This is the final article in a four-part series on internal GP practice buyouts. The series began with Why internal GP practice buyouts fail more often than they should by Dr Chris Mitchell AM, FAICD, continued with Valuing a GP practice for an internal sale, and Structuring the deal: vendor finance, earnouts and staged equity. This article covers the full document suite the transaction requires.
The document suite for an internal GP practice buyout mirrors that of an external sale. Assuming that internal transactions require less documentation leads to many disputes. A pre-existing relationship does not reduce documentation needs; if anything, it increases the risk of gaps, as parties rely on goodwill rather than enforceable terms and avoid formal negotiation. When issues arise without complete documentation, goodwill proves insufficient.
A subtler issue is the internal buyer's due diligence. Familiarity from working in the practice can give a false sense of understanding. Buyers who have worked with the selling doctor often assume they fully understand the business and don't feel the need to undertake due diligence on the business. Critical issues are not always visible within the clinical operation.
The shareholders agreement
If the internal buyer acquires shares or units in the entity that owns the practice, a shareholders' agreement or unit holder agreement governs the rights and obligations of all equity holders from the date of settlement. If one does not exist before the transaction, it needs to be prepared as part of it if there is more than one shareholder.
Missing buy-sell mechanisms often become critical when relationships deteriorate, as they address exit rights, including price methodologies, compulsory transfers, and the rights of remaining shareholders. Without these, deadlocks in two-person practices frequently escalate to litigation or dissolution, making the lack of a buy-sell provision far from minor.
Drag-along and tag-along provisions protect parties in a future sale. A drag-along allows a majority shareholder to require minorities to sell on the same terms to an acquirer. A tag-along allows minorities to join a sale on the same terms as the original parties. Both are standard in well-drafted shareholders' agreements yet are often missing in GP practice internal buyout agreements I review.
Key takeaway
Parties often focus on entry terms to the business but neglect exit terms. It is integral that the shareholders' agreement includes buy-sell, deadlock, valuation and restraint-of-trade clauses to avoid issues if the relationship changes.
The sale agreement
The sale agreement records what is being sold, at what price, on what terms, and what each party's obligations are at and after settlement. In an internal GP practice buyout, the first structural question is whether the transaction proceeds as a share sale or a business and asset sale.
A share sale transfers ownership of the entity that operates the practice. The buyer acquires the entity's history, including its existing liabilities, tax position, employee entitlements and any undisclosed claims. Stamp duty on a share sale varies by each state and territory but is generally lower than on an asset sale. In light of recent changes to the treatment of CGT, a seller's CGT position may determine how a transaction is structured.
An asset sale transfers the practice's assets: patient goodwill, equipment, fit-out, the practice name and other intellectual property, and the benefit of key contracts. The buyer does not inherit the entity's liabilities. Stamp duty that may be payable varies by each state and territory. The buyer starts clean. The seller retains the entity and its history.
Key takeaway
The structure of a sale (share or asset) has significant legal and financial implications. The agreement must precisely reflect what was discussed, as verbal agreements may result in misunderstandings and disputes if not properly documented.
Restraint of trade in a sale of shares or goodwill
A restraint of trade clause in a GP practice sale uses a different legal standard than an employment contract. A seller who has been paid for shares or a business's goodwill is transferring their patient relationships and the practice's reputation. Courts generally uphold a post-sale restraint proportionate to what was sold, even when the same geographic scope and duration would be unenforceable for employees.
There have been cases where the courts have upheld an injunction restraining a departing doctor from practising within a defined radius of the practice following a sale of goodwill. The court applied a more generous enforcement standard than applies in employment restraint cases, on the basis that the seller had been paid for the goodwill being protected.
The drafting failure I see most often in restraint of trade clauses is the absence of a cascading clause. A cascading clause provides a series of progressively narrower restraint parameters: if the broadest geographic scope is held unenforceable, the next narrower scope applies, and so on. In NSW, the Restraint of Trade Act 1976 (NSW) gives courts the power to read down an unreasonable restraint to an enforceable scope rather than void it entirely. In other states, the common law blue pencil doctrine applies a stricter test: the clause is either enforced as written or struck out in its entirety. A cascading clause provides protection in both environments. Without one, a restraint that is challenged and held excessive at its broadest scope may provide no protection at all.
Defining restricted activities requires precision. Preventing a seller from "practising medicine" is not the same as prohibiting them from operating a competing general practice within a set radius. The first is likely unenforceable and not the intent. The second almost certainly reflects the parties' intention.
The proposed Albanese Government ban on non-compete clauses for employees earning under the Fair Work Act high-income threshold (currently $183,100) applies to employment restraints. It does not affect sale-of-goodwill restraints. The sale-of-goodwill restraint and any employment restraint are different instruments governed by different legal standards. The proposed legislative change affects only the latter. Given it is highly likely that the seller will be a separate entity and not the doctor personally, any sale agreement should be drafted in a manner that contains a restraint clause that captures not just the seller, but also its directors, shareholders and any selling doctor.
Post-settlement consulting obligations
If the selling doctor continues to consult after settlement, the terms must be documented, usually in either a consultancy agreement or a contractor services agreement, depending on the services being provided. Address the seller's ongoing commitment, planned withdrawal, patient continuity, referral management, access to clinical records during transition, and the seller's engagement with staff and practitioners.
Key takeaway
Always document post-settlement consulting arrangements. Informal agreements risk misunderstandings that can threaten patient retention and staff management. Without documentation, enforcement is difficult if expectations diverge during the transition.
Facilities and services agreements for continuing GPs
If there are independent GPs consulting from the practice, their contractor services agreement needs to be reviewed as part of the transaction. A change of ownership can trigger a review right under the existing contractor services agreement. The buyer needs confirmation from existing GPs before settlement that they will continue on current terms, or on terms the buyer has reviewed and accepted.
Employment obligations on settlement
New ownership does not automatically require new employment contracts, but it is an occasion to review and update existing arrangements. The Fair Work Act 2009 (Cth) governs the transmission of business and the obligations that transfer with it. From experience, more often than not, the new owner will require staff to enter into new employment agreements. The new owner's obligations from day one include compliance with the applicable modern awards, confirmation of how employee entitlements are treated at settlement, and verification that all staff are correctly classified and compensated under the award that applies to their role.
Key takeaway
Settlement documentation must specify how employee entitlements are treated: whether they are carried over or paid out. The buyer must ensure receipt of proof of payment if the seller settles the entitlements, to avoid post-acquisition disputes. Failure to address this clearly is a common cause of conflict.
Structure before settlement
The structure of the sale, the timing of settlement, and the earnout design all affect which concessions are available and how they apply. Attempting to restructure after settlement to achieve a better tax outcome is expensive and not always possible.
Most of the problems I see in GP practice internal buyouts were visible before the transaction started. A practice used as a personal bank account, with entangled personal finances and no separation between business and personal assets, requires restructuring before the transaction can proceed cleanly. A practice with no shareholders' agreement, no employment contracts reviewed in years, and facilities and services agreements that have never been updated, presents a different set of problems. Both are common. Neither is unusual.
Reverse due diligence (a structured review of the practice's legal, financial, tax and operational position undertaken by a practice owner before any sale conversation starts) identifies these problems at the outset and gives the owner a choice about what to fix before they open the books to a potential buyer. From my experience, too many transactions are complicated by issues the seller did not know existed and the buyer discovered too late.