Why Are Practices Merging?
The five year forward view talked about practices working at scale. The main reasons practices are merging are:
- Retirement of Partners - Partners looking to retire cannot find new partners to take over the practice. So, to avoid giving back the contract, merging is a good alternative. In some cases, another practice may simply take over the list as opposed to taking over the practice and premises.
- Future Proof - If a practice is part of a bigger organisation, there may be more opportunity to compete for additional services, private work and be more resilient against the issues facing General Practice.
- Recruitment Issues - This is one of the biggest challenges facing General Practice today. There are many cases where partners have retired/left the practice and cannot be replaced and the use of locums is not sustainable. Merging and being part of a bigger practice gives flexibility regarding the workforce.
Types of Mergers
• Collaboration - This is where GP practices remain independent, but are part of a group of GPs working together under a formal arrangement to bid for new services, share staff and other efficiencies.
- Full Merger - Where two or more practices merge to become one partnership.
- Take over - Where one practice takes over another practice.
- Super-Partnership - A merger of multiple practices to forma significant larger entity.
Reviewing Financial Information and Preparing a Financial Model
This is an important part of the merger discussions and you should prepare a financial model so that you can overcome any difficulties this may create early on.
- You will need to share a copy of your accounts with the practice you are looking to merge with. If this is a take-over, only the practice being taken over will need to share its accounts.
- It is important to carry out an analytical review of the accounts; how the practices compare in terms of income, expenses and profits. If one practice is a very high earning practice and is merging with an average or lower earning practice, consideration will need to be given regarding how profits will be shared. The review may also help to identify areas where income can be increased and/or expenses reduced.
- Prepare a profit forecast for the merged practice:
- Identify potential savings from economics of scale, for example, changes to staffing levels, additional GPs to replace outgoing partners.
- Identify potential areas to increase income.
- Consider, if merging with a PMS practice, what impact PMS reviews will have on income going forward.
- Consider any additional costs such as the transitional cost of merging telephone lines, computer systems and possible staff redundancies.
- If you are just taking over a patient list and not the full practice, you will need to prepare a projection of likely income from that list, bearing in mind some patients may choose to go to another practice. You will also need to know the likely staff who will be TUPED over.
Once a profit projection has been prepared, you need to discuss the financial model of how profits will be shared. Issues can arise if a high earning practice is merging with a lower earning practice as the partners in the high earning practice may not want to take a cut in profits. The intention of any merger is that all partners will eventually be at full parity, but you may need to discuss and agree on a rise to parity in these situations.
- The lower earning practice could be on a parity percentage of the higher earning practice which increases over time, similar to when a new partner joins.
- You could agree that the higher earning practice has a fixed amount protected as a prior share and the balance of profits split in profit sharing ratios. This fixed amount could reduce over time as the merged practice increases its profitability.
The parity issue should only be a short term issue as the profitability of the merged practice should improve over time.
If the merging practices have two different contracts for example, one practice has a GMS contract and the other a PMS contract, you will need to consider impact on the contracts.
All merger applications need approval by NHSE and the CQC. You could discuss with NHSE about having one contract for the merged practice, but you would need to consider any loss of income from merging PMS or GMS contract.
Alternatively, each partner can be added to both contracts and you keep the two contracts separate.
Different Accounting Year Ends
If the practices merging have different year ends, you will need to decide which practice year end to change to. This could have tax implications for a non-March year end changing and could lead to a catch up of tax and superannuation which you would need to plan for.
Merging and Dealing with Old Practice Accounts
Once you have decided on a date to merge, each practice will need to prepare cessation accounts to that date. You will also need to consider who will be doing the bookkeeping for the merged practice and whether you need a cloud based bookkeeping system.
A new bank account should be set up for the new merged partnership and each partner will need to contribute an amount for working capital. Usually, this will be transferred from their old practice.
It is important in the early months of merging that any income and expenses which relate to the previous practices are separately identified and paid back to the practice they relate to.
There are many issues regarding premises which would need to be considered and this will be covered in our next newsletter issue.
At Ramsay Brown, we have a lot of experience in dealing with practice mergers and can help in reviewing accounts and preparing financial forecasts.