Looking to sell your dental practice? Read this first…
So you’ve decided that you want to sell your practice. Maybe it’s because of health reasons or perhaps you want to do something different. Or maybe you have other opportunities that you want to pursue (like just associating with practices). Whatever your reason may be, you need to think about some of these things:
Selling Shares
Generally, if you’re a seller, it’s better for you to sell shares of your dentistry professional corporation because you may be able to take advantage of the $750,000 lifetime capital gains exemption. This could result in tax savings (assuming the dentist was earning income at the top marginal tax rate) of up to $174,000. You can also multiply the lifetime capital gains exemption by having certain family members (e.g. spouse) involved in owning the right kinds of shares. Worth mentioning is that, even if you do take advantage of the lifetime capital gains exemption, you may still pay an alternative minimum tax. But this tax can be offset against taxes due in the following 7 years (think: continuing to associate!). Be sure to speak with your accountant about this! If you don’t have a professional corporation, there are strategies in place that will allow you to create a new one and roll over your assets into it on or before the day you sell the shares (and still take advantage of the lifetime capital gains exemption).
Get your Minute Book up to date
Your minute book is a compendium of documents concerning your corporation. It will have the certificate and articles of incorporation, registries and ledgers, meeting minutes, share certificates, and more. It’s important for record-keeping (like proving that you’ve owned the right type of shares for the requisite period of time required to be eligible for the lifetime capital gains exemption). It’s also important because, in the context of a deal, the purchaser’s lawyer will want to see it up to date and completed before the deal can be closed). Here’s a blog post I wrote about corporate minute books. Be sure to speak with your lawyer and accountant about getting your minute book properly organized and up to date!
Dealing with Staff and Associates.
Purchasers like seeing staff on contracts that can be terminated with notice (or payment in lieu of notice). If you don’t have your staff on contracts, then doing so can increase the value of your practice. I’ve seen purchasers successfully reduce the purchase price because staff and associates were not on contracts. The purchaser was adamant that staff sign contracts beforehand that contained restrictive covenants like non-competes and non-solicits. And the fact that the vendor didn’t have them and wasn’t willing to ask for them resulted in a significant reduction to the purchase price!
Restrictive Covenants
If you don’t plan on practicing after the sale, you will probably be ok with agreeing to REASONABLE restrictive covenants like non-competes and non-solicits. Whether a non-compete or non-solicit is enforceable will depend on whether they are reasonable (and a host of factors will help determine this). You can read more about non-competes and non-solicits in our previous posts.
Dealing with the Lease
Purchasers like leases that are favourable and which can be easily assigned. So you may want to have a dental lawyer review your lease to ensure it doesn’t have unfavourable terms like demolition clauses, no renewal options, etc. I’ve personally seen vendors lose HUNDREDS of thousands of dollars because their lease contained unfavourable terms (e.g. demolition clause) which the purchaser just wouldn’t accept without a significant price reduction. Purchasers and their financiers generally like to see 10-year terms with 2 renewal terms of 5 years each. They also like to see low rent that increases slowly over time. It’s also important for the lease to address how the tenant can assign it (i.e. whether landlord consent is required and if, so, if such consent can be withheld).
Get an appraisal
Typically, a purchaser and their financier will ask the vendor for an appraisal. The cost is roughly $3,500 to $7,000. There are various appraisal companies that will do this for dental practices (e.g. Fair Market Value Inc., Tier Three, Al Heaps and Associates, Hill Kindy, ROI Corp., Professional Practice Sales, etc.). Go with a reputable company.
Listed vs. Private Sale
Most appraisal companies are also realtors who help broker deals. They can list your practice, market it (e.g. blasting out e-mails, doing open houses, etc.), and bring prospective buyers to the table. Vendors will need to give them a cut of the overall purchase price (I’ve seen it range from 6-12% in the most extreme cases; 7%-10% is the norm).
Associating Afterwards
Many vendors are asked to stay on and associate to help with the transition. To this end, the parties will need to enter into an associate agreement. This will include the key terms fo their relationship (e.g. term, compensation, termination, restrictive covenants, etc.).
Dental Records
A big part of buying a dental practice involves purchasing dental records. The purchaser will want to make sure that the number of active, semi-active and new patients being represented in the appraisal is true and accurate. The vendor may sometimes be required to give written promises (called representations and warranties) in the agreement of purchase and sale. Instead of giving these promises, the vendor simply allows the purchaser to do a chart audit and convince themselves that everything is good to go.
Financials
Be prepared to show your practice’s financial statements, tax returns, accounting records, etc. to prospective purchasers.
