practice premises finance for how property is funded alongside an acquisition.

Regulatory approvals by profession

Approvals often set the timetable. They vary by profession, and in some cases the buyer cannot operate the practice until they are in place. The main examples are below; your solicitor will confirm which apply.

• Law firms: the SRA does not approve acquisitions as such, but anyone becoming a manager or owner of an authorised firm must be approved first. The SRA’s page on applying to add a manager or owner explains that the individual must not take up the role until approved. The SRA has also published a warning notice on due diligence in mergers and acquisitions.
• Pharmacies: a change of ownership must be notified to the General Pharmaceutical Council, and the GPhC’s guidance on change of ownership of a registered pharmacy sets the deadline for doing so. Separately, to provide NHS pharmaceutical services in England the new owner needs to be included in the pharmaceutical list, and regulation 26 of the 2013 pharmaceutical services regulations provides a route for change of ownership applications.
• Dental, GP and many private healthcare services: in England the new provider must be registered with the Care Quality Commission for the regulated activities, with buyer and seller applying around the same time.
• Veterinary practices: individual vets are registered with the RCVS, while the RCVS Practice Standards Scheme is a voluntary accreditation. Whether a practice holds it can still matter to a buyer and a lender.
• Accountancy, architects, opticians and funeral directors: professional body membership, individual registration and firm-level requirements vary; check the position with your adviser and the relevant body.

Lenders usually make completion of the relevant approvals a condition of releasing funds, so an approval running late holds up the whole transaction.

PII run-off and other profession-specific costs

In a law firm acquisition, professional indemnity insurance is a significant consideration. Under the SRA Indemnity Insurance Rules, when a firm ceases there is run-off cover for past work, and where there is a successor practice the position can differ. Whether the buyer is treated as a successor practice affects who carries liability for historic claims and can change the insurance cost. This is a legal and insurance question to settle before the deal is priced.

Ongoing PII cost is also part of the buyer’s affordability, and the premium for the enlarged or newly owned firm may differ from the seller’s. PII premium finance can spread that cost; our PII premium finance guide explains how.

Other professions have their own equivalents: pharmacy stock and wholesaler accounts, optician frame and lens stock, veterinary drug stock and equipment, and vehicles and premises for funeral directors. Build them into the plan rather than treating them as extras.

Working capital after completion

The first months after completion often have the tightest cash flow. If WIP and debtors stayed with the seller, the buyer starts with fees to earn and bills to issue but nothing yet to collect. Staff, rent and loan repayments start immediately. In NHS-funded practices, payment cycles may take time to settle under the new owner.

There are also one-off costs of the change itself: rebranding, new IT and practice management systems, data migration, and sometimes duplicated rent or staff during a transition. These are easy to leave out of the plan and difficult to fund once the acquisition loan has been drawn.

Lenders like to see a realistic cash flow forecast that shows how the practice gets through this period. Where there is a gap, it can be covered by a working capital facility arranged alongside the acquisition loan, which is usually easier than trying to add one after a problem appears.

Professional fees and due diligence

Legal fees for the acquisition, accountancy and tax advice, valuation fees for the goodwill and any property, the lender’s own legal and valuation costs, and regulatory application costs all need to be paid, usually by the buyer, and some are incurred before you know the deal will complete. Due diligence should cover the accounts, client or patient base, contracts, staff, regulatory history, premises and, in a share purchase, the company’s tax and liabilities.

Lenders will ask for summaries of this work. A clear due diligence pack reduces questions at credit stage. Our guide to preparing a practice finance application sets out what lenders typically request.

The order to arrange funding in, and how we can help

1. Speak to a broker before heads of terms are signed, to test what lenders are likely to support.
2. Agree heads of terms with the structure in mind, including deferred consideration.
3. Start due diligence and the regulatory applications in parallel.
4. Submit the main acquisition application with valuations and forecasts.
5. Arrange asset finance, property finance and working capital alongside, so each is ready for completion.
6. Satisfy the lender’s conditions and complete.

We arrange acquisition finance for professional practices across the whole of the market, with access to 300+ lenders. We structure each part of the cost with suitable finance, approach the right lenders, present the case and manage the process to completion. Finance is subject to status, lender criteria and approval. Where the borrower is an individual, a sole trader or a small partnership, finance of £25,000 or less can be regulated consumer credit, and we will say at the outset if that applies.

See how it works or our buying a practice hub, and for dental buyers, our dental practice purchase guide.

Common questions

This guide is for general information only and should not be treated as legal, tax, accounting or financial advice. Funding availability and lender requirements depend on individual circumstances.