The ABC's of buying a practice  
 
Accountants

Find an experienced dental accountant, who has a number of dentists in his portfolio as clients, to assist in assessing the value of the practice.

Your accountant's assistance is an absolute requirement for such areas as:

• tax considerations in purchasing a practice
• assessing the quality of the valuation on the practice
• assessing the leases on both the premises and the equipment
• reviewing the financial statements to ensure that they have been normalized for a purchaser such as yourself
• to assist with advise on how to best finance the practice re leases VS loans; banks VS other financial institutions.
• to review the distribution of the value of the practice
• to ensure that the values assigned to the hard assets are reasonable
• to review the remuneration of staff: re pay, hours, vacation and other benefits
• to review abnormal expenses
• to advise re computers and software
• to assist with the selection of experienced "non deal-breaking" lawyer
• PLUS many other items with will arise in the purchase of a practice

Buyer Beware

Understand that all practices are not worth the value to all purchasers! One should focus in on all the things that make the practice different. The following are some things to look out for:

• ethnicity of the client base (language, customs should be comfortable to you)
• the reputation of the vendor (your lawyer and accountant cannot fully protect you if the vendor is not reputable)
• parking for you, your staff and patients (this can be a turn off)
• natural lighting is nice (certainly better than four walls)
• children and seniors as patients (there is a difference)
• expanding community is often desirable (but not necessarily a necessity)
• ability to expand the facility, to add extra operatories without having to move
• old computer systems may need an upgrade
• does the vendor perform procedures that you do not perform
• deal through an honest, reputable, experienced, licensed broker
• PLUS many other potential problems in which your accountant and lawyer will have experience

Chart review

There is no substitution for an in depth chart review of the practice! The reason you are purchasing the practice is for the billable patient base; equipment is secondary as it can be replaced in less than a month. You want to establish a sound understanding of the patient base with regard to:
- number of RECALL patients (which have been in the practice in the past 12 months and have a pattern of coming to the practice at least annually), SEMI ACTIVE patients (who have been in the practice in the past two years but are not recall), INACTIVE patients (not been in the practice in the past two years)

• proximity of the patients to the practice (local or remote)
• quality of the dentistry being done by the vendor
• rates that the vendor is charging
• percentage of insured patients in the practice
• percentage of welfare patients in the practice
• ethnicity of the client base
• the type of procedures performed in the practice (amalgam VS composite)
• the extent of perio, endo, ortho, and oral surgery compared to your abilities
• what procedures are being sent out which you would like to perform
• the extent of the different age groups
• PLUS any other features unique to that practice

The ABC's of Selling a pratice  

- Asset Sale Part 1-Tax Considerations

It is important to know that the sale of your practice is generally an asset sale, not a sale of shares. The goodwill of the practice cannot be owned by a company if you have one. Many practices have limited companies (often owned by spouses) which own the equipment, the Leasehold Improvements and even the building but the Doctor owns the goodwill related to the patient base.

Your accountant should be brought into the picture early so that he can advise you on the tax implications of selling your practice. The net value of your practice is based on the net after tax position of the sale not the gross value achieved. The value of assets in a sale is generally divided into four categories 1) Equipment, 2) Supplies, 3) Leasehold improvements and 4) Goodwill. The first three categories could attract recapture of Capital Cost Allowance (CCA) which would generally be taxed at your incremental tax rate i.e. 50% for the recaptured portion, not for the Undepreciated Capital Cost (UCC).

The fourth item, goodwill, is taxed at 3/4 of your incremental tax rate. This 25% reduction in tax can be further reduced if your accountant had the ability to crystallize your capital gain back in 1994 in which case there would be no tax on the amount crystallized up to $100,000. Due to the lower tax rate the vendor likes goodwill but the purchaser would much rather place the value on hard assets as they can be written off at much higher CCA rates. Goodwill is the plague to the purchaser as 75% of it is written off at a CCA rate of 7% but 25% is never written off. Selling your practice with a reasonable allocation to all assets is important to the purchaser and the vendor.

Asset Sale Part 2 - Valuation

If your practice has a reasonable value, over $150,000, most banks and financial institutions want some assurance that a qualified appraiser has valued the practice as a basis of lending funds to the purchaser (generally speaking 100% financing) to enable the purchaser to buy your practice. Generally the Vendor does not want to be "a bank" and lend the funds to the purchaser, because funds are available to qualified purchasers.

Our comprehensive valuation is also the focus of the value, some even consider our valuation to be a self fulfilling prophecy. Our objective is to find a Fair Market Value for both The Seller and The Buyer. If the price for the practice is too low - it will sell and probably too quickly. If over priced it probably will not sell at all.

A comprehensive valuation should include a detailed list of assets in the practice, as it is these assets that are sold, also included is documentation on how the practice is run. The value is presented in four values 1) Equipment - supported by a list in detail with age and individual values. 2) Residual value of Leasehold Improvements. 3) Supplies - a general assigned value for supplies which will change on a daily basis but within non-material limits. 4) Goodwill - the intangible value assigned which generally relates to the client base, location and future potential of the practice.

If the value of the practice is under $150,000 a simpler and less expensive Letter of Opinion may suffice. With the smaller loan at risk, the financial institutions require less documentation to support the loan. We would not recommend a comprehensive valuation if we thought a Letter of Opinion would suffice in order to sell and obtain financing for a practice.

Asset Sale Part 3 - Valuation - Equipment

Equipment should be valued as part of an ongoing practice and not as equipment for sale which is sitting on a warehouse floor or at an auction. The equipment should be listed in detail with such detail as serial numbers and the date when it was first put into service where possible.

The Undepreciated Capital Cost (UCC) of equipment is the value which most financial statements will show as the book value of equipment but Capital Cost Allowance (CCA) uses 20% declining value to allocate the cost of the consumption of the equipment over the useful life of the asset. This calculation writes off approximately 80% of the value of the asset in about 7 years, yet the equipment will often times have a useful life of 20 years. As a result the book value of the asset is generally understated compared to its true value.

Exceptions to the above would be assets which do not have a twenty year life expectancy such as computers which have a life expectancy of approximately 5 years. Computers have also been dropping in cost and to reflect this CCA is 30% declining balance.

The expectation of value for assets should relate to condition, age, technological obsolescence, universality of use by most Dentists . Turnkey practices have reasonable equipment which should be expected to be available in most practices. Excessive value of equipment may limit the availability of goodwill especially if the billings relating to the equipment are limited. Seldom is it beneficial to replace older equipment just prior to selling your practice. The best you can expect is to recoup your cost and even that may be optimistic. Our advice would be to review your practice's equipment 5 to 8 years prior to when you expect to sell your practice and to do any replacing at that time.

The tax implications on the sale value of equipment is: The value allocated in excess of book value is called recapture and is taxed at full tax rate. For the Purchaser there is an 8% PST on equipment which is not attached to the premises. Even with this 8% penalty purchasers prefer value being assigned to equipment rather than goodwill, as goodwill is written off at 7% declining balance.  It takes 23 years to write off 80% and only 2/3 of the value can be written off with this potentially decreasing to 50% if current direction of taxation continues.

Asset Sale Part 4 - Valuation - Leasehold Improvements

Leasehold Improvements (L/I) are expensive and restrict many dentists from moving the location of their practices. Sometimes L/I are changed entirely but most of the time there are Band-Aid changes made as the component parts wear out.

Typically most practices will spend about $65 per square foot for original installation of L/I and there is a base of $25 which they do not go below if the facility would be acceptable to the purchaser without changes. This accounts for the wires and plumbing in the walls. With reasonable repair and maintenance and repair both mechanical and cosmetic the L/I typically tend to stabilize in value as the consumption and replacement are similar.

What can go wrong ---

1) The landlord no longer wished to renew the lease. The L/I value disappears at the end of the current lease and options. Security of possession is important to the purchaser thus to the value of the L/I.

2) Community changes ethnically. As cities grow pockets within the city change and the patients which were comfortable seeing the current dentist move away and the new neighbors are looking for a different ethnic practitioner. This causes practices to have lower billings and thus reduces the value of the practice.

3) Design of offices changes over time. The current concept of having the reception project into the patient waiting room is positive in valuing a practice. The sliding window is not a contemporary design.

4) Fire/water damage. This should be covered by cost replacement insurance which should be reviewed every couple of years.

Asset Sale Part 5 - Valuation - Supplies

Supplies are a combination of actual supplies which are for sale and for use within the practice but also is a catch all for hard assets outside of the standard Equipment and Leasehold Improvement category. This would include small hand instruments not listed under equipment. The level of supplies changes on a daily but the essence is that the overall value does not change materially and the value assigned is to represent the value of the "Supplies". The variance in value of supplies in a dental practice is not material in the overall value of the practice.

For TAX PURPOSES supplies are taxed on the difference between the book value of supplies if any and the sale price allocated to supplies. The sale price would be taxed at full tax rate, up or down, as it would be an adjustment in your cost of supplies during the year.

RISK- Supplies is of limited risk in a purchase and much more straightforward than the other allocations of value.

Asset Sale Part 6 - Valuation - Goodwill

This 6th part of the Asset Valuation is the most important - GOODWILL. The value that relates to the clients of the practice as well as intangibles such as location, billings per patient, new patient count and many other intangibles within the practice. The other assets of the practice are easy to asses value. The trick is to understand the value of goodwill. Practices that have too high a value in hard assets, may not have enough value to achieve what the goodwill is worth. There is a limit to the total value of the practice, based on its ability to create excess income. Therefore, in gross measure, Goodwill relates to the balance between Assets, Excess Income and Patient base.

For the Vendor it is now taxed at half of the normal incremental rate of taxation and as such is desirable to have it as high as possible. But there is a counter balancing side. The purchaser can only write off 50% of the value and can only write it off at a rate of 7% declining balance basis. In other words the purchaser wants lots of goodwill but does not want to pay for it. This makes assigning value for goodwill very difficult but achievable.

Broker - a friend in deed

The Broker generally represents the vendor in a sale of a practice. As such the purchaser may see the Broker as acting for the Vendor against the purchaser but I see the Broker's role as a "marriage councilor" who brings two parties together for their mutual benefit. The Broker guides the two parties through a maze of pitfalls to ensure that each party is successful in achieving reasonable goals. Matching the two parties so that the vendor feels comfortable with the purchaser and the purchaser can continue the care of the patients that the vendor had nourished through the years.

Often the Broker presents innovative concepts for the sale to occur. Tax planning strategies, timing of the sale, preparation of the sale contract, associate agreements, consulting agreements and imaginative transition procedures are but a few of the benefits of using a Broker.

If the vendor does not wish to use a Broker to sell the practice, the purchaser may well ask for a discount because the vendor did not have to pay a Broker. When this happens the vendor does all the work of the Broker i.e. showing the practice, negotiations with lawyers and accountants as well as direct interfacing the purchaser without the use of an intermediary (the Broker). If the Broker does not sell the practice there is no fee! He is paid for success!

Charts - Patient retention - the key to practice value

You cannot have too many patients or too much profit! The patients are the life line to the billings of the practice which is where the business begins. It is important to have new patient flow as well as a sound patient retention emphasis. Purchasers will be very concerned that the patients are truly in the practice and active. The actual count of the patients will be examined in detail by the purchaser. A practice billing $600,000 with 3,000 patients is very different than a practice billing $600,000 with 1,500 patients. Understanding the difference is important.

It is not important to clear out old inactive patient files. It would be reasonable to keep them current to save space and time but the actual number of active files is the reality. The practice would be enhanced to have a computer to control their records if there were over about 1,200 active patients.

Having a team approach toward patient satisfaction and retention is certainly important because perception of care is as important as the actual care that is given. A strong team is a definite asset that is part of the goodwill of the practice and is reflected in the active patient count which is part of the goodwill component of the value.

Charts - Patient education

The patients, who know their needs, make the best patients.  The team approach to educating patients is the responsibility of the owner.  To think that the staff can or would educate the patients without the direct support and commitment of the owner is being over optimistic.  Without continual involvement of the owner, most systems will degenerate.  I cannot over state the value of continuing education of the professional staff in order to support the team effort in educating the patients.

                Let the patient know that they are important to you and that you care about their dental health.

Take the time to ensure that the patient perceives that your practice cares about their dental health.  There are only a limited number of things the practice can do if there is no commitment by the patient to keep up their dental health.

Committed patients come back time and time again to make a strong practice.  Remember dental services are only as good as they are perceived to be by the patient.  It is important that the team is in place to ensure that the patient is aware of the superior team of caregivers you have assembled around you to support your dental philosophy.  Repeat patients are what a purchaser is looking for in a practice.

Charts – New Patients

New patients are the sustaining force that allows the practice to move forward.  Practices, which have only a limited new patients count (10 per  month), will not be as attractive to the purchaser as one with a high new patient count (60 to 100 per month).  The purchaser generally thinks of purchasing a practice and taking it to the next level or higher.  If they figure that the new patients are not available to the practice, it would be detrimental to the value of the practice.

New patients are attracted to a practice because:

·          Location, location, location with free parking and visible to drive by potential clients.

·          Friendly caring staff and professional team – never under estimate the value that each member of the team can bring to the value of the practice.

·          Hours of service is important to today’s busy work force which cannot always come in during daytime hours.

·          Recommendation from other patients - let your current patients know that you appreciate referrals to your practice.  Newsletters, an Open House and other social events are great practice builders.

·          Lower treatment rates – I am not a fan of this technique.  I would rather attract patients which appreciate the quality of the service to win their heart rather than their pocket book.  I would view my services as affordable and fair for the services I provide.

Should I incorporate my Dental practice? 

As of November 2002 dentists can now incorporate.

The basics for the creation of a dental professional corporation are: 

1) That the dentist must be the only shareholder, officer and director of the corporation.

2) The professional corporation will give you limited liability protection from trade creditors but not your patients.

3) You will require a Certificate of Authorization from the R.C.D.S.O.

The true advantage of incorporating your professional practice is the reduced tax rate for any income you can afford to leave in the corporation.  The concept of incorporating to sell your practice shares, in the short run, is not expected to be a benefit as the share sale will not have as much value as selling the assets including goodwill.  The reduced value of the share sale is due to the fact that the purchaser cannot write-off the value of the shares as they can the assets in an asset sale.

Tax deferral, in the long run, is extremely advantageous, as the maximum rate, as an individual, is about 46% where as, the money you can leave in the professional corporation is taxed at about 23%.  This tax reduction is a tax deferral as it can be invested by the corporation and only be fully taxed when withdrawn for personal use.  Also, capital gains in the corporation, after incorporation, would fall under the $500,000 tax exemption, which is still applicable.

  [MAIN] [WHO WE ARE] [OUR SERVICES] [BUYING A PRACTICE] [VIP PROGRAM] [CURRENT LISTINGS] [CONTACT US]