September 1, 2022
by TMFD Financial
It seems that every industry eventually goes through a period of very rapid change, and this is especially true for dentistry in the last couple of years. Dental practitioners have had to face the challenges of a global pandemic and the subsequent regulatory modifications, staff shortages, decisions about whether to remain an owner-operator or sell to corporate dentistry, technological advances, taxation improvements when selling a dental practice to children, plus a government initiative that intends to introduce a national dental care program.
Impact of Covid-19
At the onset of Covid-19, dental offices in Ontario faced a dramatic (and arguably traumatic) closure for three long months. During that time, governments and regulators pivoted to develop a framework for safely delivering dentistry to both patients and staff. The introduction of fallow time reduced patient flow and impaired revenue potential. So, it was welcome news when RCDSO eliminated fallow time requirements in August 2022. RCDSO also updated their IPAC guidelines for managing infection risk during in-person dental care; for example, ASTM Level 1 procedure masks are required for cleaning and admin duties, and ASTM Level 2 or 3 or N95, as guided by the type of procedure. These changes should lead to improved patient flow and increased revenue.
The impact of Covid-19 has been far-reaching. The more stringent infection protocols and increased infection risk resulted in a moderate exodus of qualified staff from the dental industry. There are countless stories about how difficult it is to find and retain support staff, including hygienists, assistants, and front desk receptionists. The government support programs, such as CERB, provided a financial cushion and may have encouraged some staff to remain on benefits, which further reduced the pool of available workers. The result has been increased wages across the board, not only to encourage staff to return to work but to retain existing staff. It should be noted that enticing staff to join a new office could be viewed as an inducement; under employment law, the new employee would be credited with the years of service from the prior employer and could be entitled to a larger award upon termination. This raises the importance of implementing employment contracts with all staff members so that inducement and many other aspects of the terms of employment can be addressed.
Prevalence of Corporate Dentistry
The majority of dental practices in Canada continue to be owner-operated, but the pace of sales to corporate entities is quickly increasing. Many well-established dental practices across the country have received multiple invitations from various corporate buyers to join their ranks. The merits of corporate dentistry include getting relief from some management duties, operational efficiencies, belonging to a larger community, and financial rewards from corporate share ownership.
The structure of these deals is different from a private dentist-to-dentist transaction. Typically, the vendor receives 75%-80% cash proceeds upon closing, with the remaining 20%-25% shares of the corporate conglomerate; this ensures the vendor maintains a vested interest in the future profitability of the practice. The vendor is committed to achieving financial thresholds over the first five years, otherwise, penalties may apply. There is a perception that corporate buyers offer a substantial premium to private transactions, but it would be fair to say the 75%-80% cash component is equivalent to the value of private transactions, and the remaining 20%-25% offers potential upside after the five-year holding period. Dentists at the tail-end of their careers have been the most common participants, but the appeal has been growing for mid-career and younger dentists who do not want the responsibility of managing a practice. Either way, the trend towards corporate dentistry is here to stay, so the choice to join a larger network or remain independent would be a career-defining decision and warrants thorough consideration.
Another area of rapid change is new and expensive equipment related to technological advances and determining what makes sense in each specific practice. The decision whether to invest in new equipment should include a review of the financial aspects in this area. For example, while digital radiography and digital impressions are rapidly becoming customary, expensive equipment like in-house milling machines are also becoming more common in progressive offices. In a competitive marketplace, dentists want to showcase their “cutting edge” equipment but should assess the cost-benefit before deciding if these purchases are advisable. Oftentimes, the supplier or accountant can perform an analysis to determine if it is wise to purchase an in-house milling machine or send it out to the lab (e.g. depending on many factors such as the number of units produced).
Sale of Dental Practice from Parent to Child
Last year, the federal government introduced Bill C-208 which equalizes the tax treatment between a third-party sale and a sale to children of a family business. This comes as welcome news to dentists who wish to sell their dental practice to a child who also practices dentistry. Previously, gains from intergenerational transfers were taxed as dividends instead of capital gains. Under the new rules, parents may utilize the Lifetime Capital Gains Exemption (LCGE), which could result in much lower taxes. These changes offer a variety of new planning opportunities for the transfer of the family business.
Dental Care for Canadians
In Budget 2022, the federal government announced plans to improve access to dental health care. The budget proposes to provide funding of $5.3 billion over five years, starting in 2022-23, and $1.7 billion ongoing, to Health Canada to provide dental care for Canadians. This will start with under 12-year-olds in 2022, and then expand to under 18-years-olds, seniors, and persons living with a disability in 2023, with full implementation by 2025. The program would be restricted to families with an income of less than $90,000 annually, with no co-pays for those under $70,000 annually in income.
In August, the Canadian Press reported sources close to the government said they are planning a temporary solution that involves giving money directly to patients in order to keep their promise to implement the program this year until they work on a permanent answer.
This program could result in a significant change to the dental business model. There are many unanswered questions about how the fully implemented program will work, such as whether it will be administered federally or provincially. There are further questions about its impact on profitability and the long-term valuation of dental practices. Anecdotally, the uncertainty around these pending changes may have prompted some dentists to sell their practices now, preferring to associate or simply retire.
Let TMFD Financial Help You Navigate Through These Changing Times
While change is inevitable, it can be disruptive, and it requires active leadership to navigate through an evolving business landscape. It’s important to seek a support network to help navigate through periods of change. Membership in professional organizations, such as ODA/CDA and the local study clubs, are excellent forums to share the latest developments and ideas with fellow colleagues. But it’s equally important to maintain a network of professional relationships that understand both the dental industry and your unique circumstances.
At TMFD Financial, we specialize in the business of dentistry – which means our group of professionals understand your industry, and how these changes will affect your business.
Let us help you look at the “big picture” to ensure that the most suitable choices and strategies are chosen for you, your practice, and your family.
*TMFD Financial offers accounting, financial planning, and consulting services for dentists through one convenient point of contact. Their integrated team of proficient financial professionals work together to synchronize all the moving parts of a dentist’s personal and professional finances. All tax and accounting services are provided by TMFD Professional Corporation, Chartered Professional Accountants.