Whenever we sit down with a selling dentist to talk about a future sale, the first thing we ask is:
“When do you want to put down the drill for the last time?”
And the dentist generally will say in 2 years or 5 years or 6 months. And then we tell them that, in order to get the best deal possible for themselves and have the best transition, they really do need to WORK BACKWARDS. Why?
2 Year Associateship: Best Deal for the Seller
Well, first, there’s a “I want to get the best deal possible for me” concern. And purchaser dentists are more willing to buy the practice, pay top dollar, and agree to the seller’s terms if the seller is willing to stick around – even at a reduced schedule mind you – to help with the transition. If the selling dentist is OK to work 1-2 days a week for 2 years with lots of time off (e.g. 2-4 months), then the buyer will be happy because this will give them enough time to come in, work more, get to know the staff and patients, etc. So this is first thing the selling dentist needs to think about: 2 years of associating after the sale helps them get a good deal.
2 Year Associateship: Reduce Legal Risk to the Seller
Second, there’s a legal risk timing issue: if there’s an issue with the purchase and sale transaction, the buyer will generally have 2 years from the date they knew or ought to have known they suffered damages to make a complaint. Now, for arguments sake, let’s say the buyer did their due diligence and closed the deal and took over and had access to everything the seller had access to. If they suffered damages at that time (because they borrowed a bunch of money and bought a practice and discovered something bad after buying and now want to complain), the buyer will have 2 years to make a claim. Otherwise, under Ontario’s Limitations Act, the buyer’s claim will be statute barred (i.e. the buyer ran out of time to make their claim).
Now why would the buyer make a claim against the seller? Basically it comes down to them losing money. If they’re losing money because staff or patients are leaving (and it doesn’t even matter why – even if it’s the buyer’s fault), then the buyer may look for a scapegoat – i.e. the selling dentist. So what happens if the selling dentist sticks around for 2 years and patients and team are stable and the practice keep associating there? It’s very unlikely that the buyer would go after their main star attraction – i.e. the selling dentist. If the selling dentist sticks around for 2 years after the sale, even at a reduced schedule with lots of time off, the buyer is unlikely to sue them for things that went wrong with the sale. So again: the selling dentist should generally consider sticking around for 2 years AFTER the sale to keep associating.
Timing of the Actual Sale
The sale process generally takes 3-6 months, depending on how organized the selling dentist is, how cooperative and responsive the landlord and the banks are, and how quick the buyer and their team of professionals are (banker, lawyer, accountant). The first month of the sale process usually involves getting an appraisal and organizing due diligence documents. The second month involves marketing the practice for sale, preparing the draft legal paperwork and finding a buyer. And the 3rd to 6th months usually involves due diligence, wrapping up the legal paperwork, dealing with the landlord to get the lease transferred / property sold, and getting the bank funding.
Nowadays, with the Bank of Canada interest rates on the upswing (e.g. there are 2 more dates where the central bank could increase the interest rates again – October 25 and December 6), the risk/credit departments at the bank are being even slower and more cautious in getting bank funding in place. Deals are still getting done, albeit a bit slower than usual. At their height, it used to take bankers 5 business days – after they received all the legal paperwork, insurance documents, and other requirements – to get the financing over to the buyer’s lawyer. Nowadays it’s more like 10-20 business days.
Another thing that a lot of selling dentists aren’t aware of is that MARCH and OCTOBER are the hottest times to market a dental practice for sale. We call it “March Madness” and “Octoberfest“. So if you’re thinking about selling, keep in mind that you should have your latest financial statements for your dental practice READY TO GO and then give yourself one (1) month to get a comprehensive appraisal and then a few weeks in order to allow us to market in March or October. So you’re looking at getting your appraisal in January/February (to have us market the practice in “March Madness” OR in August / September (to have us market the practice during “Octoberfest“.
Preparing for a Sale
The last thing you want to hear when you’re thinking about selling is that you need to spend 2-5 years PREPARING for a sale! Why?
Well, if your dentistry professional corporation hasn’t been set up properly, then you may need to restructure it in order to take advantage of the lifetime capital gains exemption. Or if your corporation has too many bad assets in it and it needs to be purified, you may be waiting 2-3+ years before you can sell and take advantage of the lifetime capital gains exemption. Check out our blog about tax planning before a sale; point is: it could take YEARS of tax planning for you to save the most $$$ when you DO go to sell!
Well, if your lease has a demolition clause in it, we’d need to negotiate with the landlord well in advance of selling to see if we can get that clause OUT or delayed. Banks and buyers will try amortize the practice loan for twelve (12) years for the buyer but they’ll be reluctant to do so if there’s a demolition clause in your lease (which gives the landlord the right to terminate the lease and kick the dentist tenant out with some notice if the landlord wants to redevelop the building or shopping centre or strip plaza, etc. – for example, to make a condo).
Finally, you should definitely put employees and associates on contract before a sale. And this can be a lengthy process – especially if you have long term team members who aren’t on contracts. Buyers will want them to have signed contracts which limit the buyer’s liability in the event of a termination; buyers will also want non solicitation clauses built into the contracts too in order to protect their investment. So if you dilly-dally and wait on taking care of putting team members on contract, you’ll find yourself doing this – and delaying your own sale – at the very end of the process. You’ll have no one else to blame but yourself.
So get crackin’ already and take care of business if you’re thinking about selling! And you need to do these things BEFORE YOU get an appraisal (you can consult with us now on what your practice is worth – you don’t need to waste your time and hard-earned money on a formal appraisal). You don’t need to consult a Real Estate Salesperson or a Broke-er. Just reach out to us first to get your ducks lined up for a sale.
Make sure to talk to DMC first once you start thinking about selling. You’ll want to do all the right steps in the right order to ensure the best deal possible for yourself and a smooth and hopefully pain-free transition.