Merging your practice: a checklist
Accountants Bob Senior and Deborah Wood go through the factors you should consider before joining forces with another practice
In June this year the BMA published a survey suggesting that 6,700 GPs across the UK are planning to retire in the next two years. Of these doctors, 56% say NHS reforms were a reason for them to hang up their stethoscopes. But where will this leave the remaining GP partners, particularly those in smaller practices faced with increasing costs and decreasing profits?
Merging with another practice is an option you could consider, since the combined strength of two small practices could result in an organisation with greater resilience than the sum of the individual entities.
However, while safety in numbers may be an attractive prospect, it is essential for the two parties to thrash out the details before going ahead. And there are many, many issues that have the potential to derail the whole process. How does profitability per partner compare? What are the benefits each practice expects from the merger? Are both practices on similar contracts? What legal issues need to be considered?
Our advice is to kick-start the process by having a full and frank discussion between the two parties. Differences between the practices can then be identified and potential pitfalls avoided. Sensitive or tricky issues can be worked through with advice from specialist accountants and lawyers.
Use the following checklist to ask the right questions about all the essential issues:
1. Difference in partner workloads
- How many sessions are worked each week?
- How many patients are seen per day?
- How are ‘extra' patients managed?
- What is the patient age profile and how does this impact on workload?
- How are holidays, study leave and sabbaticals managed?
2. Financial differences
- What is the attitude to using locums?
- Does one practice use them more than the other?
- Are expenses such as motoring, medical defence and professional subs paid for by the practice or by the individual partners? If the practice pays thousands of pounds of medical defence fees, for example, this has a significant impact on practice profits.
- How are unreimbursed maternity leave costs managed?
3. Staff issues/contractual
- Contract terms – if staff at one practice are on more attractive terms (for example, they may have better holidays by being on Agenda for Change), there could be cost implications in bringing all staff up to the same level.
- Are there differences in rates of pay?
- What is the approach to staffing levels?
4. Staff issues/financial
- What is the policy for overtime payments?
- How do nurse appointment times vary? Are they fixed or is there a degree of flexibility depending on the type of treatment given?
- Are more hours than necessary worked through staff inefficiencies?
- Are there overlapping staffing levels? Redundancy costs will vary between longer serving and newer staff.
- What are the costs per patient for administration, reception, practice management and nursing staff?
- Are the premises owned or leased?
- Are there any fixed rate loans in place? Early redemption penalties can be expensive.
- If premises are leased, what is the length of lease remaining?
- Are leases on a full repairing and insuring (FRI) or internal repairing only basis? If FRI rather than a need merely for internal repair, what is the dilapidations position? When handed back, the premises need to be in an identical state of repair as at the beginning of the lease.
6. NHS contract issues
- Are both practices under the same type of contract? It is possible to merge PMS with PMS and GMS with GMS but an overarching legal entity would be needed for a GMS and PMS practice to work together.
- Are there significant differences in funding per patient in PMS practices?
- Are there supplementary APMS or PMS Plus contracts, for example to manage a district nurse contract?
- If the two practices are on different contract types how will the accounting be dealt with?
- Are the year-ends the same for both practices? Which practice should change if not?
- How will transactions for the old practices be dealt with?
- Do both practices use the same bank?
- Who will do the book-keeping?
- Are partnership agreements in place?
- Is one of the existing agreements suitable for adoption or do you need to start from scratch?
- Are there any unique points in the partnership agreements that each party needs to be aware of? For example, are any superannuated posts to be treated as practice income (eg a GP doing some hospital work)? If so, how is the superannuation to be managed? Are benefits shared or kept by the GP doing the work?
Once discussions are underway and a merger looks to be on the cards, consider taking the opportunity to enter into a joint project, for example tendering together for a new service. This gives you the opportunity to find out in advance how well you work together as partners and can be a useful exercise in flushing out any remaining issues between the two practices.
Armed with the information gained from your discussions and joint working, you will be able to identify strengths, weaknesses, opportunities, threats and shared values and use this as a basis for a business plan. You can then go on to develop a draft partnership agreement and financial model that clarifies both parties' expectations of the proposed arrangements.
Beware of resistance to change at all levels within your combined organisation and give plenty of time and energy to the planning and transition process. Be flexible and be prepared to compromise for the common good and long term goals.
Every practice will have its own reasons for considering a merger, whether succession planning for partners approaching retirement; to gain more influence with the local clinical commissioning group; to enable a move to better premises; to benefit from a more business-led management structure; or to have additional skills and consequently the ability to offer a wider range of services. Whatever the case, thorough due diligence, planning and preparation is essential if the merger is to proceed smoothly. With all the issues considered carefully beforehand, you and your colleagues will be in a stronger position to lead your new organisation into the future with energy and enthusiasm.
Bob Senior and Deborah Wood are chair and vice-chair of the Association of Independent Specialist Medical Accountants
Practice A and Practice B had worked alongside each other sharing premises for many years. With some partners approaching retirement, the other partners considered merging into one practice. At first glance the practices appeared similar. Both were training practices, had broadly similar but declining lists, and had comparable headline profit per partner figures. There were, however, a number of subtle differences between the two practices that, when seniority and professional subscriptions were excluded from the profit per partner figures, exposed a rather nasty looking £13,000 difference in profit per partner between the two practices. Some considerable time into the negotiations, and with both parties at an impasse, specialist accountants RSM Tenon were brought in to review the last three years' financial results for both practices. The accountants uncovered a set of complex factors that had led to the profit per partner figures for Practice B being much higher than Practice A. One of the key considerations was the number of equity partners.
Practice A had not reduced its number of equity partners in the previous three years with full time equivalent (FTE) equity partners increasing slightly from 6.5 to 6.56. Practice B, however, had reduced from 6.5 FTE equity partners to 5, with the reduction covered by an increase in the use of locums and a fixed share partner (in effect a salaried GP).
Two partners were due to retire from Practice A within a year of each other. While normally the practice preferred to replace partners with partners, by replacing one partner with a salaried GP, the profit per equity partner would improve by more than £5,000 per year. This was acceptable to the partners at both practices who, focused on the long-term benefits of the merger, were able to look beyond the first couple of years and compromise over profitability. The merger went ahead and, over time, profitability improved as significant savings were made in the areas of locum and staff costs.