I recently blogged about the ways in which a seller can try to maximize the value of their practice before selling it. Now I’m going to discuss 10 things a dentist purchaser should be aware of when BUYING a practice.
1. Buying assets instead of shares
Typically, a seller will want to sell the shares of their professional corporation. They do this so that they can take advantage of the lifetime capital gains exemption. But a buyer will want to buy ASSETS. This is for two main reasons. First, why would the buyer want to inherit the liabilities of a corporation (some liabilities may be hidden). You can avoid buying these liabilities by purchasing the assets of the dental practice and not the shares of a professional corporation. The second thing is that when you buy ASSETS, there are certain tax advantages vs. buying shares. The only issue is that you may not be in a position to purchase assets given that it is currently a seller’s market out there and they will demand a share sale.
2. Check the lease
If you’re not purchasing real estate to go along with the practice, you’ll need to take a good hard and long look at the lease. This is typically a very long and complicated document. You should have your dental lawyer review it for pitfalls like a short term, high rent, demolition clause, difficulties with transferring it, no exclusivity, improperly described use, etc. You may either need to get an assignment of the lease from the landlord with amendments OR get an entirely new lease from the landlord altogether.
3. What to do about the employees
I’ve written extensively about what to do with your employees when you’re purchasing a dental practice. You can read more about this here.
4. Due Diligence
Due diligence means investigating! And this can and usually does involve your dental accountant reviewing the financials and tax returns of the seller to make sure everything is on the up and up. They may also do pro forma financial statements so you can get an idea of the cash flow you expect to make and how soon you’d be able to repay the loan. The legal due diligence involves conducting searches against the seller, the landlord/owner of the property, etc. Searches can reveal, for example, if the vendor has any creditors and who needs to get paid before the sale can take place. It also involves reviewing the corporate minute book of a corporation if the sale involves the shares of a professional corporation, hygiene corporation, technical services corporation, or real estate corporation. Finally, you should definitely get an equipment inspection from a reputable technician (who can provide you with a report), as well as conduct a chart audit to verify the number of active, semi-active, and new patients at the practice. This is all part of doing your diligence!
5. Structuring the deal
How will you be purchasing the dental practice? Well, if you’re buying shares, then you should have your dentistry professional corporation buy the shares. Why? Two reasons. First, a corporation can repay a loan much faster than you can because it has more after-tax dollars to spend repaying the loan than you can. Second, having a corporation on the hook for everything (instead of you personally) can act as a shield in case anything goes wrong; only the corporation’s assets would be exposed in those situations. That said, it’s often the case that you’ll be asked to sign the agreements, documents, financing documents, and lease in your personal name because third parties don’t want to let you off the hook that easily! But you should always try to have everything in your corporation’s name.
6. The Appraisal
There are numerous appraisal companies out there. Any prospective purchaser will want to see an appraisal and so too with their accountant (to let them know if it’s a good practice) and banker. Now, if the vendor is looking to list their practice on the open market, the real estate firms will typically charge between $3,500-$7,000 (depending on the complexity of the practice and the time spent appraising the assets), but will not charge you if they are allowed to list the practice as well. Sometimes, in a private deal, the parties will agree to split the appraisal costs or the purchaser may pay for the appraisal costs entirely. Just be mindful of who is engaging the appraisal company, paying their fees, etc. as this may impact the overall valuation (although technically it shouldn’t, we’ve all heard stories…).
7. Incorporate and organize
If you’re going to end up buying a dental practice using a professional corporation, you will need to get a dental lawyer to incorporate and organize that professional corporation first. It should have limitations/restrictions on its business (as required by the RCDSO), an appropriately comprehensive yet flexible share class structure (designed specifically for dentists to income split with their family and multiple the lifetime capital gains exemption). It should also have an appropriate name (as per the RCDSO) and a registered practice name (both with the Ontario government and approval must be obtained from the RCDSO). Finally, it should be organized internally with all the necessary documents; I’m talking about including the certificate of incorporation, articles of incorporation, by-laws, director and shareholder meeting minutes with resolutions, director/officer/shareholder registries, share certificates, and forms filed with the government, etc. This is a heavy undertaking so you should definitely have a dental lawyer take care of it for you. On top of all of this, you’ll need to have your dental lawyer prepare all the paperwork to obtain a Certificate of Authorization from the RCDSO so that this corporation can actually practice dentistry. This involves more paperwork, a status certificate, fees, etc. Don’t try to do this yourself as you may end up making mistakes and paying more to fix those mistakes!
8. Vendor as Associate
Will the Vendor be staying on as an associate after the sale? If so, you will need to enter into a written associate agreement with them outlining the key terms of your relationship. How long will the term be, what about the associate’s schedule and remuneration? How can the agreement be terminated? And what kinds of restrictive covenants will you require (e.g. non compete, non solicit, confidentiality, etc.). I’ve blogged extensively about the legality of non-competes and non-solicits in this website. You can read up more about these topics here.
9. Charts, Charts, Charts
What does the appraisal say about the number of active patients (i.e. in the practice the last 12 months and who have a habit of regularly coming), semi-active patients (i.e. in the practice the last 24 months and not including active patients), and new patients (in the last 12 months)? If possible, make sure that these figures are included in an agreement of purchase and sale as something that the vendor is promising and which the buyer is relying upon.
10. Get Your Team Assembled!
You’ll likely be asked to sign a document called a letter of intent. It’s a generally non-binding document that sets out the key terms upon which you will buy another dentist’s dental practice. But if you haven’t thought about any / all of the above and still go ahead and sign, you could be doing yourself a disservice. You need to reach out to a competent, responsive, and experienced dental lawyer, dental accountant, and dental banker to make sure you have done everything possible to structure the deal in your favour. If you’re looking for professionals, check out this list of professional advisors.
So there you have it: 10 things you should do to prepare yourself for buying a dental practice.