Hugues Boisvert, Founder & CEO, Business Lawyer
Claudia Lach, Summer Student
Are you considering stepping out of the dental industry after many long years of practice? Or are you looking to purchase an established dental practice with lifelong clients to jump start your dental career? If so, there are many things that you should consider first.
Initially, it must be stressed that the dental market is a seller’s game, especially in larger cities. Prices have been steadily increasing over the last several years with some estimates claiming the market has doubled within the last ten years. As a seller, this is good news because your practice may sell at a much higher value than if you sold it in the past. As a potential buyer, this may also be indicative of the market going forward, illustrating a strong investment.
Conducting your due diligence is crucial before buying or selling any business. How much due diligence you should do depends on whether you are purchasing or selling the business through assets or shares. Assets are what a company owns to run a business; these can include inventory, equipment, and capital items. On the other hand, shares give you ownership of the business itself. Once you have a potential deal, you want to do your due diligence. You want to have as much information on the assets and shares you are looking to purchase or sell before signing a contract.
Why should you do your due diligence as the buyer?
Generally, you want to make sure that the business you are looking to purchase is financially sound. It is crucial for you, as the buyer, to know what kind of liabilities you are taking over before you end up making a costly mistake. If you are only purchasing the assets of a business, you are only assuming some of its liabilities. However, if you are buying its shares, you will be stuck with all of its liabilities. Imagine signing a deal and later finding out that you have to pay thousands of dollars in unpaid taxes that could have been easily avoided if you had done your due diligence. Doing your due diligence helps you know what the business is worth and helps you secure a favourable deal.
If you are the buyer, you want to ask a lot of questions and dig deeper into any unanswered questions. What might the seller be hiding? Review the business’s minute books, financial statements, contracts, and other company records. This includes looking into its purchase and sale agreements to see where you could incur liability, and looking into any documents regarding the company’s past or present litigation. Make sure that all the tax returns have been filed. Additionally, you want to make sure that there are no discrepancies between what is written on paper and what is actually going on. Visit the firm and meet with its key employees to scope out the situation. If you are purchasing the assets, have them valuated. Conduct searches to see whether there are any liens or securities registered under these assets.
Why should you do your due diligence as the seller?
Even as the seller, it is essential for you to do your due diligence. Firstly, unlike for a buyer, it is favourable for you to sell shares because you are giving away the business’s liabilities. If you are only selling the assets, you will still have to deal with the liabilities that the buyer did not specifically take over. Secondly, you want to make sure that the business is fit before the purchaser conducts their due diligence, and ends up discounting your business. You do not want to lose a deal because some of your contracts were not fully executed or records were missing, when these tasks could be easily remedied. Thirdly, you want to make sure that you have all the pertinent information before you negotiate your deal and your lawyer drafts details such as representations and warrantees into your transaction documents.
As the seller, it is important for you to review your business’s minute book, contracts, financial statements, and agreements to make sure that they are properly organized and complete. Make sure all the necessary material is ready for the buyer to examine. Prepare a team that can properly answer any questions the buyer may have. You will also want to have your business valuated; you want to get the best price for your assets or shares, so you need to know how much your business is worth before negotiating.
Here are some considerations for those specifically looking to buy a dentistry practice:
The Patient Base – As a purchaser you should consider how many active patients the practice has. Generally, an active patient base of over 1000 annual patients is a satisfactory starting point. You should also consider how much revenue each patient brings into the practice and at what frequency. It is also important to segregate revenue based on hygiene versus dental. Hygiene revenue is much more profitable and stable than dental revenue. Determinations as to the adequacy of the patient base, and thus the purchase price, should be made by a professional brokerage firm.
Retain the Vendor – One very important asset a buyer should look to retain is the vendor. In a practical sense, the vendor is likely the individual who the clients have returned to see and is also the primary person the clients trust. He or she is generally the face of the institution. The vendor has developed rapport and personal relationships throughout years of working for the corporation. It is thus very important to entice the vendor to continue to be present with the business to maximize client retention. For example, a separate agreement can be made to have the vendor remain with the practice as an associate for two days per week for an eight-week period. In return, the vendor would be paid 50% of net collected billings during this timeframe, while nonetheless transferring his or her long-term patients to the buyer while working at the practice.
Associates – Are there associates within the office who have no desire to buy the practice? If the associate is not buying the practice, does the employment contract contain a valid non-compete clause that prevents the associate from soliciting clients after the purchase if he or she chooses to leave and begin their own dental practice? Another consideration is whether the seller will remain an associate post sale. For example, what are the post-sale arrangements for fee sharing? The transaction must be structured as such to avoid any infringements of the rules created by medical regulatory bodies.
Employees – Staff members are valuable assets to any dental enterprise. As with the associates, employment contracts should be analyzed to conclude whether they have a strong non-compete clause for all key staff members, such as receptionists and hygienists. When contracts are in place for everyone, it strengthens the value of the dental practice due to the protections given.
Leasing – Depending on whether the premises are leased or owned, the leasing agreement between the seller and the landlord will need to be examined to spot out powerful and damaging lease provisions. A “demolition clause” gives the landlord the right to terminate the lease if the building is to be demolished and replaced. If you plan on making major structural renovations after purchasing, these provisions may make the practice a poor investment. If the selling practice is located in a mall or large commercial building, a “relocation clause” allows the landlord to move the business elsewhere in the building. Therefore, a practice that is a prime location within the building is not guaranteed to stay there. A strong relocation clause will force the landlord to compensate, which also acts as a deterrent.
10 year Lease – In addition to the above considerations, it is important to determine whether, after purchase, the lease and its applicable renewal options add up to 10 years. This is because most bank loans for dental practice sales require a 10-year repayment arrangement. Lenders will want to be confident the premises are secured for at least 10 years.
Equipment Leases – Does the seller own the dental equipment in the office or is it leased through another leasing corporation? Additionally, if the equipment is leased, is the leasing period almost finished or does it extend far into the future? Importantly, are you as the purchaser looking to purchase assets or the dental practice itself?
Here are some considerations specifically for those selling their dentistry practice:
Appraisal – Have you obtained a proper and accurate appraisal for your dental practice? As discussed below, dental practice appraisals include an analysis of a wide array of factors include patients, hygiene versus dental revenue, annual new patients versus client deterioration, and many more. For these complex calculations, we recommend a professional brokerage firm with specialized experience in the dental industry. We personally suggest “Tier Three Brokerage” for selling, buying, and appraisals.
The Purchaser – Is the purchaser an associate, a private individual, or a multi-practice dental ownership corporation? The purchaser, amongst other things, has an effect on the purchase price and means of payment. Typically, when an associate or private purchaser acquires a dental practice the full purchase price is paid at closing. However, large corporate purchasers may instead offer equity in the purchasing corporation while allowing the seller to remain as partial minority owner. These outcomes are of course open to negotiation in individualized circumstances but depending on the future you envision, one may appear more attractive than the other.
Shareholders – If there are other partners or shareholders within the dental practice, examine any existing shareholder agreements to determine whether there is a right of first refusal. It is important to keep in mind that only those who are licensed to practice within the profession, such as dentists, can own voting shares of the professional corporation. Therefore, if a shareholders’ agreement is in place or one is desired after the transfer of the business, then only licensed dentists can be parties to the shareholders’ agreement. If non-licensed shareholders are parties to the shareholders’ agreement, it may be rendered null and void.
Tax Considerations – Ideally, you will want to reap all possible tax benefits from the transaction. It may be favourable to set up a separate professional corporation to purchase the vendor’s shares and then amalgamate the two corporations. Another option with an existing dental practice would be to borrow money from the established professional corporation and pay it back accordingly.
Selling or purchasing a dental practice is both an exciting and stressful period. However, working alongside a professional brokerage firm and experienced legal counsel can simplify and streamline the process while ensuring you are protected both financially and legally. Whether it be receiving a proper appraisal, or drafting and reviewing legal documents, consult with those at Tier Three Brokerage and Hazlo Law – Business Lawyers to assist with the process.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Hugues today. 613-747-2459 ext.304, [email protected]