Selling Your Dental Practice? Read this FIRST!
It’s amazing really. Many, many dentists aren’t incorporated. And now they’re thinking about selling their practice. What’s wrong with this picture? EVERYTHING! The bottom line is that there is a LOT OF TAX SAVINGS to be gained by (1) rolling over your dental practice into a dentistry professional corporation and then (2) selling the shares of the dentistry professional corporation. You get to take advantage of a tax-deferred rollover (when transferring assets from your dental practice to your dentistry professional corporation) and then you get to take advantage of the lifetime capital gains exemption on the sale of the shares of a small business corporation. I’ve previously blogged extensively about these topics, but I thought it would be worthwhile to get into some of the nitty gritty that’s involved in selling your dental practice. So lets get into it, shall we?
Step #1: Create a Corporation
Not every lawyer understands how to create a corporation that complies with dental laws. The name of the corporation needs to comply with specific rules. The business of the corporation needs to be restricted (to include only dental activities, etc.). The share structure needs to be flexible enough to accommodate non-dentist family member shareholders (e.g. spouse, child, parent). The minute book needs to be organized. Directors and shareholders need to have their meetings, pass resolutions, etc. Shares need to be issued. Shareholder and Director registries need to be updated, etc. This isn’t for the faint of heart. Accountants don’t usually do the whole thing for you. They may just file articles of incorporation with the Ontario government, but there are bound to be problems. Make sure to have a lawyer who is knowledgeable of these matters to set up the corporation for you properly. Otherwise, it will cost you more time and money in getting amendments, etc.
Step #2: Get a C of A for the Corporation
After you have a corporation, that corporation will not be able to practice dentistry unless it has a Certificate of Authorization from the Royal College of Dental Surgeons. Now you may be asking: “If I’m going to rollover my assets into my corporation, take back shares, and then sell those shares ALL on THE SAME DAY, then why should I get the C of A for the corporation?” It’s a good point. But the purchaser of your corporation WILL WANT the corporation to have a C of A until they either (1) amend the corporation’s name to their own and get an amended C of A for the new corporation or (2) amalgamate the corporation with their own and get a new C of A. The point is that the legislation didn’t really take into account this interim period whereby a newly purchased corporation carries on the business of a dental practice without the naming requirements being met. It’s best to get the C of A so that no one blames the corporation for illegally operating a dental practice after the sale but before an amendment / amalgamation has been completed. I realize this may be a lot of legal mumbo-jumbo, but just trust me on it…
Please note that there is a lot of paperwork that goes into getting a C of A from the College. If even one of the requirements (e.g. timelines aren’t met, documents are incomplete, documents are not provided, the business wasn’t set up properly, etc.), then you can kiss your chances of getting a C of A any time soon goodbye! It will add more cost and time if you don’t do this right from the get go. It’s particularly important if you’re under time constraints to buy or sell a dental practice.
Step #3: Rollover Your Assets
If you plan on selling the shares of your professional corporation, the professional corporation will need to acquire the assets of your dental practice FIRST. Otherwise, the shares of the professional corporation are not worth anything. So, if you were running a dental practice as a sole proprietorship or in partnership with other dentists, then you need to transfer (or rollover) the ASSETS of that business into the corporation.
This is done through an asset purchase agreement. The purchaser is the corporation. The vendor is the party who owns the assets of the dental practice (you, your sole proprietorship or the partner dentists). The dentists should have the ability to transfer over the assets without getting into trouble with creditors. In exchange for transferring the assets to the corporation, the vendors will take back shares that are equal to the worth of the assets that they are transferring. This is generally fair market value. It’s typical to find ‘price adjustment clauses’ in asset purchase agreements which say that, if the CRA ever challenges the value attributed to the assets and declares it to be higher or lower than what was elected, then the vendor and purchaser will be deemed to have completed the sale at THAT price. It’s just like an insurance policy: the vendor and the purchaser agree that, if the price they elected to rollover the assets and take back the shares was wrong because it wasn’t FAIR MARKET VALUE (which is a whole other thing), then they’ll just adjust to whatever the CRA thinks it should have been…Nice.
Step #4: Sell the Shares
Now, assuming that you qualify for the Lifetime Capital Gains Exemption on the sale of shares of small business (you really should talk to an accountant about this), the next step is to sell your shares. So, when you rolled over your assets into the corporation, there would have been an Asset Purchase Agreement. Now, when you’re selling your shares, you’ll be entering into a Share Purchase Agreement. This will be much more negotiated than the previous agreement because before, you were basically transferring assets from your left hand into your right. Now, you’re selling the whole thing to a third party.
Closing a Share Purchase is complicated and has a lot of different components to it. There is not only the agreement but also the schedules. There are indemnifications, declarations directions, etc. The corporation minute book has to be updated to account for the asset and share purchases. It’s a lot of work…trust me. And the whole deal could fall apart if the due diligence hasn’t been completed or if third-party consents haven’t been provided.
Assigning the Lease
One area that is too often overlooked is assigning the lease. A lot of times, a share purchase agreement is about to close but all is hanging on getting the consent of the Landlord in order to assign the lease. Things can get somewhat tricky here. You should get a lawyer to review the terms of the lease to find out what are the conditions or requirements in order to transfer over the lease. For instance, how much longer is the term of the lease? Is the Landlord’s consent required? Can consent be withheld? Are there any expenses associated with getting consent? Is there a specific way for consent to be requested (in writing, timelines, etc.)? What if there is a transfer of ownership in the professional corporation? Does the Landlord have to give consent for that? There are a lot of things to think about here.
Step #5: Amalgamate the two corporations
Now, it’s sometimes the case that the purchaser will be another dentistry professional corporation. So one corporation will purchase the shares of the dental practice. What happens then? Well, there will need to be an amalgamation (or joining / combination of the two corporation into ONE NEW CORPORATION). The new corporation will then proceed to get a Certificate of Authorization to be able to carry on the dental practice.
This is just a general overview. There are a lot of nitty gritty things to look at in greater detail – which I will in the next few posts. Each step of the way carries with it significant legal and accounting implications. Make sure you have someone knowledgeable enough on your side to answer your questions and ensure a smooth transition.