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Increasing the Value of Your Practice BEFORE Selling!

By December 4, 2013April 28th, 2021Selling A Practice

So later this evening David Mayzel (my law partner) and I will be presenting to the Class of ’87 about “Maximizing the Value of your Dental Practice Before Selling”.  For those who aren’t in attendance, I wanted to go over some of what we’ll be talking about.  Also, if the situation permits, we’ll hopefully be recording and posting our discussion on this website sometime next week (because I’m off to Jamaica starting tomorrow).  So with that said…

Questions about the Current Marketplace

1. True or False: the current dental marketplace is a Seller’s market?

ANSWER: It is a Seller’s marketplace.  The influx of new grads and foreign-trained dentists into the marketplace, coupled with low-interest rates and 100% bank financing, and the limited supply of patients and practices for sale means that a well-run dental practice can sell for more than its appraised value and with fewer conditions required in order for the deal to move forward.

2. What are dental practices selling for these days?

Based on a presentation by Bill Henderson of Tier Three Brokerage Ltd. that we sat in on at the Winter Clinic last month, the practices that he examined sold for about 115% of appraised value.  There are discrepancies, however: one of our clients bought a practice for 54% of the appraised value because of the presence of a demolition clause.  Bill also mentioned another practice that sold for over 170% of appraised value.

3. What does the future look like for the dental marketplace?

This is debatable.  For some purchasers, the future looks big and bright: many dentists will need to retire and there will be an influx of dental practices in the market.  For purchasers, this will help lower the costs (given the available opportunities).   If interest rates go up (which they invariably must do), only “serious” purchasers will be left to shop around in the marketplace, commanding a discount and many conditions in order to agree to get the deal done.  But for some sellers, the future also looks great for them too: investor dentists (whose presence is ever-increasing) will pay a premium for a well-run practice, even if there are many practices available.  Brands, niches, franchises, corporate, and specialty practices will also command a premium.  And the limited supply of independent dental practices available for sale will require purchasers to pay more.

Questions about the Lease

4. What are favourable terms to have in a lease?

ANSWER: good long term (e.g. 10 years at least), renewal terms (2 x 5 year terms is nice to have), low base and additional rent, exclusivity in the building/project/floor for dentistry and ancillary services (e.g. teeth whitening, hygiene, specialties, etc.), ability to assign to another dentist/dentistry professional corporation without needing the landlord’s consent (but providing them with notice), ownership of leaseholds, no demolition clause, and favourable terms concerning signage and parking.

5. True or false: a demolition clause in your lease will ALWAYS result in low offers from prospective purchasers.

ANSWER:  False.  If the practice is housed in a relatively new development, the risk of the landlord using a demolition clause to convert the building into a condo, etc. is relatively low.  And if it’s a particularly hot property and the landlord agrees to delay using the demolition clause for a number of years, it likely won’t affect the sale price.

Get Contracts for Staff and Associates

6. How do you present new contracts to existing staff without getting sued?

ANSWER: By giving notice! The amount of notice depends on a number of things.  To find out more, read this blog post here.

7. True or false: if you don’t have an agreement with your Associate, they can leave and set up shop across the street, contact patients they have treated exclusively, take a patient list with them, and bring staff with them.

ANSWER: you might be surprised.  For the answer, read this article I wrote in Ontario Dentist magazine.

8.  If you are selling the assets of your dental practice (either personally or through a professional corporation) circle the one(s) that are true:

a) The Purchaser WILL ALWAYS assume liability for an employee’s past length of service under the Employment Standards Act, 2000 if they keep them after the closing.
b) The Purchaser WILL ALWAYS assume liability for an employee’s past length of service under the Common Law (i.e. judge-made law) if they keep them after the closing.
c) You WILL ALWAYS be responsible for employee termination costs (to some extent) after the closing for one of your former employees if the Purchaser wants to terminate them.

ANSWER: None of the above.  For a), the Purchaser can avoid liability under the Employment Standards Act, 2000 if they wait 13 weeks after the closing before hiring anyone.  For b), the Purchaser can avoid liability by presenting new contracts to staff immediately after the closing with a clause that says their past service with the Vendor will not be recognized.  For c) just remember: everything is negotiable!  You may agree to have no liability whatsoever!

Shares vs. Assets

9. What does a purchaser prefer to buy and why: shares of a dentistry professional corporation or assets of a dental practice?

ANSWER: purchaser don’t want to buy a corporation because of hidden liabilities and unfavourable tax consequences.  They only want the good stuff – i.e. assets of a dental practice (including goodwill and patient charts), the staff, and a new lease or assignment of a favourable existing lease.   They don’t want hidden liabilities which the corporation may have – such as secured debts to creditors, accounts payable to vendors, liabilities under the lease, litigation-related matters (e.g. related to taxes owed by the corporation, unhappy patients, slip and fall, etc.).  Finally, purchasers can choose who they want as employees and avoid liabilities if they present them with contracts from the beginning (with clauses that say that past length of service won’t be credited); their exposure under the common law is eliminated in these circumstances.  Also, share purchase transactions are more costly and complicated than asset purchase transactions, as the purchaser corporation will need to immediately amalgamate with the target corporation immediately after the sale.  Sellers, for their part, want to sell shares because of the lifetime capital gains exemption and the ease of transferring things over (i.e. because the corporation stays the same; just the ownership of the corporation changes).

10.  Which of the following statements are true concerning the Lifetime Capital Gains Exemption:

a) Starting January 2, 1014, you can save up to about $184,000 in capital gains tax by selling shares of your professional corporation.
b) You can multiply the lifetime capital gains exemption by using family members.
c) Only certain shares qualify for the lifetime capital gains exemption.
d) You can ONLY sell the shares of your professional corporation after holding them for twenty-four (24) months.
e) For the twenty-four (24) months prior to the sale, your corporation CANNOT have more than fifty percent (50%) of its assets as “non-active business” assets (e.g. excess cash, investments, certain real estate, etc.).

ANSWER: a, b) c) and e).  D is not true: you can transfer in assets on the day of the sale to a professional corporation, take back shares and then sell those shares and still qualify for the lifetime capital gains exemption.  Read this blog to know more!

DMC