Looking to Sell? Need a Contrast?
Put Down the Drill and Stash the Cash?
Dash Down South ’n Make a Splash,
Mash it Up and Have a Blast
Doing Dental Outreach with Lee and Carabash?!
Well, To Get There: You’ll Need a Plan.
First Thing’s First: Your Corporation
And Financial Information
We’ll Need to Scan it to See if You Can
Avoid Paying More to the Big ‘Ole Tax-Man.
Then Onto Your Lease – A Crucial Piece.
A Bad Term Can Decrease or Even Cease
Your Deal, So Be Prepared to Grease
Your Landlord. And to Get Some Peace
O’ Mind, Get a Personal Release!
Then Onto Team Contracts – A Lot
Of Which Are Not, Despite What You Thought,
Any Good. ‘Cause Some Judges Shot
‘Em Down. But Don’t be Distraught:
We’ll Fix It So They Don’t Ruin Your Plot.
“And What About Associating?”, You Say.
Well, to Help Keep the Practice from Going Astray
To Help Keep the Buyer’s Lawyers at Bay,
After the Sale, You Should Plan to Stay
For A Minimum of 2 Years, Plus a Day.
Finally, Let’s Chat Price and Fee
For Price, Your Practice Metrics are Key:
Procedures, Patients, Profitability
Let Us Foresee (Though We Can’t Guarantee)
What Your Practice Could Sell For in 2023.
And For Costs, Include The Legal Fees.
So There’s Your Plan, Now Get The Right Team
Of Lawyers to Prep, Market and Streamline
Your Sale. Your A-Team Should Scream
Experience and Move at Full Steam
To Help Make Your Dream a Reality.
Ontario dentists are heading to the exits (i.e., selling their practices) now more than ever. Can you blame them? COVID-19 is still around, interest rates have risen (to combat rampant inflation), staff shortages and wages have increased, court cases have ruined existing employment contracts, and difficult landlords and leases aren’t helping.
This has caused practice values to slip away from the record highs that sellers have experienced over the past few decades (especially during a prolonged and historically low-interest rate environment). But great practices will still sell for great prices and terms for the selling dentist. And that’s because the selling dentist is proactive in ensuring everything lines up – often years before selling – for a seamless transition.
If you’re considering selling in 2023 (or beyond) and want a great sale and transition, here are 10 tips you should know.
Tip 1: Manage Your Expectations
Your practice likely isn’t worth in 2023 what it was in early 2022 or pre-COVID-19. That’s because of macro factors (i.e., high-interest rates, inflation, staff shortages, staff wages, etc.). Business and real estate values have all started to come down. Don’t take it personally. As Michael Carabash tells his kids (Michael – aged 10, and Daniel – aged 7): “You get what you get, and you don’t get upset!” Besides, you may have no choice but to sell (e.g., retirement, health reasons, wanting to do something else, relocating, etc.).
Tip 2: Control What You Can
Ensure your corporation is “clean” (more on that below), employees are or will be on proper/up-to-date contracts, and you have an excellent long-term lease. Also, be prepared to associate for up to 2 years. Finally, focus on improving your practice’s key metrics – hygiene program, active patients, new patient count, collections, referrals, bottom line cash flow – that are attractive to a buyer. These things are generally well within your control. And if you try to time a sale, have our list and market your practice in March or October. We’ve found these to be the best times – we call them “March Madness” and “Octoberfest.” It must have something to do with the changing seasons?
Tip 3: Check Your Balance Sheet
Does your professional corporation (“PC”) have too much cash, loans receivable (e.g., money owed to your professional corporation from related corporations), investments, or real estate sitting in the asset section of its balance sheet? That’s problematic if you want to sell your PC’s shares (i.e., ownership). You can’t leave these “bad” assets in there (because a buyer is just paying for the dental practice assets, right?).
Leaving these “bad” assets in your PC could also disqualify you from saving big bucks by using your lifetime capital gains exemption (“LCGE”). If you meet all the LCGE tests, each shareholder can claim up to $971k in the capital gain exemption in 2023 (that translates into saving around $260k in capital gains taxes)!
One LCGE test requires that, for the 24 months leading up to the sale, no more than 50% of the fair market value of your professional corporation’s total assets can be “bad” assets. So if your practice assets (i.e. “good” assets – like charts, supplies, equipment, leaseholds, etc.) are worth $ 1 million for the 24 months leading up to a sale, then your PC cannot ALSO have another $ 1 million of “bad” assets at any point during that time. You’ll need to purify (“clean”) your PC. Best to speak with professionals (i.e., lawyers and accountants) a few years before selling so you’re not surprised by a big tax bill at the last minute.
Tip 4: Check Your Minute Book
Another LCGE test requires you to own the suitable types of shares (i.e., common shares) for at least 24 months before a sale. If you aren’t sure, check your corporation’s minute book (the extensive compendium of documents that includes the Articles of Incorporation and the share certificates that you may end up selling). Only “common” shares or equivalent that appreciate with the PC’s “good” assets will qualify for the LCGE; “special” or “preferred” shares that can be redeemed (i.e., repurchased by the PC) for a nominal amount – like $1.00 per share – do NOT participate in the sale (they just get repurchased).
There is a caveat to the general 24-month rule: if a selling dentist transfers all or substantially all of their “good” dental practice assets to their PC and takes back shares (worth the same as their practice assets), then that dentist can then turn around and sell those shares and still qualify for the LCGE.
Finally, if you’re trying to multiply the LCGE among non-dentist family members – e.g., have a spouse, parent, or adult child own non-voting common shares in your PC – then you should plan and make sure they own those shares for at least 24 months leading up to the sale.
There’s no guarantee that the Feds won’t make it harder to multiply the capital gains exemption (like they tried before). But for now, you should try to avoid paying extra taxes (which is perfectly legal).
Tip 5: Check Your Team Contracts
Do your team contracts include a “Termination for Cause” clause? That clause allows an employer dentist to terminate an employee immediately and without paying them anything if the employee has done something terrible.
If your contracts do have such a clause, then depending on when the agreement was prepared and introduced, there’s a good chance that ALL of your termination clauses are offside. That’s because a slew of Ontario court cases (starting with the 2020 Waksdale v. Swegon North America case) invalidated ALL termination clauses if an employment agreement included a faulty “Termination for Cause” clause (which many of them do).
That’s terrible news for selling dentists: buyers and their lawyers will make a big fuss about deficient team contracts and then ask for significant purchase price discounts and/or require the selling dentist to share in employee termination costs after the sale (should the buyer end up terminating anyone). The good news is that you can amend existing contracts or introduce new and proper ones before selling to preclude any negative impact on the sale.
Also, get your associates to sign reasonable and properly worded non-solicitation agreements so they’re not stealing patients or staff. Buyers and their advisors will insist on these. FYI: non-competes agreements (i.e., asking associates not to set up shop within a specific geographic distance and time) are generally not legally enforceable in Ontario for purely associate dentists (unless the associate sold and is associating afterwards at the practice).
Tip 6: Check Your Lease
If you’re renting, you’ll need the landlord’s consent to transfer the lease to the buyer. Nowadays, buyers typically need 12 years to amortize their loan (which means they’ll need at least 12 years left on the lease too).
If there’s a demolition clause – which allows the landlord to terminate the lease prematurely if the landlord wants to redevelop your space to build a condo, etc. – then the buyer will either insist on a significant price concession or walk away entirely.
How do you get the landlord to cooperate so you can sell? First, get your dental lawyer to talk to them about their plans. If there is a demo clause or they try to put one in, request that they remove or at least push it back by 12 years. If they need incentivizing, offer them a financial inducement from the sale proceeds (to be negotiated on a case-by-case basis). I suggest offering to get the incoming dentist tenant to sign a new lease (which landlords often welcome because it comes with their current lease language and higher rental rates). If they’re still not helping, request an early termination right in the event of a practice sale so you can move your practice to a neighbouring practice purchaser.
And if you are personally guaranteeing the lease, for peace of mind, get released after the sale.
Tip 7: Associating After the Sale
If they can, a selling dentist should associate for at least two years after the sale.
The reason is that if there’s a problem with the sale, the buyer can typically complain in Ontario for up to 2 years after the sale. But if the seller is still associating – even at a reduced schedule with lots of time off – the chances of the buyer going after them are rare (why would the buyer jeopardize their transition and goodwill by suing the seller’s dentist if they’re still working there?).
If you’re looking to sell and walk away, be prepared (unless you have a purely associate-driven practice) to accept a lower price and terms because of the increased risk you’re placing on the buyer.
Tip 8: Don’t Do Expensive Marketing
If your marketing has been lacklustre or absent until now, I don’t think it will help your forthcoming sale. Most dentists don’t know how to market to attract new patients or boost production, so it’s a wasted expense.
Anecdotally we tell dentists it takes six marketing campaign “touches” before someone will become your patient. That takes a lot of time, effort, and money. And while spending vast amounts on marketing is guaranteed to lower your practice’s profits (a key purchase price metric), there’s no guarantee it will proportionately increase production anytime soon.
Instead, leading up to the sale, focus on inexpensive word-of-mouth marketing, equip another operatory, or increase your skill set to offer new treatments to your existing patients. Those are generally better investments than external marketing at the last minute.
Tip 9: Have a Great Legal Team
It would be best if someone guides you through the tips and traps of preparing, marketing, and selling. You’ll likely only sell once in your career; this is their day job, and you’ll benefit from their experience. Are they inexpensive? No. But you get what you pay for. Find a team of dental lawyers who will do almost everything in-house (i.e., clean your PC, review, and fix your lease, introduce employment agreements, market, do the legal paperwork, etc.), all for a fixed fee, most of which is paid from the sale proceeds.
Tip 10: Do Dental Outreach!
When you’ve gone through the selling journey, consider giving back to those less fortunate! Join us on one of our many annual Caribbean dental outreach programs (e.g., Grenada, Turks & Caicos, Jamaica, or Sint Maarten). You’ll make new friends and discover a passion for giving back. We stay at a Sandals / Beaches resort for free and work five of the ten days we’re there. If you’re like us and our other selling dentists, you might even get addicted.
About the Authors
Michael Carabash, BA, LLB, JD, MBA, CDPM is a founding partner of DMC LLP, Canada’s largest dental-only law firm that helps dentists sell and buy practices in Ontario. Michael leads DMC’s annual Caribbean dental outreach programs. Michael can be reached at michael@dentistlawyers.ca or 647.680.9530.
Jin Lee, BA, LLB, is a dental lawyer with DMC and helps dentists sell and buy practices. In 2022, he also assisted Dr. Bhoomika Piplani in DMC’s Grenada Dental Outreach Program and had a blast / learned a lot. Jin can be reached at jin@dentistlawyers.ca or 416.443.9280, ext. 207.
