To merge or not to merge

Mergers seem to be one of the hottest topics around. Quite often we are asked “We’re thinking of merging, is there anything we need to watch out for?” A short question, with a long answer. We consider some of the main financial issues below.


The financial aspects of a merger can quite often prove to be the deciding factor as to whether the merger goes ahead. The 10 main areas to think about are:

  1. 1. Profitability
  2. 2. Working capital / current accounts
  3. 3. Property ownership
  4. 4. Contracts
  5. 5. VAT
  6. 6. Tax
  7. 7. Superannuation
  8. 8. Staff
  9. 9. Structure
  10. 10. Timescale


1. Profitability

One of the first exchanges of information in merger discussions is quite often the practice accounts; this can make or break the talks at the outset. We’d strongly recommend confidentiality / non-disclosure agreement is signed by all the parties before any information is exchanged.

Practice profitability varies, so how do you compare one practice with another. Bear in mind that there will always winners and losers when this takes place. The best indicators for profitability would be to look at the profit per patient for each practice along with how much profit a GP session is worth to a partner.

Another important area to bear in mind is the ratio between the number of sessions that are provided for patients to GPs. This could have a bearing on the salaried GP/locum costs as well as the number of partners required. It might be that changes to working practices could create a more favourable comparison for a potential merger.

You still need to consider how each practice treats expenses such as medical defence subscriptions, locum insurance, motor expenses and personal expenses. For example some practices pay the medical defence fees for the partners, whereas others expect the partner to claim for themselves in their personal expense claims. The medical defence fees could create a large disparity in profit comparison, for example a partnership with 5 full time partners could be paying in excess of £40,000 for cover. Essentially you need to make sure you are comparing like with like.

The same goes for comparing dispensing practices with non-dispensing practices, adjustments will need to be made to get a like for like comparison. It might not be as simple as eliminating dispensing income and expenses. Take care to check the roles of the dispensing staff, they may be providing a role that is covered by clinical staff in a non-dispensing practice.

You also need to consider how your accountant treats your employer’s superannuation in your accounts as there are two ways of doing this. Some deduct it from profits, whereas our preferred treatment is to charge your current account.

The comparison of accounts is a good starting point, but knowing how much profit the merged organisation will make can only be determined by the preparation of a detailed financial forecast.


2. Working Capital

Practices have different philosophies when it comes to how much money to leave in the practice for paying the day to day bills. Some are more comfortable leaving cash in the practice, some like to utilise an overdraft facility. The approach taken will determine the level of the new entities current account balances. Once the level of working capital is determined there again could be winners and losers, some may be asked to contribute more than they currently do. Some could get a pay out.


3. Property Ownership

Firstly the decision has to be taken as to where the new entity will operate from a new site or over the existing premises?

Utilising existing premises

With existing premises you need to consider the current ownership and what the plan is for future ownership. There could be outstanding loans on the premises and therefore the equity will need to be shared in the new merged arrangement. Depending on the equity in the various buildings some partners may need to contribute. Also if there are any property owners who aren’t current partners, you need to consider if they are to be paid out. To calculate this you’ll either need to agree a valuation between yourselves or more commonly get up to date professional property valuations.

The loans themselves could be with different banks and a full refinance may be required. Whilst most new bank loans don’t have early settlement penalties that may not be the case for some of the older arrangements, so this will need to be checked. The other potential issue with this is that interest rates now are not be as favourable as they were in the past, with the days of offers of 1% over base from the banks now a distant memory there is a possibility of increased costs.

You may also want to consider making improvements to the premises, which may require additional funding.

Changes in shares of property ownership could also have capital gains tax implications so this will also need to be reviewed.

There could also be legal costs that need to be borne in mind in relation to changes to the ownership at the land registry.

If any of the existing premises are leased then there may need to be changes to lease agreements to incorporate the new parties to the merger. Solicitors should also review leases for dilapidations clauses, as there may be a need to update the premises before new parties agree to become parties to the lease or before you move out if you are moving to a new site.

New Site

If you’re moving to a new site then one of the first things to consider is what is happening to the existing premises.

Who owns the existing premises now? Will the new entity buy the properties? Will the existing properties be sold and if so will they generate enough funds to repay any outstanding loans? Are there redemption penalties for early repayment of loans? It’s possible the properties may have a different value on the open market compared to their use as a GP practice with a guaranteed rental income. Again up to date property valuations will be needed to assess the impact of a potential sale. If you plan to give up leased properties, you need to look at the term of the lease and see if a break is possible, and whether there could be expensive dilapidations to pay for first.

With any sale of property there could be Capital Gains Tax to pay, so once valuations have been received this can be assessed so everyone is aware of any potential liabilities.

With the new site, will this be owned by the GPs or a third party landlord? Have lease agreements and maintenance contracts reviewed in detail. You’ll need to consult with NHS England to allow time for patient consultation for moving the surgery and the availability of notional rent and any other additional funding


4. Contracts

Are contracts being merged or are they going to be retained as individual contracts, with the same contract holders?

Merging contracts can cause issues, especially where there are dispensing/non dispensing practices and GMS/PMS contracts. Whilst PMS contracts are being phased out, transitional arrangements may be lost in the event of a merger.

Adding partners to an existing contract is an easier option than merging them, but can cause issues further down the line with separate superannuation certificates required for each contract, but you may be preparing one overarching set of accounts.

If one of the contracts being merged is a dispensing contract then you’ll need assurances from NHS England if you want to continue to dispense that this will be continued.


5. VAT

Merging a dispensing practice with a non-dispensing practice will have VAT implications that will need to be considered. There could be a change to the proportion of input VAT that is currently recovered. The non-dispensing practice might also have to start charging VAT on some medical reports and other private work. If the prices aren’t increased this will lead to a loss of 20% of the income as it will need to be paid over to HMRC in output VAT.

It’s also possible that merging a group of non-dispensing practices could create VAT issues as their taxable supplies combined could push them over the VAT registration threshold.


6. Tax

Merging March year end practices with those who have a non March year end takes careful planning. Essentially the non March year end practice could very easily crystallise liabilities a year earlier than they would normally occur, which can be a big cash flow problem.

Merging practices will also need to decide who pays the tax bills – practice or partner? Different practices work in different ways, so agree this at an early stage so partners have time to save for tax bills if necessary.


7. Superannuation

If individual contracts are maintained rather than merging them then it is likely that separate superannuation certificates will need to be completed for each contract. The records and accounts will need to be kept in such a way that the results for the two contracts can be separated out.

The merger can also affect your pension contributions and pension amount. Clearly, if your profits increase or decrease as a result of the merger, your superannuation contributions and final pension will increase or decrease too.

There is also a hidden effect though – some practices may perform more non NHS work than others, and this can affect the overall ratio of Non NHS income to NHS income, which subsequently affects the allocation of expenses on the superannuation certificates. This will have an effect on superannuation payments and therefore pensionable profit.


8. Staff

It’s essential that specialist legal advice is taken when dealing with staff during a merger process. It’s very probable that some roles will be duplicated but given the increased scale of the new organisation some roles may need to be broken down and shared. Whilst it is generally acknowledged that in a larger organisation can give scope for economies of scale where staff are concerned, this could lead to redundancy costs which can be substantial. TUPE regulations will need to be followed and if redundancies are going to be made then the correct procedures must be followed to ensure there are no claims made by staff against the organisation.

There is also the issue of pay scales: the same role may attract different pay rates at different practices, and each practice may have different terms such as holiday and sick pay entitlements. These differences need to be harmonised over time. There are often inconsistencies between job descriptions and roles between practices too, so it’s important that each person’s role and responsibilities are reviewed to compare with other people with the same job title. It is possible there could be a hidden cost in bringing people to the same level, and often a bigger practice can have higher staff costs than average, because it is difficult to keep the same tight hands on management control that a smaller practice can achieve. There could also be a further hidden cost if the increase makes the employee fall foul of the NHS Pension final pay control rules also highlighted on page 7 of our December 2015 newsletter.


9. Structure

Throughout this article it has been assumed that the new organisation will be a partnership, however you may decide to operate as a limited company. So instead of a new partnership agreement, Articles of Association together with a shareholders agreement will be required.


10. Timescale

Mergers don’t happen overnight, so you need to make sure you set aside adequate time and resources to manage the merger. Also consider what is going to happen if a partner retires/leaves or joins in the interim. For example how would you deal with a property owning partner who wants to retire? If a building is not being used in the newly merged practice its sale value may very well be less that it’s current value in the accounts. What will their pay out be based on? When will they get their pay out? How will you finance their pay out? What impact does it have on the other partners? Will they be responsible for a share of the merger costs to the date they leave? You may need some interim provisions in your partnership agreement for all the partners to sign up to at each practice.


The above are just a flavour of what you can expect to discuss should you decide to go down the merger route. Whatever your particular circumstances, we can help guide you through the whole process.

Contact Faye Armstrong or Richard Kay.

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