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Whether you’re fresh out of dental school preparing to buy a clinic or a seasoned professional ready to sell, the process of buying or selling a dental practice is a long and often meticulous one. From deciding what type of sale you’re interested in to ensuring you’re structured properly for tax purposes, there are many considerations to keep in mind.
The dental industry – A seller’s market
As a prospective buyer (or seller), it’s important to note that the dental industry in Canada is a seller’s market, especially in larger cities throughout B.C., Alberta and Ontario. Clinic prices have increased significantly in the last decade, in part due to limited supply .
Typically, dentists are retiring later than they used to. Couple that with an influx of dentists immigrating from other countries and an uptick in the number of investor dentists who own multiple practices, and it’s clear why buying a clinic has become a more expensive, but still lucrative, investment.
In fact, some professionals prefer to buy into clinics instead of stocks – as they can have a profit margin as high as 20 percent.
Starting a dental practice – what you need to know
If you’re fresh out of dental school and are ready to start or buy a practice, it’s important to factor tax planning and long-term viability into the following decisions:
Incorporation
One of the first decisions you’ll have to make is whether or not to incorporate. Some dentists will choose a sole proprietorship instead. This is the simplest option with the least amount of paperwork or financial costs. Sole proprietors don’t have to register their businesses with Corporations Canada and will simply pay personal income tax on any net income made.
If you’re working with someone else, you may choose to structure your business as a partnership. Like a sole proprietorship, it’s simpler to set up but you’ll be exposed to personal risk (though it’s shared between you and your partner). It’s still recommended to sign a contract explaining each partner’s rights and obligations.
While incorporating your company can be a complicated, costly process that should involve your financial and legal team, there are many benefits. For one, there is less personal risk. In the event of a legal issue, the corporation will be liable. Incorporated clinics also receive a variety of tax and financial benefits, including:
- Small business deduction eligibility in Ontario. For most incorporated clinics, your first $500,000 of net income will only be taxed at 12.2 percent instead of the much higher personal rate. Additional income is still taxed at a lower rate – only 26.5 percent. Practices structured as a partnership will be taxed at 26.5 percent.
- Deferring taxes. Because business income in a corporation is taxed at a lower rate, it’s possible to defer taxes. Dividend taxes, for example, would only apply if your income is distributed to an individual shareholder.
For those who choose to incorporate through a Dentistry Professional Corporation (DPC), you’ll also be able to defer personal taxes on any of your DPC’s undistributed income.
- You, as the clinic owner, can receive a personal, short-term loan from your corporation. As long as it’s paid back within one year, the loan won’t be taxed. You’ll also be able to pay a spouse or family member through your corporation, and might be able to pay them dividends based on income splitting rules.
- If you’re preparing for a short-term leave or parental leave, you’ll be able to use income earned as contingency cash flow. During your leave, you’ll be paid by the corporation.
Dental practice business expenses
When considering tax implications, it’s important to take expenses into account. Tracking business expenses helps reduce taxable income and will make any CRA audits easier. In the event of an audit, make sure your financial records are organized and easily accessible. You may need to show proof of the following expenses:
- Conventions or seminars
- Dues and fees
- Business supplies and dental equipment
- Phone and internet costs
- Accounting or legal fees
- Dues and fees to professional organizations
If you purchased something before starting your clinic, like a computer, but continue to use that item in your clinic, you might be able to deduct that item as well.
Sale types
Before buying or selling a clinic, you’ll have to decide what type of sale you’re interested in:
Asset sales:
This is popular with buyers, as it allows you to buy the clinic’s assets instead of its shares, which reduces legal risk. In this type of sale, the purchaser will buy a clinic’s supplies, dental equipment and other tangible assets. Intangible assets, like patient records, can be purchased as well.
Share sales:
This is popular with sellers. Dentists selling their practice often want to sell off their corporation’s shares. While you may face legal risks, you maybe eligible for the lifetime capital gains exemption, which allows you to shelter up to $892,218 (in 2021) from the sale (per person) . It’s also important to note that only 50 percent of realized capital gains can be taxed.
If family members hold equity shares and are involved in the practice, this exemption may be multiplied.
Hybrid sales:
This type of sale combines assets and shares and is often used for larger sales, like those involving practice consolidators. While hybrid sales allow both parties to balance risks and tax costs between them, it is a complicated, costly transaction.
Other considerations
It’s essential to ensure your business will be able to survive long-term and weather future storms. A good way to assess this is to look at the clinic’s infrastructure. Are there any employment agreements that ensure you’ll be able to keep your professional staff long-term? Are there any issues with leases that may cause issues within the next five years or so? Did the current owner enter into any non-compete agreements that could hinder your growth? And finally, how did the clinic fare during the pandemic? Covid-19 hit many businesses hard, including those in the medical community. It’s important to review the clinic’s financial records to ensure it was able to recover and has the capacity to grow over time.
Buying a clinic isn’t an easy feat in today’s economic climate. It’s also good to consider how you’ll finance the clinic. While dental practices used to be 100 percent financed, you’ll likely have to put down a deposit today due to more cautious lending practices.
Selling a dental practice – what you need to know
Preparing your clinic for sale is an intensive process ideally starting at least two to five years before you’re ready to sell.
As with buying a practice, it’s critical to understand what type of sale you’d like to be part of. As noted above, share sales are popular with sellers. Other factors to consider during a sale include:
Valuations and financial review
The first step of a sale is usually a financial review. This will help determine your valuation and will give you a realistic idea of how much you can sell for. During the review, your financial team will look through your clinic’s financial records to determine your past and potential future earnings. It’s important to choose an experienced financial team that works with dental clinics, like Zeifmans.
There are some things that can be done in the years leading up to the sale that can increase your valuation, such as dealing with any debt, which can negatively impact a sale, especially since banks are becoming more cautious during their approval and review processes.
Purification
While a sale can include assets, there may be some assets owned by your corporation that you’ll need to transfer to yourself prior to the sale. These include marketable securities, life insurance policies and rental properties. This is called purification and it may require permission from your province’s dental college.
During this process, it might be possible for shareholders to claim a capital gains exemption. To qualify, your corporation must be Canadian-controlled. Other criteria that must be met include:
- You or a relative of yours must have owned shares at least 24 months before the sale.
- Over 50 percent of your corporation’s assets must have been used in an active, Canadian business.
It’s critical that any non-practice asset transfers be done at least two years before you sell your shares. A trusted financial team should be consulted to ensure this process is done correctly, given these extended timelines.
Understanding any legal issues
As you’re preparing for a sale, there will be a variety of issues your legal team will have to review, including:
Leases
Building leases and location are important factors in a sale. If a purchaser can’t maintain the location long-term, this could significantly affect your sale price. Review any and all leases and renewal periods to make sure there are no long-term issues.
Employment agreements
It may be worth your while to look into creating associate and employment agreements in the years before the sale. This way, you’ll be able to ensure the purchaser has a stable business, therefore increasing your clinic’s viability and value.
Covenants and non-competes
During the sale process, the purchaser will have access to any covenants or non-compete agreements that may limit the clinic’s growth. It’s important to proactively review these yourself to ensure there are no professional restrictions, like operating a clinic in certain cities.
A helping hand
Whether buying or selling a dental clinic, you’re likely to experience a complicated, potentially years-long process that involves a number of financial, tax, and legal considerations. It’s vital to have a professional financial team by your side. At Zeifmans, we have decades of experience in the medical field and understand the unique challenges dental practices face. Contact us today to discuss your next move.
