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Demystifying GP Practice Finance: Navigating the Challenges and Choices in Partnership and Loans

• Arun Mehra

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Are you grappling with the daunting task of raising finance for buying into GP practices? Sit back and absorb as our commercial finance manager, Dan, demystifies this complex yet crucial topic. We delve into the major challenges GPs face, discussing the pros and cons of partnership from both financial and operational perspectives. 

As accountants to GP's its imperative to provide sound commercial advice as to how to finance such loans.

We pull back the curtain on two primary ways GPs can structure their buy-in loans. Dan shares his insights on arranging loans in one's sole name, a route now challenging due to the dwindling number of banks offering unsecured loans. Alternatively, we explore how a practice can refinance the entire loan, creating a more appealing package for potential partners. Whether you're a GP considering partnership or simply curious about GP finance, this episode promises a wealth of information.

Arun Mehra:

Hi, now today I'm here with Dan, one of our commercial finance managers. Dan, how are you doing today? You all right? Yeah, I'm good, I'm good, thanks, right. What are we talking about today? Gp finance? Am I right in saying that?

Dan Fearon:

GP finance. Yeah, we're going to talk about GP finance today.

Arun Mehra:

Right, what are the main issues that GPs find when they're trying to raise finance for buy-ins or buying their practice? What are they?

Dan Fearon:

Yeah, I think what we're seeing at the moment in the GP sector is there's a shortage of new partners coming into the healthcare. The reason for that is a number of reasons. One is that the number of qualified GPs has reduced, so we've got less people coming in. And also you've got a bit of a reluctance from GPs or salary GPs becoming partners, so they don't want to step up and become partners. So obviously that's reducing the amount of partners that you've got. There's a couple of reasons.

Dan Fearon:

Obviously everyone's got pros and cons for that. Obviously, for the pros of becoming a partner, you're going to get more control over the practice, so you're actually going to get a say on what that practice is doing. Obviously you need to work within the NHS framework, but you're going to get a say on the types of services you want to do and how that practice is run. Also, it's not all about money, but obviously the financial benefits have become a partner as well. So once you become a partner you'll have that increased salary because you'll get a share of the profits and then also you'll get a share of the freehold of the practice that is based in. So obviously you will hope that that practice over a period of time would increase in value and then when you get to that point of retiring, that is increased in value. So you've got that financial benefit. Also, in terms of cons, you may be happy being a salary GP. You do that, you've got.

Arun Mehra:

Nothing wrong with that, is there actually? No, that's what you want to do. You can walk away and forget about any other pressures in that respect.

Dan Fearon:

Exactly so. You've got that, so that's what you want to do. Also, you've got the element of you're getting into a partnership of convenience. You're not choosing the people that you're going to be working with so that they're the partners at that practice. Sometimes that can cause a little bit of conflict going forward, so you may just be happy, that's not for me. And then also you're going to have the other part of You're going to be running a small business.

Dan Fearon:

Gp practices turn over a lot of money and there's a lot of services they do and that could take up a little bit more of your time that maybe you don't want to do. So there are pros and cons to both scenarios really. But if you've weighed up the pros and cons, you found the practice that you actually want to become a partner in. You like the partners and you like the way everything's going. Your next part of it will be how do I finance that? How do I arrange my buying loan for that? So there's sort of two elements that you can do it as. Really so if you take one step back, one step back, dan.

Arun Mehra:

So you're a young GP, or a young GP?

Dan Fearon:

A-G-P.

Arun Mehra:

You've been working a number of years and opportunities come to buy into a practice you may be working in or another practice and because of a retiring partner. So you're going to try and raise finance to buy your share of the freehold effectively, that's the situation, isn't it?

Dan Fearon:

Yeah, because within GP-PAC there's no goodwill element.

Arun Mehra:

So when you're buying, you buy a share, and that's normally a share of the freehold value Okay, and that freehold receives a notional rent which has been predetermined already, so correct. So the challenge is how do I raise the money to make it work for you as a buyer, but also, potentially, for the current owners as well?

Dan Fearon:

Yeah, yeah, yeah, because what will happen is at the point. So normally the scenario is there's a GP, one of the partners, looking to retire. So what they'll do is they'll normally have the freehold valued and if they say it's worth a million pounds for a nice round number, you're buying in. There's four partners and you're buying sort of 25% of that. So you'll need this loan for a circuit like 250,000 to buy in. And then what an effect that will do? You buy in and then the outgoing GP will take their cash and then they'll leave the partnership and then you become the new partner. So as one steps up, one sort of gets removed from the partnership. That's a normal scenario when a buying loan is needed. And so you've got the normal buying loan, so you've got the I say simple version.

Dan Fearon:

But what people will tend to do is, instead of sort of arranging the loan in the practice name, they'll arrange a loan in their sole name. So it's still a business loan, but it's a business loan to them sort of personally, and then they will raise that finance, normally the term 20 to 25 years, obviously, when they're buying in as a partner. These are long term sort of visions and they're doing it for a long period of time. So they'll do the arranged the loan.

Dan Fearon:

And then the issue with the buying loan has become is that there's a lot of lenders and not really looking at these now because they're unsecured loans. They're all arranging the loan for 250,000 and it's not against the freehold, it's to them personally, you know, in a good sector where they're going to get a good income from that, and then they have to lend to their personal. So because it's an unsecured loan, the amount of banks that can do it has reduced, unfortunately. Yeah, so we still think it's a really good sector and obviously there's no issues there because they're getting a good income, because their actual repayments are going to be done based on their salary and their share of the notional rent. So that will pretty much fund the loan repayment for the loan over a period of time. So that's how a buying loan sort of tends to work. Very simple you arrange a loan to Mr Smith or Mrs Smith is going to buy your adopter, smith, rather, is going to be buying in, and then you arrange a loan and then that 25% share buys out there for partner.

Arun Mehra:

Okay, but there's an alternative way though, isn't there, corrine?

Dan Fearon:

Yeah, so we're looking at an alternative way and there's a few practices that have started to do this as well, because there's, like I said earlier, there's because there's a shortfall in terms of GPs sort of becoming partners. Yeah, what a practice sort of needs to do is try and sort of sweeten the deal a little bit if possible, so, you know, to make it a little bit more advantageous for someone buying in. Is what they could do is arrange the loan, but as a practice. So instead of them doing a sort of buying loan for themselves, the practice will in effect sort of refinance the whole loan. So, again, if we use that million pound figure, so the new partner buying in will still buy in the 250,000 on that million pound. The other three partners will have their loans and they might be lower in value, those loans correct they may be lower in value.

Dan Fearon:

Yes, they may be slightly lower in value. So then you're probably thinking so why would the other partners want to secure a higher loan against their freehold if they've got a smaller loan? Well, the way sort of not around that, but a way to sort of smooth that out for the other partners is, if they've got smaller loans, the same one's got a loan of maybe 50,000. So the new partner coming in, they'll take a loan of 250,000. The other three partners have got a loan of 50,000. What you could do is refinance everything so you no longer have sort of random buying loans or some practice loans in the practice time. You have just a one loan for everyone and then the other partners. What they could do, in effect, is release 200,000 from the equity that they've built up over sort of 15, 20 years within, and obviously it's their money and they can do with what they want with that. So I suppose, if you look at the moment, if you've got maybe a large mortgage and you want to sort of pay that down it might be on a high interest rate pay that 200,000 over to your personal mortgage, either reduce that or, if you're in a good position, pay that off in full and then what that will do is bring all the GPs to a loan parity, so everyone's on 250,000. Within the practice the loans will be paid again by the notional rent and we'll see if there's any sort of slight shortfall from drawings. But I say that will be the same and it will be divided by the share that they have, so 25% each.

Dan Fearon:

The other advantage is to get the tax benefit of having a business loan which they won't get on their personal mortgage. They may even want to again, even in a better position and haven't got a personal mortgage. They might want to put lump sum into the pension. Now with the pension changes they may sort of have that and obviously that would be a good investment for them going forward. And it's just a good way of securing the loan against the freehold because that'll bring down the rates as well for the clients.

Dan Fearon:

Because if you're doing an unsecured loan you may be looking at a rate of sort of maybe 3%, 4%, where if you're doing the loan against the freehold and you're in a nearly fully secure position because the banks will do 100% finance for GP practices, the rate could be something starting with a two. So it's a lot cheaper for the partner buying in and obviously for the other guys who are in the partnership. They're releasing money from the business which they would have had to wait until someone else retired and you've got all that money tied up within their business. So you release it a little bit early and obviously still either enjoy that money or make that money go to work for you in the meantime.

Arun Mehra:

I think it's a great idea because I think for the older partners in the partnership, it gives them an opportunity to release their equity before they have to exit, which they give them the flexibility yes, it's a good angle if it can be achieved and if all partners are in agreement. Ultimately, you've got to get their agreement. Everyone has to be in agreement.

Dan Fearon:

That's the point really. I suppose on the first scenario, the buying loan, you're just arranging that line for them directly and obviously they're buying out that the partner taking their money and going where. In this scenario the other partners will need to sort of agree to it and sort of come on board with it. But there are practices doing that because they see the benefit of one. It's nicer for the partner coming in because again the loan will be in the practice name. There's only one loan because sometimes you can buy into a practice.

Dan Fearon:

You've arranged a loan for maybe 250,000 to buy in, but the practice may have other loans in the practice name that suddenly you're liable for as well because you've become a partner.

Dan Fearon:

So you sort of take all that out of the equation. You've just got the one loan and it just sort of puts everyone on an even kill so that going forward the partner coming in is happy, the existing partners are hopefully happy that they've managed to release some funds, and then even when you've come into that point again of someone exiting, they'll just come on to the partnership loan and they'll do the same thing again. So you just keep sort of repeating it. So it sort of takes away the, the panic of people buying in as well. And even if you haven't got a new partner coming in but someone's retiring, you can still do this with the other partners. So in this scenario we've used sort of four. But if someone's retiring and there's free staying but a new partner's not coming in, you can still do that with the other three partners. You can still arrange a loan for them to buy out the exiting partner still, and then you just keep the the three partners instead of four going forward.

Arun Mehra:

Does that make sense? So now, for any potential GPs out there, or for any potential accountants out there who have GPs as clients, how should they reach out to you? What can you do? What would you do to help them?

Dan Fearon:

Yes, so I'm more than happy for so. As Samira, we're more than happy to have a conversation with anyone. We can do an initial chat with them free of charge just to see if we can help them and sort of take it forward. We do evening calls as well, if that's easy, because we know people are busy during the day, sort of doing appointments etc. So we could do that and sort of just go through the different scenarios based on their practice as well. So it makes a little bit more real for them on what we can do and sort of see, put some figures together for them so they can understand the difference and if they needed us to sort of present that to the practice and do like a joint, you know we're doing meetings for presentation.

Dan Fearon:

You know we're more than happy to do that. So everyone understands the process in doing it. In terms of the practice, they're going to get a valuation as part of the buying anyway. So as long as that valuation is on the banks panel, we shouldn't really cost them any much, if it shouldn't cost them much more really to do that in terms of putting everything together. So it's just an easy way to attract new partners to your business once to the practice.

Arun Mehra:

Okay, all right, brilliant, okay. So thank you, dan. I think that's been really, really useful. So, for anyone who's looking to raise finance, if you're a GP, or you're an accountant or a GP seeking finance to buy in, give Dan a shout, all his details will follow and we'll be delighted to help. Okay, thank you, dan for today. Thanks, evan Cheers.

Dan Fearon:

Thanks bye.