Make your merger magic – not manic

This article first appeared in the Summer 2021 issue of AISMA Doctor Newsline, the newsletter of the Association of Independent Specialist Medical Accountants.

The last 12 months has seen practices working much more closely together to respond to the pandemic and to deliver the network contract DES in PCNs. Many practices, having seen the benefits of closer working, are now considering merging. In this article, Alison Oliver outlines some of the key issues to consider if you are thinking about merging with one or more other practices.

Why merge?

There are many reasons why practices merge. The administrative and financial burden on practices has increased significantly over recent years and smaller practices are more likely to struggle with this burden. Bigger practices are likely to enjoy economies of scale as well as being able to offer more flexibility for staff and partners to develop special interests. It is widely recognised that practices will need to be more robust and resilient in order to have a strong position within integrated care systems, and merging is one way of achieving that. Where practices have worked well together within PCNs, some are considering taking the plunge and merging to form a practice covering a whole PCN patch.

It is important to be clear about the benefits that you are hoping to gain from merging.

Types of merger

There are various different types of merger, including:

• Full merger – two or more practices merging to provide services under a single NHS contract
• Partial merger – two or more practices merge at an operational/organisational level but keep separate NHS contracts for different sites
• Federated model or super-partnership – multiple practice sites continue to operate semi-independently under the governance of an over-arching partnership and management board
• Incorporated model – practices merge and form a limited company to operate the merged practice

Merging NHS contracts requires the approval of NHSE/I. They will consider matters such as whether the merger offers benefits for patients and value for money. NSHE/I consent is also required to novate NHS contracts into a limited company. The NHS Primary Medical Care Policy and Guidance Manual includes further detail on the requirements for mergers and incorporation of NHS contracts: Primary Medical Care Policy and Guidance Manual

Look before you leap

You should get to know the other practice (or practices) before you commit to a merger. This involves carrying out due diligence to satisfy yourself that the other practice is well run and financially viable as well as identifying any potential liabilities which could become liabilities of the merged partnership following a merger, such as employment claims, patient complaints or breaches of the NHS contract.  You should appoint specialist accountants and lawyers to assist with the financial and legal due diligence process. If issues are identified during due diligence, these should be addressed in the merger agreement to afford you some protection against historic issues affecting the other practice(s). If the issues identified are serious, you might conclude that a merger isn’t worth pursuing with that particular practice.

As well as legal and financial due diligence, the culture of practices with whom you are proposing to merge is also important – do you all share a common vision and have enough common ground in the way you work to be able to gel properly as a merged practice?

Harmonisation and integration

The partners at each practice will have different profits.  If there is a big discrepancy and this is caused by factors such as the population’s requirements which it is serving, consider carefully how they will be equalised, or if not, how they will be weighted. This is something that your accountants will be able to assist with.

Different practices are likely to have different terms and conditions for partners on various other matters such as leave entitlements, sharing workload, decision making, accounting practices and so on. You should discuss with your prospective merger partners how these different terms will be harmonised so that your merged partnership has consistent terms and conditions which are acceptable to all the parties.

You will also need to discuss how to integrate the practices’ systems, procedures and records.

Staff

The majority of the staff of the merging practices are likely to remain employed by the merged partnership, but it is possible that you will need some new roles (for example, to appoint a single business manager for the merged partnership),  that some roles might no longer be required (for example, you multiple practice managers might be unnecessary) or that some roles will change (for example, with some staff working across multiple sites).

You should ensure that you comply with employment legislation (such as the Transfer of Undertakings (Protection of Employment) Regulations – TUPE) in respect of transfers of staff in connection with the merger and in relation to any redundancies or changes to terms and conditions.

Consultations

You will be required to consult with stakeholders, including patients, the other practices in your PCN in addition to the commissioners. It is wise to consider the impact the merger may have on others and ensure that they are informed and will support you in the process.  Some mergers become quite political, so don’t ignore local councils and councillors.

Premises and other assets

Assets of the merging practices will generally transfer to the merged partnership. You should consider whether any consents are required for these transfers. For example, if you own your surgery premises you might transfer these to the merged partnership or you might retain them as an investment asset and grant a lease to the merged partnership – and don’t forget that if the premises are mortgaged, the consent of your lender is likely to be required. If you rent your premises, the lease will have to be assigned to the merged partnership or a sub-lease granted to the merged partnership and both will almost certainly require your landlord’s consent.

Regulation and compliance

The merged partnership will require all the usual registrations, licences and permits and will need to comply with the all the usual regulatory requirements. In particular, you will have to apply to register the merged partnership with the CQC (or make changes to the registration of one of the existing practices to bring the other sites within its scope).

Tax and financial matters

It is important to take early advice from a specialist accountant on the tax and financial considerations of merging and the proposed structure and accounting practices of your merged partnership. There might be tax charges on the transfer of some of the assets into the merged partnership.

Documentation

There are various documents required in connection with a merger, including:

• Confidentiality agreement – you might consider entering a confidentiality agreement before commencing negotiations to ensure that the merger discussions remain confidential in the early stages. This will help avoid unsettling your practice unnecessarily if the merger doesn’t go ahead
• Heads of terms – it is a good idea to seek to agree key terms at an early stage to guide the negotiations
• Cost sharing agreement – you should agree how legal and financial costs in connection with the merger will be shared, particularly if the merger doesn’t proceed to completion. A cost sharing agreement is advisable to avoid disagreements arising over these matters if negotiations don’t go well
• Merger agreement – this is the main document setting out the terms of the merger and dealing with the transfer of assets, contracts and staff and apportionment of liabilities of the merging practices
• Partnership deed – this will set out the terms governing the partnership from the merger date and should be entered into on or before that date, otherwise the merged partnership will be a partnership “at will”, which is an unstable structure. All partnerships should have a valid and up-to-date partnership deed and this is particularly important for a merged partnership where the scope for disputes might be greater than with partners who have worked together for a long time
• Declaration of trust – where the merged partnership owns surgery premises, a declaration of trust is advisable to govern the rights and obligations of the partners who co-own the premises
• Lease – if existing premises will remain owned by some of the partners outside the merged partnership, a lease should be granted to the new partnership so the terms of occupation are clear

Key points

• Identify your reasons for merging and as negotiations progress, keep sight of your objectives – don’t be afraid to walk away if negotiations don’t progress as you expect
• Consider entering a confidentiality and heads of terms agreement with your prospective new partners so that you have a roadmap for your negotiations and can share confidential information with greater confidence – also consider a cost sharing agreement dealing with how you will share costs of the merger process
• Get to know your new prospective partners and their practice
• Appoint specialist professional advisors early on to agree a structure for the merged partnership and to ensure that you deal with all the necessary legal requirements at the appropriate stage
• Appoint a working group comprising lead partners and staff from the merging practices to coordinate the process

Alison Oliver is a partner in the primary care team at Hempsons. She advises GP practices, provider companies and primary care networks on partnership and company law issues, NHS contracting, collaboration and governance arrangements. She has handled numerous practice mergers. Hempsons is a leading health and social care law firm ranked as one of the best specialist law firms in England and Wales.

This article is for information purposes only and should not be relied on as legal advice. Neither the author nor Hempsons will be liable for losses arising from reliance on the information in this article.