Author: marketing

Professional Incorporation: Tips for Negotiating the Purchase and Sale of a Practice

Date Posted: 2007/06/05

This article will address the art of negotiating the purchase and sale of an incorporated practice and provide a few tips for both sides as to how they may view the key issues.

Disclosure

As a licensed business broker, I act as an agent for the seller, never the buyer. However, I have several ethical obligations to the buyer, one of which is full disclosure of all material facts. There are those who advocate “dualagency” whereby the agent claims to work for both buyer and seller equally — but I firmly believe that it’s best to know which “master” I serve when negotiating a transaction. With that said, some of these tips are intended for the benefit of the buyer, to improve his or her odds of success and to negotiate a fair price, in terms of tax efficiency. Accountants normally provide this advice to the buyer, for a fee, and I do not wish to replace their expertise, however, much of the art of buying an incorporated practice is common sense.

Structuring the Deal

Why are the majority of transitions now completed as a share sale? One reason is the excess of buyers versus sellers, especially in the GTA. Thus sellers often have the upper hand when dictating the terms of a sale. Most sellers are insisting on a share sale and they are getting what they want. While price is usually a topic of negotiations, in some cases our clients set their price as firm (not negotiable) and we regularly obtain offers at such prices.

Occasionally the buyer may be able to negotiate a reduction in the price, based upon the argument that if the seller receives the proceeds of a sale tax free, he or she can at least share some of the windfall with the buyer by lowering the price. To what extent the price is lowered is based upon the undepreciated value of the assets within the corporation. Such assets are rolled into the corporation prior to sale (this is called a Section 85 rollover), providing a buyer with some future write-offs and thus minimizing a portion of the after-tax disadvantages of buying a corporation.

Negotiating Points — Seller

Sellers seek to obtain the highest price and to pay the lowest (if any) taxes on sale. The best advice for the seller is to incorporate early, preferably two years prior to sale, or at a minimum, ensure that the majority (90 percent) of the assets you are planning to sell are actually used in day-to-day practice. If your corporation has investments, automobiles, cash or others assets, they will not be sold with the company and must be removed two years prior to sale. Many sellers choose to form a new professional corporation just before the sale to be sure it is not full of old assets and liabilities. Contact your accountant for further explanation.

Negotiating Points — Buyer

The buyer cannot attempt a price adjustment unless he or she knows the exact structure of the corporation. If the seller has rolled undepreciated assets into the corporation, the buyer may have some future tax relief — but be aware that the extent of such relief is dictated by the value of those assets.

• For example, a relatively new and modern practice with over $300,000 of un-depreciated assets on the balance sheet was recently sold. This situation was very favourable for the buyer and no price adjustment was negotiated — it sold for the asking price, as a share sale.

• In another recent sale, the corporation formed by the seller owned nothing but some very old equipment, all of which had already been completely depreciated. The buyer (with the help of his accountant) was able to effectively negotiate a price roughly six percent lower than the asking price for the shares.

There are many variables that may affect price adjustments, and a calculation of the “lost tax-shield” will help determine what — if any — adjustment will be fair. I act for the seller and seek to obtain the highest price on the most favourable tax terms. However, every buyer deserves fair treatment, even in this over-heated market, so we normally promote a negotiated price that is fair to all parties.

Conclusion

I predict that more and more sellers will continue to seek the share sale method, and that buyers, particularly in the GTA, will learn to live with the post-purchase tax scenarios these share sales provide. When the market becomes more balanced again, buyers will likely regain some negotiating power and the after-tax impact of professional incorporation may become more favourable. In the near term however, it remains a sellers’ market and tax issues will remain a major item of negotiation.

Ontario Dentist – June 2007

Incorporation: How Does it Affect the Purchase, Sale, and Value of a Practice?

Date Posted: 2007/05/02

Introduction

Buying or selling a dental practice carries numerous tax implications. For the seller, the most significant is the potential tax savings achieved via professional incorporation. This mechanism can potentially shelter up to $750,000 from income and/or capital gains taxes — an opportunity few would want to miss! For the buyer, this tax shelter is less favourable, as he or she cannot write-off some or all of the purchased assets. This article will review the impact of incorporation on the purchase, sale and fair market value of a dental practice.

The Seller

It is prudent for a seller to legitimately minimize the taxes payable on the sale of a dental practice. Incorporation allows for that to occur, because no taxes are payable on the first $500,000 of share sale proceeds — and this is likely to increase to $750,000 once the recent federal budget becomes law. The costs of incorporating are modest when compared with the substantial tax savings the seller may achieve — typically 15 to 25 percent of the final sale price. For example, if a practice sells for $500,000, an incorporated dentist, by selling shares rather than assets, could save up to $125,000 in income taxes. Thus, today’s seller is highly motivated to offer a practice for sale as a corporation.

The Buyer

It is less favourable for the buyer to buy shares versus assets. Buyers seek to pay a fair price for the practice, while hoping to depreciate the assets over time and thus reduce taxable income. Unfortunately, the purchase of shares works against the buyer as he or she loses the future income tax shield: a buyer cannot write off most of the assets purchased in a share sale, resulting in higher income taxes each year thereafter. However, when buying a corporation there are some benefits to the buyer. He or she does not have to pay PST on the equipment or GST on the leaseholds — a savings of roughly $15,000 to $25,000 in sales taxes for a typical practice sale. As well, most accountants advise that a buyer should form a new corporation when purchasing the seller’s corporation, thus allowing for the debt to be paid in corporate after-tax dollars, versus personal aftertax dollars. In short this means the purchaser services the debt in a much more tax-efficient manner.

Fair Market Value

There are many schools of thought as to which is the best method to appraise a practice. I note the growing number of companies offering appraisals and have examined the various methods employed by each. As an appraiser myself, I am biased to suggest that one method is superior to another. However, the major Canadian banks have confirmed their preferred appraisal method, and it’s unanimous: the direct comparison approach. This means comparing one practice to others that are similar and that have recently sold on the open market. There are hundreds of variables to compare, but the most common include:

• type (preventive, specialty, restorative);
• size (both in terms of equipment inventory and square footage);
• patient volume indicators (gross and net incomes); and most importantly,
• location

When a practice appraiser has access to open market sales data, the direct comparison method usually produces the most accurate value. As well, it is easily understood by the market place at large and buyers can easily connect with the rationale as to why one practice may be more valuable than another when studying the variables used for comparison.

Alternative Appraisal Methods – Incorporation

Another appraisal method is to examine the practice as an investment only, not as a career choice. In this approach, the appraiser applies a formula whereby the owner is treated as a notional associate in order to determine the return on the investment (ROI). The appraiser deducts true operating expenses of the practice (and adjusts for non practice expenses), associate earnings (typically 40 percent of dentist production) and income taxes, from gross income. The result of this equation is known as the excess earnings, or the after-tax profit the practice may generate after the owner had been
paid a reasonable “salary”. These earnings are then divided by a selected capitalization rate to determine the value of the practice.

There are several debatable elements of this method, the most notable being the appraiser’s choice of the income tax rate — should it be personal or corporate? Either tax rate can be used, but the corporate tax rate (being about onehalf of the personal rate) results in substantially higher excess earnings, which then produces a substantially higher value for the practice (good news if you’re an owner).

Personal Versus Corporate?

Which tax rate should the appraiser select and why? The answer, from a highly reputable and experienced accountant, is that the choice of a tax rate is highly subjective and is unreliable for determining fair market value. One accountant pondered: “Just because a dentist can incorporate, does that mean that he should pay more for a practice than one who does not incorporate?” Another said, “This shouldn’t impact the fair market value of the practice, but can make a purchase more feasible for some.” I surveyed other accountants for their opinion on this highly controversial topic. The commonly held belief was that the use of differing tax rates in an appraisal should not be a guide to determine fair market value. And further, a brief survey of a wider circle of dental advisors (bankers, consultants & lawyers) suggested that this emerging trend of valuation is not credible. As a business owner, I would prefer that my business be appraised using this method, but as a realist, I know that my business is only worth what the market will bear.

Conclusion

The marketplace is very intelligent and well-informed. It watches the trends in values and also keeps an eye on the appraisers, myself included. In the present, over-heated market of the GTA, any attempt by appraisers to increase market values further is being closely examined. Those who study the market have already scrutinized our various methods many times, and any changes we make are immediately questioned and challenged. The marketplace says that the direct comparison method remains the only true, time-tested approach to determining the fair market value of a dental practice.

Ontario Dentist – May 2007

Rising Prices in the GTA

Date Posted: 2007/04/13

Why are the values of dental practices in the greater Toronto area (GTA) increasing? My associates and I are asked this question almost every day. Our answer is simple: there are far too many dentists in the GTA. This may be a direct result of the lifestyle choices of the dental graduates of the past 10 years.

If we examine the gender and ethnic profile of last year’s University of Toronto dental graduates, we can easily see why many have chosen to stay in the GTA. Women make up just over 50 percent of the class, and ‘visible’ ethnic dentists (both those born and raised in Canada and those who emigrated here) make up the majority when gender is ignored. Do these dentists want to practise in rural Ontario, or in cities like Sudbury? The answer I get is “Absolutely not!” This is due, in part, to their desire to live closer to families, cultural centres and the many social attractions that larger cities provide. The current profile of dental students suggests that an even larger number of future graduates will remain in the GTA, compared with the past 10 years. This supports my theory that sale prices may continue to increase, and it seems to be the primary reason that rural and remote practice values are declining, in some instances, drastically. What a shame.

When you consider the large number of dentists immigrating to the GTA from all over the world (including the US), you can see why the supply of dentists is growing faster than the local population. Accordingly, the dentist-to-patient ratio is increasing each year. In the 1970s, this ratio was roughly one dentist to every 2,000 people for the GTA. As of 2007, the ratio will hit an all time high of roughly one dentist to 1,000. This is not favourable for dentists, because it is estimated that 30 to 40 percent of all people DO NOT seek regular dental care in any given year. Thus, the actual ratio may be one dentist to 600 to 700 active patients. For the GTA dentist who has not established a patient base this is a significant and unfortunate reality.

However, this is good news for the dentist who owns an active patient base in the GTA, because the demand for these patients (known as “goodwill”) is very strong and it increases the value of each patient chart each year. In 2006, the value of an “active” patient in the GTA reached an all-time high — with prices exceeding $500 per chart. Unfortunately for purchasers, I predict that values may rise even higher. For the owner, this is encouraging as it increases his or her assets and the proceeds of a practice sale.

Another effect of the increasing propensity to stay within the GTA is that patients seeking a new dentist are gaining the upper hand. As the ratio continues to evolve an inevitable result may be the discounting of dental fees, which could dramatically begin to lower the income of many GTA dentists. In fact, discounting of fees is already a common practice in the GTA — some may deny it, but it happens daily and it is an economic fact that it will continue. (While gathering data for our appraisals, many dentists admit that they are charging fees that are lower than the Fee Guide, usually in an effort to attract new patients. Most who do this are situated in the highly competitive markets of the GTA.) One reason that I wrote this particular column is that I was recently “accused” of inflating prices to earn higher commissions. While I can understand the view of this purchaser, it’s a foolish accusation to presume that one appraiser such as myself is capable of the continuous manipulation of sale prices. Banks, accountants, lawyers and many dentists study the entire market on a regular basis. They are familiar with all brokers, the various appraisers and even the private sales — thus they have a complete view of the market place and they are watching. If you are unhappy with the current trend in pricing, look to your advisors for their opinion and talk to your colleagues (who are looking to buy the very same practices as you). It is inaccurate to suggest that the appraisers are responsible for high prices — it is buyers who drive market values.

Like it or not, if you are thinking of purchasing a dental practice in the GTA, you may have to pay higher and higher prices over the next three to five years. My advice is this: move outside the area, at least a one-hour drive by car, and you may find that you are warmly welcomed and busy from day one. Otherwise, be prepared to pay. Supply and demand remains the most powerful force in the economy.

Ontario Dentist – April 2007

Preparing a Practice for Sale

Date Posted: 2007/03/05

Many of our clients ask what steps they should take when preparing a practice for sale. Common wisdom suggests that a little planning can yield big results if the owner of a practice is committed to the succession planning process. Even with one year or less before an anticipated sale, the following steps, if taken, may result in a higher sale price and a smoother transaction.

1. Confirm Your Premise Lease Renewal Option(s)
Most leases contain an option to renew, once the current term expires, but the tenant must confirm the presence of such an option or risk being faced with the following situation:
In this case, the tenant failed to notice that the landlord had intentionally deleted the option to renew clause. The office was in a fabulous location and moving this practice was most definitely not in the dentist’s best interest. The practice was put up for sale, but the dentist had yet to approach the landlord to discuss the matter of the renewal option. When an offer was presented, the buyer insisted that we include a condition that the landlord confirms, in writing, that the lease may be renewed. This was eventually accomplished, but not without delay, additional cost and frustration for all parties involved. It could have easily been prevented had our client carefully reviewed the first lease he signed (five years earlier) — an easy and relatively inexpensive task. In the event the landlord was not as co-operative, this condition may not have been satisfied, resulting in a failed offer. Today’s buyers (or more often, their bankers) demand the right to remain in the existing premises for a minimum of seven or eight years. Banks are reluctant to finance a practice sale if the office has to be moved on short notice. If your lease does not include adequate renewal options, contact your landlord and request written confirmation of same. You may want to consult with your appraiser or lawyer before doing so.

2. Prepare Your Financial Records
Most practices use computer software that tracks monthly production statistics. However, we notice that some of our clients are unfamiliar with their software and do not always have adequate reporting functions for income, hours worked and the various procedures performed or patients referred. Buyers wish to understand the unique nature of a practice, and may often ask to see the procedure analysis to determine if their skill set is compatible with that of the owner. If you do not have computerized records (yes, about 20 to 30 percent of dental offices are still using one-write systems) I suggest you retain the day sheets for at least six months, to demonstrate your appointment protocols and the procedures provided in your practice.

3. Protect Your Practice from Employee Fraud
Sadly, a growing trend in business is employee theft. While dentists are not usually victims of this crime, when compared with retail businesses, it is apparent that more and more staff are discovering methods of exploiting the inherent weaknesses of dental practice management systems. Longstanding and trusted employees have been involved in reported cases of dental fraud. Employee fraud in dental practice appears to be a growing trend — one that may be very damaging to the value of your goodwill. Here are a few ways to help ‘fraud-proof’ your practice:

• Request a copy of each day-end report and examine the billings and deposits
• Cross-check the daily billings with appointed patients indicated on the day-sheets
• Examine the deposit book for cheques received and compare to the bank or computer deposit slips
• Randomly examine patient charts and compare the procedures recorded with those found on the patient ledger
• Day-end reports may be changed at any time — so cross-check them with month-end reports to verify no backdating or reversals have been made.

The advent of sophisticated software has accidentally provided a complex means to hide or erase data and make employee fraud easier. To their credit, the major software companies have been modifying their programs to prevent changes to financial records, but it is not yet a foolproof system. Any dentist who does not know how to use his or her dental software properly is open to fraud. To protect your investment it may be necessary to hire a professional fraud examiner. One such company in Canada is found at www.prosperident.com.

4. Review and Update Contracts and Agreements
Purchasers demand accurate details of the contracts you have in place. Ask your associate(s), partner(s), landlord and any other suppliers for a current version or copy of your agreement(s). We often receive copies of important contracts that are not signed, current, dated, or valid. The owner has enjoyed a positive working relationship with the other party for many years and no one thought to revisit the agreement to be sure it accurately reflects the current relationship. Lawyers, accountants and bankers are becoming more skeptical and thus more protective of their clients. They do not enjoy the benefit of familiarity and trust that you have with your suppliers and other parties. A lack of up-to-date contracts may substantially reduce the sale price of a practice, and in some instances it may prevent a sale altogether.

5. Consult with Your Accountant About Incorporation
The large majority of today’s selling dentists are incorporating prior to sale, and we are sometimes surprised to discover that our clients have not had this discussion with their trusted advisors. Although we are very familiar with the advantages and disadvantages of professional incorporation for dentists, your accountant is the expert and the best person to assess your particular situation. Incorporation may provide substantial tax savings to a dentist.

Ontario Dentist – March 2007

Market Overview of 2006

Date Posted: 2006/12/05

2006 was another record year for dental practice sales. More practices sold this year than in any other single year and average sale prices also reached an all-time high. Will the trend continue in 2007?

I’ve been reporting on rising sale prices for several years and predicted, incorrectly, that market prices had peaked. Several factors and variables affect this marketplace, the key ones being “supply & demand”. As mentioned in my previous articles, the GTA (an area now defined as a one-hour drive from Yonge Street and Highway 401) continues to show a very strong demand: there is an oversupply of dentists seeking to buy a practice, and an undersupply of dentists willing to sell. I do not foresee that there will be enough vendors who will emerge in the short-term (the next one to two years) to absorb this demand. Factor in the 125 to 150 new dentists who will graduate or emigrate to the GTA in this same period and there could be further increase in sale prices.

Average dentist incomes continue to increase as well. The typical Canadian dental practice with one dentist and a full-time hygienist grosses about $600,000 per year. While overheads are also rising, the net incomes of the average dentist have also risen proportionately. The average practice has adjusted cash flow, before nonessential expenses, of about 35 to 45 percent of gross. In the GTA, overheads are slightly higher due to rent and wages, but the dental IQ of the average GTA patient also appears to be higher. This is reflected in a greater percentage of higher-fee procedures being completed, resulting in a higher gross income per year, per patient, when compared with national income averages. It is still a profitable venture to live and practise in the GTA.

Another interesting variable, observed in 2006, was the emergence of more assertive financing for purchasers. More financial institutions have recognized that a dental practice is an attractive, limited-risk lending proposition. This ample supply of favourable financing options tends to stimulate sale prices. However, if the supply of readily available credit were to decrease, sale prices would likely decline.

Of notable mention is that we have managed to sell several practices in remote and rural areas of Ontario. The ‘investor’ dentist appears to have discovered the low overhead of these fabulous opportunities, while a select group of younger dentists finally saw the wisdom of moving at least one hour or more away from the GTA region. Our Senior Associate in Ottawa, Ann Wright, reports a coinciding increase in demand for the Ottawa region. Other sales transpired in Thunder Bay, Sudbury and Sault Ste. Marie, among other smaller communities. Perhaps the ‘log-jam’ has finally broken? If only more dentists would discover the many lifestyle benefits of practising in rural Canada, this would bring hope to those dentists in the outlying areas who are anxious to retire with dignity.

In 2006 I heard some incredible stories from those who bought or sold a practice privately. While the intentions were to save fees (commissions) and to avoid the competition of the marketplace, it appears as though the private sale also created some significant difficulties: unintentional withholding of valuable information and poor communications between the parties. It continues to amaze me that professionals are reluctant to hire other professionals for this monumental exercise in their careers. Perhaps I have not done enough to educate the dental professional on the merits of the services a broker provides? We continue to find it odd that a dentist would attempt to sell his or her practice without the aid of a professional business broker but would not think of listing the principal residence for sale without the aid of a real estate agent. A business is a far more complex transaction.

For 2007, I am predicting that we will see more of the same as in 2006: too many buyers in the GTA and too few sellers. Those who will try to DIT (Do It Themselves) may save in the short term, but it may ultimately cost more in the long run. I am constantly monitoring the marketplace, private sales, and those of our competitors, and I see another year of escalating prices.

It’s a sellers’ market, and this means more tough decisions for today’s buyers.

Ontario Dentist – December 2006

Buying & Selling: Past & Present

Date Posted: 2006/11/07

When asked at a recent ROI Corporation retreat what aspects of buying and selling dental practices had changed the most, everyone unanimously agreed on one thing: the process has become much more sophisticated! Here is a list of the top five reasons contributing to the increased complexity of dental practice sales:

1. The Baby Boomer Mentality

Baby Boomers — those individuals born between 1946 and 1963 — seem to be a more educated group with respect to business than the previous generation of clients. They have greater access to information, including dental journals, and the Internet and are generally better informed. However, we also agreed that this easy access to seemingly unlimited quantities of information may be causing confusion among our clients as to the quality and nature of the advice they’ve received. We are continuously observing an emerging client base of Baby Boomer dentists who themselves may be attempting to learn too much, too late, about the rapidly evolving business
of selling a practice.

2. The Rapid Increase in Sale Prices

During the period 1974 to 1994 practice sale prices nearly doubled, and during the period 1995 to 2005, prices doubled again — but in just half the time! The emotional aspect of the transactions has become much more intense, given the magnitude of some of the numbers involved, and we assume that higher sale prices are adding to the length and the style of negotiations. When younger dentists are being forced to pay these escalating prices, without having received much in the way of formal business training, it’s easy to see why they are more reluctant to enter ownership.

3. The Involvement of Third Party Advisors

Most dentists seek advice from a trusted advisor — it’s prudent to do so. Our former clients usually turned to such an advisor to help them through the process. Now, due to changing legislation and regulatory issues, the
increase in sale prices and the intensity of the transactions, a dentist is quite likely to turn to several third party experts for advice. While we, as a third party ourselves, appreciate this trend, we have also noted that the use of a single trusted source or specialist, familiar with dental practice sales, has diminished, and many of the newer advisors are not experienced in the unique nature of dental practice sales. This unfamiliarity means that some dentists are reluctant to act decisively, something you must do when negotiating. The addition of more third party advisors to a transaction will usually increase the time needed to complete negotiations and often increases the costs for all parties. Occasionally, this “too many cooks in the kitchen” scenario may reduce the likelihood of success.

4. The Focus is on Staff

The No. 1 issue that concerns dentists who are buying or selling is the employees. My father, Roy Brown, (founder and chairman emeritus of ROI Corporation) mentioned that in the 1970s dentists felt more in control of staff and rarely feared retributions when selling. Today, it’s rare that we do not spend considerably more time discussing the Employment Standards Act (ESA). Most dentists have a serious concern that they could be accused of wrongfully dismissing staff. We now advise our clients to consult with an employment law expert before committing to any actions regarding their employees.

5. The Desire to Continue Practicing Part-Time

Many of our clients inquire about practicing part-time after a sale has been completed. They ask about locum or associate opportunities on an increasing basis. We suspect this may be due to the declining age of the dentist when selling, especially when many are in their fifties and simply wish to exit ownership, not dentistry. Accordingly, they would be happy with a part- time position. Not all of our clients will retain their license after the sale, but more and more are doing so.

In the typical sale, the buyer will ask for a restriction as to the location in which a seller may practice. This is fair and it is customary for most business sales. However, we notice that some wish to sell, and then continue to work in close proximity to the former practice — thus causing a buyer to be very concerned for the continuity of the patient base being acquired. We submit that it’s fair for a seller to continue in dentistry but that he or she must be prepared to work well outside of the previous community in order to sell for the highest fair market value. Most transactions contain a restrictive covenant of five to 25 kilometres from the location being sold, depending on the population size and demographics of the community. If a seller wishes to work within these customary ranges
he or she should be aware that a buyer may offer a considerably lower price. This is what the market dictates.

In conclusion, when planning the purchase or sale of a dental practice, my father, my associates and I agree on one final piece of advice: plan ahead by one to three years and know what all the parties to the transaction expect. The process of selling has become far more sophisticated over the past 10 years and the many third parties who are active in this market have a longer learning curve to develop expertise in the art of selling a dental practice.

You must do your homework!

Originally published in Ontario Dentist – May 2003

Selling Your Practice: Does the Internet Help?

Date Posted: 2006/10/13

I recently asked a small group of clients how and when they use the Internet — in their practice and personal life. In late August, while attending the CDA meeting in St.John’s, Nfld., I also spoke with dental software experts. During these conversations, I discovered some interesting statistics about dentists’ use of the Internet.

It appears that dentists may be early adapters to technology that will speed the delivery of care and increase patient comfort, but they may be late adapters to the idea of the Internet as a business tool.

While most dentists use a computer, and are Internet savvy, my informal surveys indicate there are two very different user profiles. Those who own a practice rarely use the Internet at the office — because they are busy treating patients. Those who do not own a practice — dentists working as associates — tend to use the Internet more frequently. However, the majority report that they do not have Internet access at their office. They may visit Internet cafes between patients (associates typically have lighter patient loads) or use a Blackberry for their Internet connections.

All of the dentists I spoke with mentioned that they prefer to read and reply to “non-clinical” e-mails in the evenings. Patient treatment is their daytime priority of course. We have a service that records the time and date of all visits to our company’s web site. The most active times for visitors are 7:00 to 9:00 pm on Tuesday and Wednesday nights, which would appear to verify these informal study findings. Some check during the day, but only when there is a short break in their schedule — and most admit they don’t make e-mail or the Internet a priority. Patients always come first.

While conducting research on the effect of the Internet on real estate transactions, I discovered that the California Association of Realtors (CAR)™ recently announced that over 70 percent of purchasers use the Internet as “an integral part of the home-buying process”. The survey also revealed that these buyers were young, wealthy, and had high levels of education.

In the future, will professional practice brokers rely on the Internet as the preferred tool to advertise the sale of a dental practice? Will the “virtual office tour” be the method we use to educate a buyer? I predict that the Internet and the virtual tour will help, but these methods have many limitations when selling a professional practice.

Our firm and other brokers have recently begun a transition from running classified ads in dental journals to web site-based ads. The journals, while well-read, are slightly outdated the day they arrive, due to publication deadlines and distribution time. Brokers feel that web sites present the most current offerings, and are much easier and faster to maintain.

However, before using the Internet as an advertising tool, be aware of this fact: the name and address of the owner dentist is easily determined from the web site. Brokers wish to reveal the visual aspects of a practice to entice a buyer to inquire further, but posting photos and recognizable images may accidentally inform the staff, patients and nearby competitors that the practice is for sale. Confidentiality is paramount in business brokerage and a dental practice is no exception.

Another finding from the CAR survey was that “Fifty-four percent of those surveyed said the information they gathered from the Internet was less useful than that provided by their Realtors® and none considered the information gathered from the Internet to be more useful than that obtained from their Realtors®.” Web sites containing photos or any other data that could identify your practice may not work to your advantage. Some may disagree, but in our company’s experience, the ideal buyer is found through a careful selection process, and not the Internet.

Ontario Dentist – October 2006

Over-Capitalization: Is Your Practice Too Large for Today’s Buyer?

Date Posted: 2006/09/05

The dental profession continues to expand, due in large part to the increase in the average consumer’s dental IQ. According to my conversations with experts in the industry, I predict that total dental fees in Canada for the year 2006 will exceed 10 billion dollars.

With this trend towards ever-increasing billings, many solo dental practices are now generating gross fees in excess of $1 million per year. What does this mean for the appraisal and the sale of such a practice?

A profile of the typical dental practice buyer reveals that he or she is:
• 30 – 35 years of age.
• has three – five years experience in full-time dental practice.
• is comfortable, at this early stage, in producing $30,000 to $50,000 per month in dental fees.

On average, a full-time dental associate, working 20 days per month:
• generates fees of $1,500 – $2,500 per day.
• earns 40 percent of those fees, or roughly $600 – $1,000 per day.
• earns from $100,000 – $200,000 per year. (Part-time associates may earn $50,000 – $100,000 per year.)

When asked to define the ideal practice, a buyer suggests he or she wants:
• a practice with one or two full-time hygienists.
• a practice with annual gross revenues of $500,000 – $1,000,000.

Similarly, the same buyer does not want:
• a practice employing associates. The question arises: “Why won’t the associate buy it — is there something wrong?”
• the previous owner to remain, in most instances
• to buy the real estate and the dental practice at this early career stage
• to be in any form of partnership or cost-sharing arrangement.

A brief analysis of the past 100 appraisals I have prepared reveals that over 20 percent were of dental practices with gross revenues of $1 million or more. Most of these practices employ associates, part-time specialists or have partners. Given the buyer’s criteria, as set out above, who will buy these dental practices if they are put up for sale? What price will these large, sophisticated practices sell for?

Unfortunately, I predict a continuing trend towards the offering of lower and lower prices for these practices, when compared with the smaller, more manageable solo practices. I also predict growth in an emerging trend for investor dentists. These absentee owners will continue to purchase some of the larger practices, and then staff them with past owners or new associates.

Today’s young buyers are ambitious and confident. Financial institutions are more than willing to lend them 100 percent of the purchase price, but only to a point. When the practice is too large, in terms of total revenues, total investment required, or total obligations to staff and time, it becomes less saleable and less manageable in the minds of today’s buyers.

The dental practice with gross billings exceeding $1 million is a status symbol that may be difficult to sell in the future. Much like the most expensive and grandiose home in your neighbourhood — it’s admired by many, desired by few.

Ontario Dentist – September 2006

The Appraisal and Your Annual Insurance Review

Date Posted: 2006/08/13

Many of our clients ask if a practice appraisal is a valuable tool for their annual insurance policy review. My answer is always yes, absolutely.

Most business owners purchase insurance, pay the premium and then forget about the coverage contained in the policy. The common rationale is: “Why bother to examine something I may never want to use?” I have found that this casual approach to insurance policies can often lead to disappointment.

Recently, one of my clients discovered that he had developed a serious disability, one that would prevent him from continuing to practise dentistry. He was somewhat comforted by the fact that he had purchased what he thought was a good disability policy many years ago. While gathering the data for his appraisal, I inquired as to the amount of monthly income he would receive, assuming his claim was approved. The figure was substantially below his current income level and he was not prepared for this situation. The dentist told me that, according to his agent, there was nothing he could do about it, and so he had resigned himself to undertake the sale of his practice. Sadly, his long-time agent had not investigated if any other options were available to him.

I suggested he contact a Living Benefits expert in Toronto, Gillian Johnston, who is familiar with the claims process. (Living Benefits experts specialize in disability and long-term care insurance.) She discovered that he did indeed have an option to increase his benefits prior to making a claim. Many policies contain such an option that will increase his lifetime earnings substantially. By exercising the option, our client will receive an additional $3000 per month for ten years. He is now retired, on disability, and living quite comfortably.

An insurance policy is a complex document. Many professionals simply take the advice provided and purchase the policy recommended by their agents. Some agents constantly study the various offerings of insurance companies, and update their clients regularly with information on policy changes. Accordingly, it appears that a wise consumer should include a complete review of his or her insurance policy before making a claim, to determine if there are entitlements, such as the option to purchase additional coverage without medical evidence.

Due to the ergonomics of dentistry, occupational disability strikes dentists frequently, often more than many other professionals. Neck, back and arm injuries and strains are not uncommon. If you are physically unable to maintain your practice and feel it may be time to sell, why not examine your insurance policy?

My advice is to take the time now, before you have to make the difficult decision to file a claim. It could save you thousands of dollars.

Ontario Dentist – August 2006

Rural Dentists of Ontario: An Endangered Species

Date Posted: 2006/06/13

I have some bad news to report to the dentists of rural Ontario — you are an endangered species.

We have tried to sell numerous rural practices over the past 10 years. Many could not be sold at any price and our clients were forced to shut the doors, send patients away and sell off the equipment and leaseholds. Years of searching for replacements yielded minimal, if any, interest and left some of the dentists without a penny for their years of hard work.

One would think that the surplus of dentists in major cities, especially the greater Toronto area, and the large debts of today’s dental graduates, would drive dentists to these smaller towns and cities, if only for economic reasons. One might think that the lifestyle opportunities and the lower cost of living would attract many a dentist. One would assume that lower overheads, a large patient load and above-average incomes might also be incentives. These benefits alone should be enough to attract today’s graduates to these practices. Sadly, this is not the case.

I have witnessed several practices that have been dismantled, and the owner has simply ‘walked away’. In other cases the only dentist in the town would retire. Nearby dentists would be notified, yet not one would offer to buy the practice, as they themselves were already fully booked, and had no need to purchase their colleague’s patient load. The equipment would then be discarded or donated to Third World countries and the staff would subsequently lose their jobs. In one instance, the nearest dentist for a town of over 2,000 persons is now 45 minutes away — and the dentist at this office is fully booked for months in advance.

How then can the dental profession overcome this unfortunate trend? Here are a few suggestions:

1. Lower appraised values for these practices even more. While we have been conservatively appraising rural practices for years, the market dictates that we must lower them even more — a frustrating reality for our company and for our clients.

2. Unite the dentists of rural Ontario and initiate a campaign to recruit dentists to their areas. I know that the Thunder Bay District Dental Society has tried this with some success, but there are currently four dental practices for sale in Thunder Bay, none of which has attracted a buyer in over a year.

3. Consider an incentive program for dental students from rural communities who would, in exchange for some level of financial support during university, agree to return and practise in these underserviced locations. Perhaps this is too politically sensitive a topic, but where do today’s graduates wish to practise? Unfortunately, rural Ontario does not appear to be the place.

In the future, I predict that the dentists of rural Ontario will follow in the footsteps of their medical colleagues. The normal routine will be to practise until you simply can’t manage anymore, shut the doors and then wish the community good luck in finding another dentist. What a waste.

Ontario Dentist – June 2006