What Are Heads of Terms in a Dental Practice Purchase?
Heads of terms (HOTs) are the preliminary document that sets out the key commercial terms of a dental practice purchase. They are typically non-binding except for specific clauses such as exclusivity, confidentiality, and costs. Think of them as the blueprint for the full legal contract that follows.
For a dental practice purchase, the HOTs should cover the purchase price, how it is allocated between goodwill, equipment, and premises, the proposed deal structure (asset purchase vs share purchase), and any conditions precedent such as NHS contract approval or finance. Without clear heads of terms, buyers and sellers risk misunderstandings that can derail the transaction or lead to disputes later.
This guide explains what every UK dentist should include in their heads of terms, common pitfalls, and how the document affects your tax position and financing.
Why Heads of Terms Matter for Dentists
Dental practice purchases are more complex than buying a standard business. The mix of NHS contracts, goodwill valuation, equipment, and premises creates multiple layers of negotiation. Heads of terms force both parties to agree the fundamentals before instructing solicitors and incurring significant legal fees.
For the buyer, the HOTs protect your position during due diligence. For the seller, they provide certainty that the buyer is serious and has a clear plan. A well-drafted set of heads of terms also helps your accountant and solicitor structure the deal tax-efficiently from the start.
If you are considering buying a practice, our for practice buyers page has more resources on the full process.
Key Clauses in Dental Practice Heads of Terms
Purchase Price and Allocation
The total price is the headline figure, but how it is split matters for tax. The typical allocation for a dental practice purchase is 60-80% to goodwill, with the remainder to equipment, fixtures, and possibly premises. This split affects the seller's capital gains tax (CGT) position and the buyer's future tax relief on amortisation and capital allowances.
For example, if you buy a practice for £500,000 and allocate £400,000 to goodwill and £100,000 to equipment, the buyer can claim capital allowances on the equipment (typically 100% relief under the Annual Investment Allowance) and tax relief on goodwill amortisation at 6.5% per year (for qualifying goodwill acquired post-1 April 2019). The seller pays CGT on the goodwill element, potentially at 14% under Business Asset Disposal Relief (BADR) for 2025/26, rising to 18% from April 2026.
Your practice valuation should inform this allocation, not just a rough guess.
Deal Structure: Asset Purchase vs Share Purchase
Most dental practice purchases are structured as asset purchases (sometimes called a business purchase). The buyer buys the goodwill, equipment, and possibly the premises, but not the company itself. This gives the buyer a clean slate with no inherited liabilities, and allows them to claim capital allowances on equipment.
Share purchases are less common in dentistry but happen when the buyer wants to preserve NHS contracts, avoid re-registering with the CQC, or keep the company's trading history. The downside is inheriting any hidden liabilities and losing the ability to claim capital allowances on existing assets.
The heads of terms should state clearly whether the transaction is an asset purchase or share purchase. This decision affects the entire deal structure and the tax treatment for both parties.
Exclusivity Period
An exclusivity clause prevents the seller from negotiating with other buyers for a set period, typically 4-8 weeks. This gives the buyer time to complete due diligence, arrange finance, and instruct solicitors without the risk of being gazumped.
For dental practices, exclusivity is particularly important because due diligence can take longer than for a standard business. You need to review NHS contract terms, Performers List status, equipment condition, lease terms, and staff contracts. A 6-week exclusivity period is common, but 8 weeks is safer for a complex practice with multiple sites or a large NHS contract.
Conditions Precedent
These are the conditions that must be met before the deal completes. Common conditions for a dental practice purchase include:
- Satisfactory due diligence on financial accounts, NHS contract performance, and equipment
- Approval of NHS contract assignment or novation (if applicable)
- Obtaining finance from a lender
- Consent from the landlord for lease assignment or a new lease
- CQC registration transfer or new registration
If any condition is not met by a specified date, either party can walk away without penalty. This protects both sides from committing to a deal that cannot proceed.
Timeline and Completion Date
The heads of terms should include a proposed timeline, including dates for due diligence, exchange of contracts, and completion. A typical dental practice purchase takes 3-6 months from heads of terms to completion, but this varies depending on NHS contract approvals and finance.
Be realistic about the timeline. NHS contract novation can take 3-4 months alone. If the practice has a large NHS contract, factor this into your timeline from the start.
Common Pitfalls in Dental Practice Heads of Terms
Vague Goodwill Valuation
The heads of terms might say "goodwill valued at £300,000" without explaining how that figure was reached. This is a red flag. The valuation method matters because it affects the buyer's future tax relief and the seller's CGT position.
A proper goodwill valuation for a dental practice typically uses an earnings-based multiple (commonly 0.6-1.4x adjusted EBITDA depending on NHS/private mix and region) or a percentage of fee income (25-60% depending on type). The heads of terms should reference the valuation method, even if the final figure is subject to due diligence adjustment.
Our goodwill valuation and sale playbook explains the methods in detail.
Ignoring NHS Contract Terms
NHS contracts are not automatically transferable. The buyer must apply for assignment or novation, and the NHS body can refuse. The heads of terms should state that the deal is conditional on NHS contract approval, and include a mechanism for what happens if approval is refused or delayed.
Some buyers include a "UDA adjustment" clause where the purchase price reduces if the actual UDA delivery is below the contract target. This is sensible because UDA underperformance can significantly affect practice profitability.
Overlooking Staff and Performers List
Dental practices rely on their team. The heads of terms should address how staff will be transferred (TUPE applies if the practice is a going concern) and whether the buyer requires key associates or hygienists to sign new contracts. For the seller, the Performers List status of associates must be confirmed.
If the practice has a principal who is also the main performer, the buyer needs to ensure they can join the Performers List for that area before completion. This can take several weeks and should be factored into the timeline.
No Mechanism for Price Adjustment
What happens if due diligence reveals that the practice's net asset value is lower than expected, or that UDA delivery is below target? The heads of terms should include a price adjustment mechanism, typically based on a completion accounts review or a locked-box mechanism with a leakages clause.
Without this, the buyer may overpay for a practice that does not meet the expected financial profile.
Tax Implications of the Deal Structure
The heads of terms set the foundation for tax planning. If the deal is structured as an asset purchase, the buyer can claim capital allowances on equipment and fixtures, and tax relief on goodwill amortisation. The seller pays CGT on the goodwill and equipment proceeds, with BADR available if conditions are met.
For a share purchase, the buyer inherits the company's tax history, including any latent liabilities. The seller may pay CGT on the share sale, but the buyer gets no capital allowances on existing assets and no goodwill amortisation relief (because goodwill is already on the company's balance sheet).
Your accountant should review the heads of terms before you sign them to ensure the deal structure is tax-efficient for your situation. Our dental accountants team specialises in practice purchase tax planning.
How to Negotiate Heads of Terms
Heads of terms are a negotiation document. The seller will want a high price and minimal conditions. The buyer will want a lower price, strong protections, and a clear exit if due diligence fails. Both sides should be realistic about what is achievable.
Key negotiation points include:
- The purchase price and allocation between goodwill, equipment, and premises
- The exclusivity period length
- Whether the deal is conditional on finance (buyers want this; sellers may resist)
- The timeline for due diligence and completion
- Any price adjustment mechanisms
Use a solicitor experienced in dental practice purchases to draft or review the heads of terms. A generic commercial property solicitor may miss dental-specific issues such as NHS contract terms or Performers List requirements.
Practical Steps After Signing Heads of Terms
Once the heads of terms are signed, the buyer should immediately:
- Instruct a dental-specialist solicitor and accountant
- Begin financial due diligence on the practice accounts, tax returns, and NHS contract performance
- Arrange practice finance with a lender who understands dental lending
- Apply for NHS contract assignment or novation if applicable
- Check Performers List requirements for the area
- Review the lease terms and negotiate with the landlord if needed
The heads of terms are not legally binding on the main deal terms, but they set the commercial framework. Acting quickly after signing shows the seller you are serious and helps maintain momentum.
Final Thoughts
Heads of terms are the most important document in a dental practice purchase that most buyers rush through. Taking time to get them right saves money, time, and stress later. The allocation of price between goodwill and equipment, the deal structure, and the conditions precedent all have lasting tax and financial consequences.
Work with a dental-specialist accountant and solicitor from the start. They will help you draft heads of terms that protect your position and set up the deal for tax efficiency. For more guidance on the full purchase process, see our practice purchase financial due diligence guide.
Every practice purchase is different. The figures and terms that work for one deal may not suit another. Speak to a dental-specialist accountant before signing any heads of terms to ensure the deal structure matches your personal tax position and long-term goals.