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Guide to practice mergers: The financial aspects of a merger

It is essential for practices to compare accounts and discuss financial issues early on in the merger process, explains Jenny Stone.

You should be open about your accounts early on in your merger discussions (Picture: iStock)
You should be open about your accounts early on in your merger discussions (Picture: iStock)

Practices may have decided that they want to merge and all the partners have the same vision for the new organisation, but many mergers fail due to the finances of the practices. Therefore it is vital that you discuss finances early on in your merger talks.

Comparison of accounts

Merging practices will need to exchange accounts so that each practice can review the other practices’ finances. Ideally you should be open about your accounts early on in your merger discussions, but you may want to consider a ‘non-disclosure’ agreement.

If the merger 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 (see parity issues below).

The review may also help to identify areas where income can be increased and/or expenses reduced. Any differences in expenses could also indicate different working patterns that may need to be reviewed as part of the merger discussions.

It is advisable to ask your accountant to review the practice accounts as you need to ensure you are comparing like with like. For example, some accountants deal with the partners’ employer’s superannuation differently. At first glance of each other’s accounts the profits may look similar per partner/session, but when a detailed analysis is made, they could be very different.

Prepare a profit forecast

Once you have exchanged accounts, you should prepare a profit projection for the merged practice. This should:

  1. Identify potential savings from economics of scale, for example, changes to staffing levels, additional GPs to replace outgoing partners.
  2. Identify potential areas to increase income.
  3. Consider, if merging with a PMS practice, what impact PMS reviews will have on income going forward.
  4. 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 review the terms of the staff contracts employed at each practice as these will need to be the same. For example does one practice pay overtime whereas the other offers time in lieu?  There may be additional costs with making sure terms are the same.

Parity issues

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.

There are different ways this can work, for example the lower earning practice could be on a parity percentage of the higher earning practice, which increases over time. This is similar to when a new partner joins.

Or 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.

Type of contract

NHS England will need to be informed about the proposed merger. If you both have different contracts, ie a GMS and a PMS contract, you will need to discuss with NHS England if there will be any change to the contracts. A partnership can hold different types of contracts, however if one practice is a PMS practice this may give NHS England an opportunity to review their funding.

Accounting year-ends

Do both practices have the same year-end? If different, you will need to agree the year-end for the new partnership accounts. If one practice is changing their year-end, they may have a large catch up of tax and superannuation.

If this is the case, the partners should seek advice so that they can plan for this.


Are drawings taken net or gross of tax? Some practices still withhold the tax from the partners and pay drawings net of tax. Again this needs to be the same so you need to decide how your drawings will be taken in the new partnership.

Working capital

All practices have different working capital requirements and partners will view how much of their income they need to leave in the practice differently. One practice may take fewer drawings throughout the year and take a lump sum once the accounts are prepared, the partners in the other practice may take all their income out each month and leave the minimum amount of working capital. Again you need to agree the level of working capital for the new partnership.

VAT registration

Is one practice registered for VAT? If so, VAT will be applicable to the merged practice and VAT will need to be charged on the supply of services that are not exempt.

If both practices are not VAT-registered you will need to review the combined level of turnover that is not exempt. The new practice may need to register for VAT if it exceeds the turnover thresholds.


You will need to discuss what will happen to the practice premises and any branch surgeries. Are they owned or leased? If one practice owns the premises and the other is leased, will all partners have an opportunity to buy into the premises that are owned? If premises are leased, both practices need to be aware of the terms of the lease.

If you are considering closing a branch surgery, the terms of any lease will apply. You also need to consider whether there are dilapidations relating to leased premises and who will be responsible for these costs.

If premises are leased, establish whether there are any outstanding service charges relating to the period before the merger as you need to ensure provisions have been made.

If the merged practice will be moving into new premises, check whether there are any loan redemption charges. If so, a decision will need to be made as to who will pay for these charges.

Accounting systems and banking arrangements

Each practice will currently be running their individual accounting systems. You will need to discuss setting up one accounting system for the new partnership. You will also need to open one bank account or add all partners’ names to an existing account and decide who will be responsible for looking after the practice finances and signing cheques.

It is important in the early months of merging that any income and expenses that relate to the previous practices are separately identified and paid back to the practice they relate to.

  • Jenny Stone is a partner at specialist medical accountants Ramsay Brown & Partners.
Finance checklist
  • Exchange practice accounts – you may want to have a 'non-disclosure' agreement.
  • Ask your accountant to review the other practice’s accounts and make a comparison to your's for profit per partner and session.
  • Prepare a profit forecast for the merged practice, taking into account savings or additional costs.
  • Inform NHS England about the proposed merger, so discussions can be made if the two practices have different contract types.
  • Review staff contracts and levels of staff, calculate any potential redundancy costs.
  • If year-ends are different, get advice about the potential increase in tax and superannuation of one practice changing their year-end.
  • Agree how drawings will be taken and working capital requirements.
  • Review whether the merged practice will exceed the turnover registration limit for taxable income that is not exempt from VAT.
  • Leased premises – Ensure provisions are made for outstanding service charges, consider who would be responsible for any dilapidations.
  • Owned premises – Consider whether all partners in new practice can buy into the premises. Beware of changes to finance arrangements and early redemption penalties.
Guide to Practice Mergers

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