Over the past decade there has been growth in the market for the purchase and sale of dental practices. There is a natural fit between older dentists wishing to retire and younger dentists who wish to establish their own dental practice. In a very competitive market, there is a distinct advantage for a younger dentist to acquire an established practice. And, lenders are very accommodating in providing the funds to complete the purchase.
There has also been growth in larger corporate organizations established to operate dental practices. These corporate organizations are actively purchasing established dental practices from dentists who are seeking to retire or simply wish to be removed from the day-to-day administrative burdens and who may continue to practice as an associate. Corporate dental organizations are relying upon their ability to retain associate dentists who will provide the professional services to the patients of each individual practice location. Today, many dentists are quite happy, for lifestyle reasons, to simply practice dentistry, without all the administrative issues associated with running a private dental practice.
Early planning is important
All dentists will eventually retire and face the challenge of succession and the sale of their practice to another dentist, group of dentists or corporate dental organization. Planning for such a sale should take place many years prior to the dentists’ target date for sale. Here are a few reasons for planning earlier than later:
- There are beneficial tax opportunities that may only be available if an appropriate corporate structure has been put in place. This restructuring may need to occur several years prior to the sale to ensure that the professional corporation operating the private practice does not hold investment assets that the dentist would not want to sell. Associated with this point is the fact that the capital gains exemption may not be available on the sale of shares of a professional corporation if there are non-business assets held in the professional corporation.
- Certain business considerations expanded upon in this article will need to occur many years prior to the sale including, having a good lease in place, having a strong employee group, and having appropriate employment and associate agreements signed.
Key planning considerations
Having a strong lease in place
A prospective purchaser will want to be assured that he or she is able to continue practicing from the same location for a reasonable period of time. This will be necessary in order to preserve the goodwill of the practice. Patients of the practice will be familiar with the current location and may leave if the location changes. Therefore, when negotiating a lease for premises, it is important to build in renewal rights that are available at the option of the dentist to allow the purchasing dentist to extend the term with a clear mechanism for how the rent will be determined during any renewal. The lease should include a clear ability for the dentist to assign the lease or permit a change of control to a new purchasing dentist. This planning may take place in the ordinary course of operating the practice. However, it is wise, a few years prior to a prospective sale, to revisit the lease arrangements. It may be necessary to renegotiate the lease with the landlord to provide greater flexibility and a longer potential term, advantageous renewal provisions, and flexible ability to assign the lease to a purchasing dentist.
Building the optimum staff team
The staff of a dental practice is a key connection point for the patients. The patients will routinely see the dental hygienist and other staff members and less frequently see the dentist. That relationship with the staff is critical in building a strong and sticky patient base that will be attractive to a purchasing dentist. On a regular basis, the dentist must ask whether he or she has an optimum staff complement. Sometimes it will be necessary to terminate a staff member who no longer provides a positive fit for the team.
Clear employment and associate agreements
In addition to having the optimum staff team, it is beneficial to also have clear employment agreements with staff and associate agreements with associate dentists. These agreements should provide flexibility in termination as termination costs will be a key factor in valuing the dental practice. In addition, for associate dentists, the associate agreements should include a properly worded non-solicitation clause that prevents the associate dentist from soliciting patients of the practice should he or she leave and practice elsewhere. This will also be important for a purchasing dentist who will not wish to risk having a departing associate poach a patient base that has been paid for.
Up-to-Date leasehold improvements and equipment
In a competitive dental market, an up-to-date, warm and inviting clinic space with current equipment, is a positive value driver. If a purchasing dentist is of the view that additional investment will be required for leasehold improvements, decorating and dental equipment, this will affect the purchase price he or she is willing to pay. Therefore, a dentist who is planning on a sale in the future, should periodically revisit the question of leasehold improvements, decorating items and dental equipment to ensure this will be a positive factor in the valuation assessment.
Having the optimum corporate structure in place
The ideal opportunity for the dentist selling a dental practice is to sell shares of a dentistry professional corporation. Provided certain conditions are in place, the selling dentist could use the Lifetime Capital Gains Exemption and secure as much as $866,912 (as of 2019) in tax free proceeds. However, if the dentist holds a portfolio of investments in the professional corporation, that would represent an obstacle. And, the dentist may be reluctant to liquidate the investments and distribute the proceeds out of the corporation prior to a sale. This move would create adverse tax consequences. So, planning ought to be initiated several years prior to a potential sale, involving a knowledgeable tax professional. As well, there may be an opportunity to have more than one capital gains exemption available to other family members. However, again, the dentist should consult a knowledgeable tax professional many years prior to any intended sale of a practice.
We know that life is fragile. Addressing the planning steps early will be advantageous to a surviving spouse required to sell a practice following an untimely death. The advantages of early planning will accrue for increased valuation as well as being able to maximize tax efficiencies on a sale.
If you wish to explore succession planning issues further, feel free to reach out to one of the members of the Professionals Practice Group. The summary provided in this blog is superficial and should not be relied upon in any planning that is undertaken by a dentist professional, nor should it be construed as legal advice.