Dental partner buyout finance: paying out a retiring or departing partner

The partnership agreement or shareholders' agreement should set out how the leaver's share is valued. In dentistry, the payment usually has several parts:

• Goodwill. Their share of the value of the patient base, contract and plan income, normally based on a specialist dental valuation. This is the largest element and the one lenders scrutinise most.
• Equipment and fixtures. Their share of chairs, imaging and fit-out, often at written-down or agreed value.
• Capital and current accounts. Money the partner has left in the practice, less anything they have drawn in advance.
• A retention for NHS reconciliation. Contract income is reconciled after the year end. If the practice under-delivered while the leaver was a partner, money may be recovered later, so agreements often hold back part of the payment until the reconciliation is settled.
• Property, if jointly owned. Where the partners own the surgery building personally or through a separate entity, buying out the leaver's share of the property is a separate transaction, usually on a commercial mortgage.

Get the valuation and the payment terms agreed in principle before approaching lenders. A lender will not fund a price the continuing partners have not tested, and an independent valuation is the evidence it needs.

Funding is rarely the slowest part. Allow for the valuation, legal drafting of the retirement or share purchase agreement, NHS contract variation and any CQC application to run in parallel. In England, the NHS England policy book for primary dental services sets out how commissioners handle contract changes when partners leave or join; arrangements differ in Scotland, Wales and Northern Ireland. Where the leaver is also a party to the lease, the landlord will need to consent to their release. If the leaver guaranteed existing practice borrowing, the lender must agree to release them, which it will normally do only once the continuing owners' position is reviewed.

Illustration only, with round hypothetical figures. Two dentists run a five-surgery mixed practice as partners. One is retiring and the partnership agreement values their half share at £350,000, made up of goodwill, equipment and capital account. They jointly own the building, and the retiring partner's half is valued at £200,000. The continuing partner agrees that the retiring partner will work two days a week as an associate for a year. A term loan funds most of the partnership share, £50,000 is deferred over two years, part of it held back until the next NHS year-end reconciliation, and a commercial mortgage funds the building share. The lender's test: after paying an associate to cover the remaining three days the retiring partner used to work, does practice profit cover the term loan, the mortgage and the deferred payments with room to spare?

The main risk is paying full value for goodwill that leaves with the partner. Staged payments linked to patient retention, a proper handover and a restrictive covenant all reduce it. The second is taking on the leaver's workload yourself to make the numbers work: a plan that relies on the continuing partner adding clinical days indefinitely is fragile, and lenders know it.

Tax matters on both sides. The leaver may be able to claim Business Asset Disposal Relief on a qualifying disposal, which can make them more flexible on price or timing. On the buyer's side, a company purchase of its own shares is taxed differently from a sale to the other shareholders, and interest on personal borrowing used to buy a larger partnership share may qualify for relief. Take advice before agreeing the structure.

Alternatives to borrowing include selling the whole practice, perhaps to a group, if the continuing partners do not want to take on the debt; our guide on how to sell a dental practice covers that. If the building is the sticking point, the leaver could keep their share and let it to the practice instead of selling it now. For a buyout that is really a purchase of an expense-sharing colleague's list, our page on dental practice acquisition finance is the closer fit. Before signing any guarantee, read our guide to personal guarantees.