There is a truism in the process of purchasing and selling of dental practices that those things that disadvantage the seller will benefit the buyer, and vice versa.
Let’s examine some of these factors that are ‘two-edged swords’ to see which are the factors that create a win-win for both parties and which situations produce a winner and a loser.
Timing and Planning
It has been said that in business, indeed in life, timing is everything. Certainly, whether you are buying or selling a dental practice, you need to allow enough time to think through and plan in order to set appropriate goals and achieve them.
For the seller, this process should include several activities including: getting professional advice on retirement financial planning; arranging for a professional practice appraisal to establish the present value of the practice; and equally importantly, deciding on the type of transition out of practice that will best meet their needs. The refrain that I hear the most often is “I still enjoy my profession but I want to slow down and I’m getting tired of the management part of dental practice”.
For the buyer, there are decisions about where he/she wants to put down roots, and whether to buy an existing practice or start a new practice. Most consultants agree that the key element in the decision as to whether to buy a practice or start a new one is the cash flow that comes with an existing practice versus the time required to create cash flow in a start-up situation. The purchase of a good practice at a fair price is almost always the best option. However presently in many parts of Canada that is easier said than done.
That is because market timing is also a factor that differs for buyers and sellers. Since the mid-nineties, we’ve had a seller’s market in most urban areas of Canada. What this means is that there are more dentists seeking to buy practices in Canadian cities than there are sellers. This, of course, benefits vendors with higher prices for their assets. It also means that working as an associate or setting up a new practice may be the only option for the newer practitioner even though it will probably result in higher overhead percentages for the sometimes prolonged time period that is required to attain the cash flow necessary to cover overhead and provide for adequate income to the dentist. There is an old real estate adage that says the three most important factors for determining the value of any property are location, location and location. A dental practice is a property and therefore location is a very key determinant of value for a dental practice, especially when we recognize that the location of a dental practice interacts with the supply and demand for dentistry in a given area. As stated earlier, an important element in a purchaser’s decision as to whether to buy an existing practice or set up a new practice is how quickly the location of a new office will allow a ramp-up of new patients and the cash flow that results from that patient load. Thus the actual market value of the assets that are identified in the practice valuation will always be influenced by the supply and demand for dental practices in any given location.
There is also a very real dichotomy between the value of a dental practice in most rural areas versus most urban areas. This can be of advantage to the buyer, because the lower demand for rural practices will produce much more bang for the buck.
Lifestyle also enters into determining where people want to live, raise a family and put down roots. Presently the great majority of dental graduates seem to favour cities.
Mix of Services
Buyers can generally gain an advantage in the area of the mix of services because in most well-established practices mature dental practitioners tend to perform the aspects of dentistry that they like, and refer out the rest. For the younger buyer, this means that treatments such as endodontics, periodontics and surgery can be bought at a discount, because evaluations are based on actual cash flow. Potential cash flow can be factored into the valuation but at a lesser value.
Taxes
It seems to be impossible to talk about most business topics without the issue of taxes cropping up. The subject of how to get the greatest tax efficiencies in a buy/sell situation is very complex, and experts in this field should be consulted. However, there is one area of obvious advantage between the purchaser and vendor, and that is the sale of shares versus assets.
Briefly, if dental practice assets such as equipment and leaseholds are sold, the chances are high that the seller will have to pay taxes on the recapture of the previous depreciation taken on those assets at the highest marginal rate. Conversely, the buyer gets the opportunity to write off the depreciation of those purchased assets against their dental income.
Conversely, when the practice to be sold is incorporated and the shares of that corporation are then sold rather than the assets, then the selling dentist has a capital gain that, as a small business owner, they are allowed to shelter completely from taxes, up to a limit of $750,000. But in this case, the buyer loses out as they won’t have the opportunity for depreciation against other income.
Options
Both buyers and sellers should be aware of the availability of options other than outright purchase and sale of a practice.
What is the difference between the two? In a sale the vendor leaves immediately while a transition creates a situation where there is an opportunity for both parties to benefit from practicing together for a certain period. Both scenarios can work well although I profess a bias towards the true transition because most dentists who want to sell their practices seem to express the desire to continue practicing if they can also have the ability to ‘stop and smell the roses’ while doing so.
For many dentists contemplating retirement the economic downturn has had a very negative effect on their plans due to the investment losses that they have suffered. In this situation the idea that an outright practice sale is the only alternative to carrying on with what may be a physically or mentally stressful practice situation can leave the dentist feeling trapped.
Thankfully, there are excellent, tried and true, methods for accomplishing the sellers’ wishes and also benefiting the purchaser.
Let’s look at two scenarios
The first situation would apply to the seller who: wants or needs to practice for another three to six years; take more time off; maybe cut back to working three days per week; and wants to share the administrative burden of managing a practice.
In this approach, it is suggested that a portion (usually fifty percent) of the practice be sold. This is done in a pre-planned, highly structured manner where the interests of both parties are respected and protected.
For the right buyer, this represents a wonderful opportunity to get 100% patient retention and cash flow. It is also a great way to acquire mentoring and management skills with a minimal risk of making errors. And both parties get the benefit of lower overheads and therefore higher net incomes.
In the second situation, the practice owner has the same goals as in the previous example, but only wishes to practice another one to three years. In this case, a sale of 100% of the practice is arranged, with the previous owner staying on as an associate dentist, usually for two to four days per week.
Again, for the buyer, there is the benefit of very high patient retention and cash flow. As well, the buyer will also benefit from the very substantial income generated by the former owner practising as an associate.
In both situations the seller continues to do the dentistry that they enjoy doing, take more time off, and all this without the stress of being the sole manager of the business of dentistry. When it is properly arranged and managed, dentists who transit
ion out of their practices in this way say that it is the best part of their careers. For the purchasers who acquire these practices it removes a lot of the anxiety and risk in herent in the major decision to purchase a dental practice.
Where’s the catch? Is it too good to be true? The potential for difficulties in this type of transition can be summarized in one word, relationships, as it all comes down to finding professionals who are compatible and then creating the properly structured legal agreements that eliminate beforehand potential sources of conflict.
When the expression ‘a two-edged sword’ is used it implies that there needs to be a winner and a loser. For some aspects of dental practice transitions this is true. However, for the right people, with the right agreements it is also possible to create win/win strategies for the vendors and purchasers of dental practices.
Dr. Bernie Dolansky is a past president of the Ontario Dental Association and The Canadian Dental Association. He has been involved in all aspects of dental practice transitions for over 10 years. Currently he is a Transition Consultant with Tier Three Brokerage Limited ( www.tierthree.ca).
