October 22, 2020
by Chris Molloy, B.A.Sc., CFP
This is undoubtedly a weird time to be finishing your final years of dental school. Uncertainty is everywhere around you.
While your primary focus upon graduation should be finding an associate role to help you develop your skills, we think all young dentists should keep practice ownership in the back of their minds. Approaching dentistry with this ownership mindset will not only help you develop business and management skills, it will make you a better dentist.
Despite all the uncertainty in the world around us, we have noticed that dentists who are fortunate enough to own their own practice have been able to control their own destiny. While some dentists have been unable to adapt their practices to the post-COVID working environment, others were proactive and even grew their practice by being open for emergency dentistry when other offices were closed. So while it may seem premature, we recommend being proactive; start taking steps now on your journey to practice ownership. The first step? Have a general sense of what to look for when buying a practice.
There is immense pressure to make sure the purchase is the ‘right fit’. In many ways, finding the right practice is like finding the right home. You would never buy based on the price alone, nor would you forego a home inspection. You would carefully consider all aspects such as location, condition, local amenities, and costs. The same diligence should be exercised when buying a dental practice.
There are two major aspects to consider when purchasing a dental practice. First, there are the financial numbers. Most buyers hope to generate enough earnings (after expenses and taxes) to repay the practice loan, while at the same time, make a decent living. However, the second aspect focuses on the soft issues, and can be just as important as the financial statements, if not more so.
The soft issues cover everything in the dental office not addressed in the financial statements or projections, such as location, number of treatment rooms, or treatment philosophy of the practice. Any of these factors could dramatically affect the buyer’s success after the purchase.
A trusted advisor will guide you through an extensive list of additional factors to consider ensuring your decision is the best possible, for example:
One of the most critical factors in assessing a practice is the premises lease. Consider the amount of time remaining on the lease, a demolition clause, and an exclusivity clause. It’s crucial to assess the time remaining, as banks prefer not to lend for a period beyond the end of the lease. Ideally, it’s best to see at least 10 years remaining on a lease to match or exceed the timeframe on a practice loan.
A demolition clause can be buried in a lease and can have a devastating impact on your business because it allows the landlord to relocate your practice or terminate your lease. An exclusivity clause states whether another dentist can open up shop in the same plaza or commercial centre. The lease is a complex document, and it needs to be reviewed by an expert to guarantee full protection.
Another important issue to review is the presence of staff contracts. The absence of staff contracts creates enormous risk for a number of reasons, most notably, potential termination pay for long-standing employees. The risk is much lower if the employees have been at the practice a short amount of time. Although it would be ideal for a buyer if the selling dentist were to implement staff contracts before closing, it’s usually not a practical option. You can protect your investment by obtaining wise legal advice to explore other methods of coming to agreement.
Purchasing the right practice can be a daunting endeavour filled with endless concerns, but only if you choose to proceed with a DIY mindset! With a trusted advisory team on your side, your biggest investment can prove to be the best decision you could make. Just like when you buy a house, you can work with a team of professionals to guide you every step of the way. There are pros who specialize in the purchase and sale of dental practices. By reading this article, you are taking a great first step!
About the Author
Chris is Senior VP, Advisory Services at TMFD Financial. He has over 20 years of experience at TMFD Financial working in the Ontario area. Chris specializes in tax, estate and investment planning for dentists and dental specialists. For a complimentary initial consultation with our team, we can be reached at firstname.lastname@example.org or by toll-free at (844) 311-8633.
To read more from the 2020 Student Issue, please click here!
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