We regularly meet with dentists looking to sell their practice through us. Here are the top 10 questions dentists are asking us.
1. What’s My Practice Worth?
We are not appraisers, but can provide a rough guestimate of what your practice COULD sell for on the open market. We look at things like macro factors that affect the value of your practice. This would include things like interest rates (borrowing costs for buyers), inflation, GDP, discretionary spending, unemployment, staff shortages, etc. These things will impact the value of ALL dental offices. We also look at micro factors that affect the value of your practice: number of operatories, Production vs. Collections, active patient count, hygiene production to overall net production, whether certain expenses like supplies, rent and staff are being properly managed (in line with industry standards), landlord and lease situation, what kinds / how many cases are being referred out, how conservative or aggressive is the treatment planning, is the practice digital (in terms of x-rays) and paperless?
Generally speaking, dental practices sold for the most historically when interest rates and inflation were both low, staff and rent were managed expenses, there were lots of active patients and opportunities to increase production (e.g. hygiene production was high to overall production, lots of cases were being referred out, and the practice could be open more hours/days).
2. How long should I associate for after my sale?
We generally recommend 2 years to mitigate legal risks (even at a reduced schedule and with lots of time off). And this assumes things like the seller isn’t in a rush to retire or has health issues. But why 2 years? Because a buyer typically won’t go after a seller if they’re still associating, producing and keeping patients returning to the practice. And a buyer can typically go after a seller for something that goes wrong with the sale (like the buyer discovered a false statement was given by the seller in the context of the sale) within 2 years after the sale. The buyer will have the opportunity to do their due diligence on the practice and after the closing they’ll have access to everything. But the legal paperwork will typically say that the buyer has 2 years from the closing date to make a complaint about something the seller promised which turned out not be true. If you’re thinking about selling, time it right and be ready to do 2 years of associating after the sale (again, 1-2 days a week with 12 weeks off could be your schedule!).
3. What should sellers be mindful of that they might not otherwise be when selling?
It’s an emotional rollercoaster. You need a team of professionals who ONLY do this. You need thick-skinned and grounded legal professionals who’ve seen and dealt with bad employment situations and still sold practices. Or who’ve seen bad lease and still sold practices. Or who’ve seen poor or absent tax planning and still sold the practice. You stick to dentistry; let us do what we do best – sell your dental practice.
4. What happens to your team members when you sell?
In a sale, the buyer and the seller view the team members differently.
The seller sees the team members as the biggest asset, which they are. The buyer – scared by their professional advisors about the accrued liability – are told to view the team members as risks. And the liability may have some air of reality. Especially with long term team members who aren’t on proper and up to date contracts. Your best bet – as the seller – is to introduce new, proper and up-to-date legal employment agreements and associate agreements to your team members before you sell.
Dentists put contracts in place to try to limit the amount of money they’d have to pay an employee if they wanted to let them go. So for example, someone who’s been there for 20 years may be owed 20 months of pay plus benefits. This is called the common law or judge-made law that applies to all employment relationships. That’s a very basic way of looking at it. But with an employment agreement, you can actually have the employee waive this common law or judge-made law and have the relationship governed by the Employment Standards Act, which says an employee typically gets 1 week for every year they’ve worked for up to 8 weeks max. So a 20 year employee could be let go with 8 weeks of pay and benefits.
5. What happens to your lease when you sell?
There are assignment clauses in your lease that govern your ability to transfer your lease to a buyer. So it’s super important to have a lawyer review these clauses immediately (even before you consider getting an appraisal). Now, in the worst case scenario, we’ve seen clauses that allow the landlord to TERMINATE the lease once a request for consent to transfer the lease has been made. Yikes! Now sometimes, the dentist can withdraw their request for consent, but sometimes they can’t and the landlord can terminate (we’ve seen it once where the landlord did terminate and we had to do a forced sale to the landlord – who also happened to be a dentist, so it worked out in the end but it was risky!). So make sure to read these provisions before asking for consent to transfer the lease. Then you need to look at things like: can the landlord withhold consent and on what basis, can they ask for money (like a part of the sale proceeds), can they ask for certain confidential documents – like the purchase and sale document, can they put a lien on the assets of the dental practice of the incoming dentist tenant, will the existing tenant or the human still have to guarantee the lease AFTER it’s been transferred, and what are the costs that the landlord will impose on the outgoing dentist tenant?
Make sure your lease has at least twelve (12) years left on it when you’re considering selling. Why? Because that’s the number of years that the dentist purchaser will need because they’re getting a loan from the bank for 12 years.
6. What’s a demolition clause and how does it impact a practice sale?
Hands down, these are the worst clauses you could have in a lease. These clauses allow the landlord to terminate the lease by giving some amount of advance written notice (like 6-12 months) to the tenant and then the landlord can terminate the lease if they want to redevelop the building and the premises (maybe turn it into a condo). Often times, we see landlord slip these clauses in on lease renewals and the selling dentist may miss it or have no choice but to accept it.
This clause may not be tied into a relocation clause or a payment clause (where the landlord agrees to pay the tenant to leave). It may just be a one-sided termination clause. And the challenge is that the buyer’s bank will be reluctant to finance a dental practice purchase if the seller has this clause in their lease.
Now, there may be no guarantee that the landlord will terminate the lease. But there’s a theoretical risk (sometimes it’s a real risk if the building is old, largely vacant and the real estate is prime for a downtown condo tower). And so what we do is (1) find out if the landlord has plans to demo, (2) if not, then ask if they can remove the clause and if they’re willing to do that out of guilt or bribery, and (3) if they’re not willing to remove it, at least postpone it for 8-12 years to get a deal done.
7. How enforceable are those non-competition clauses?
Non-competes are clauses that prevent a dentist from competing, or being concerned with the practice of dentistry within a set geographic area and a set timeline. Like 5 years and 10 km from the premises. In a purchase and sale agreement, where there’s a balance of power (the buyer is handing a whack of money to the seller and has a legitimate proprietary interest that needs protection in the form of a non-compete), a court is more willing to enforce them. They have to be reasonable, protect a real proprietary interest (in favour of the buyer), and be drafted clearly (not ambiguous). In an associate agreement tied in with a purchase and sale, the non-compete can be enforced against the seller on these grounds.
But if we’re looking at a non-compete clause in a purely associate agreement with an associate (who is not a selling dentist), then courts will be reluctant to enforce them except in exceptional circumstances (which we haven’t seen). The reason is because courts want dentists to practice their trade, they don’t want to restrict them, there’s typically a power imbalance between principal and associate, and a non-solicitation clause can offer adequate and reasonable protection for the principal’s legitimate proprietary interests.
8. What kinds of tax planning can be done to minimize taxes in the context of a sale?
We definitely want to see dentists take advantage of the lifetime capital gains exemption. Simply put, this is a quarter-of-a-million -dollars-per-person tax saving strategy. And if you do it right, you can multiply this among dentist family members. There are a number of tests that need to be met here (hold the right shares, hold them for 2 years with an exception, pass 2 asset tests) and it’s best to speak with a lawyer beforehand to make sure you qualify. When we do our 2-3 intakes with selling dentists at our offices, we always look at the corporate minute book to see if the right people are owning the right number and class of shares. If there’s an issue with the shareholdings, then we may propose an “estate freeze”, where we reorganize the shares and shareholders to give the right number and class of shares to other family members who can then participate in the sale (mind you: they may need to hold their shares for 2 years before selling – so it’s best to plan carefully well ahead of a sale!).
We also look at the financial statements – particularly the balance sheet – to see if there are any offensive assets that need to be moved out. These offensive assets, if they’re too high in percentage compared to the corporation’s other assets for the 24 months leading up to a sale – can negate the dentist’s ability to use the lifetime capital gains exemption. So we fix that through a corporate reorganization in consultation with the selling dentist’s accountant. FYI: offensive assets include things like have too much cash, investments, securities, real estate, and loans receivable in your dentistry professional corporation’s balance sheet (in the asset section). There are ways to move those offensive assets out on a tax-deferred basis. Best to speak with us first to see what needs to be done.
9. How long does it take to sell my dental practice?
It depends, but WE like to typically sell it within 3-6 months, from start to finish. There’s a lot of little things that go into selling a dental practice that could make things go quicker (e.g. if you have all your ducks lined up – employees on contract, good lease / good landlord, you own the property and are selling it) or slower (e.g. you need staff to be put on contract, tax planning and your landlord isn’t responsive or cooperative).
We typically say that the first month is for information gathering about your practice, plus getting the appraisal ready (and we do work closely with one certain appraisal company for all of our appraisals, so you don’t need to both shopping around for an appraisal).
Month 2 typically involves finalizing the appraisal and marketing the dental practice. This is where we run the open house, receive offers, have you interview the prospective candidate(s), and then select a buyer. We also prepare all the legal paperwork and present all the diligence documents to their lawyer/accountant/banker so that we can help speed up the due diligence process.
Month 3-6: this is where issues rise to the surface and we try to address them to get to closing. This could involve things like putting team members on up-to-date contracts, negotiating with the landlord to transfer the lease, and preparing the closing (dealing with the banks, etc.).
10. What should I do to ensure a smooth transaction?
Get a solid team of legal and accounting professionals by your side. Get educated on the process. Appreciate that you’re invested with your team for many many months. Make sure they understand dental and have a solid background of doing dental deals (not just finding a buyer – but actually vetting the buyer, getting you through due diligence, and closing the deal). Be prepared for the worst (higher interest rates, higher inflation, staff wages and rent going up, cash flow going down) but hope for the best (that you’ll be able to sell and transition smoothly out of dentistry). Keep your expectations managed. It’s an emotional rollercoaster and you need to get the best deal possible with the best team possible.