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How to increase the value of your dental practice before the sale

By August 27, 2013November 20th, 2020Selling A Practice

So you’re looking to sell your practice.  And you might be thinking: what should I do to increase the value of the practice before the sale?  Well, here are 10 tips just for you:

1. Sell Shares of your Dentistry Professional Corporation

You typically need two (2) years of prep time before you sell in order to get your business affairs in order.  Those two (2) years are based on your ability to take advantage of the lifetime capital gains exemption (which I’ve blogged about here).  And being able to do so will allow you to pay little or no capital gains taxes on the first $750,000 of capital gains (1/2 of which are normally taxable at your personal tax rate).  So you should, if you don’t have a corporation already, speak with a dental accountant and a dental lawyer about setting up a professional corporation, transferring your personal assets into that corporation (which, by the way, can be done immediately prior to the sale to forego the two (2) year waiting rule), and then sell the shares to the purchaser of your dental practice.  If you want to try to multiply the lifetime capital gains exemption – for example, by having a spouse own growth shares – then you WILL need to wait two (2) years.  So plan ahead and speak with a professional!

2. Have contracts with staff and associates

Staff who are not on contracts are less appealing to a purchaser than staff who are.  This is because their relationship is detailed and expectations are managed when it comes to things like remuneration and benefits, working hours / days, roles and responsibilities, dress codes, termination, and restrictive covenants (e.g. non compete, non solicit, confidentiality, etc.).  Would you want to buy a practice where the long-standing front desk person could leave and help the dentist across the street to solicit patients?  I don’t think so.  So get your staff on contracts.  And it’s best to speak with a dental lawyer about this.  You don’t want to inadvertently constructively dismiss your employees while attempting to put them on new contracts.  This could be devastating!  It needs to be done properly and in accordance with the law (statutory and common law).

With respect to associates, you should have written agreements in place with them for the same reason.  It’s just as important because, without written agreements, an associate can leave and set up shop across the street, take a patient list with them of patients they’ve exclusively treated, and then inform those patients (e.g. general advertisements, etc.) of their new location.  This would be devastating for a prospective purchaser.  So make sure your associates are on contract as well.

3. Check the Lease!

If you’re leasing space, you’ll want to make sure you have a decent lease in place.  Prospective purchasers will be looking for things like a long term (including renewal options) of at least 10-15 years, agreed upon and reasonable rent for the term and renewal terms, the absence of a demolition clause (you can read up more about demolition clauses here), and favourable terms when it comes to things like assigning your lease, parking, signage, use and exclusivity (you want to be the only dentist in the building/centre/project, etc.).  If there’s something bad about the lease, you need to amend it with the landlord (use a dental lawyer or Cirrus Consulting) before you can close the deal.

4. Secured Creditors

Whether you’re selling assets or shares, or a combination of both, the prospective purchaser won’t want to take on your existing debts and liabilities.  Therefore, you’ll need to either pay these off and get discharges BEFORE the closing OR you’ll need to provide a promise to do so immediately after the closing (from the proceeds of the sale).  Secured creditors are those parties (typically banks and dental supply companies) that have registered a personal property security interest against your personal property or your professional corporation’s property such that they can seize it in the event of you defaulting.  The purchaser will want to purchase assets free and clear of any and all of these types of encumbrances.

5. Get an Appraisal

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 you’re looking to list your 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…).

6. Fill Your Schedule

Prospective Purchasers will gauge the purchase price on how much they expect to make over the next few years.  If you’re taking it easy, not working as many days / as long hours as you could, then they may see a lot of potential in your practice to increase billings, but may not want to pay you top dollar as a result.

7. Hygiene, Hygiene, Hygiene

Prospective purchasers are paying top dollar for a strong active-care / hygiene program.  Hygiene programs that generate 40% or more of overall billings are sought after the most (think: multiple competitive bids!).  And having competent, people-friendly, and efficient hygienists paid an average wage (not 50% of their billings, as I’ve seen some dentists do) is ideal.  So make sure your hygiene program is up to par.

8. Marketing!

Do you have a niche focus?  Are you corporate-esque?  Are you like a mom and pop dental shop?  What is the decor like on the inside?  What kind of marketing and advertising is being done both on and offline?  What are your patients like?  For those practices with a niche focus, they can command a higher premium because they are rare commodities.

9. Check your Equipment

Did you know that when we represent prospective purchasers, we always request that an equipment technician go in to assess the status of the equipment.  This often results in a report that shows that $x must be spent to bring the equipment up to speed.  But if the equipment was in good enough shape to begin with, there wouldn’t be any bartering on the price after it was agreed upon!  Spending a few dollars beforehand to make your practice look impeccable will go a long way in avoiding re-negotiations later on.

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 a prospective purchaser will buy your 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, dental banker, and dental realtor to make sure you have done everything possible to structure the deal in your favour.  If you’re looking for professionals, let us know and we can connect you.

So there you have it: 10 things you should do to prepare yourself for selling your dental practice.