Are you ready to buy your own Dental Practice

Finding a Practice I have many clients looking to purchase their 1st, 2nd or even 3rd practices, and I always point them to a dental broker specializing in the purchase and sale of dental practices. These brokers usually have advance knowledge of who is selling or buying and can pair you up with the type

Finding a Practice

I have many clients looking to purchase their 1st, 2nd or even 3rd practices, and I always point them to a dental broker specializing in the purchase and sale of dental practices. These brokers usually have advance knowledge of who is selling or buying and can pair you up with the type and location of practice you want to buy.

I have acted on the purchase and sale of many practices over the past 35 years. In the last 5 I have found that I am dealing with proposed purchasers who are barely out of school. I had one client last year who could not close the deal as she had to wait for her graduation and license.

Most of the practices are generating multiple offers. I have suggested to my clients that if they find one that meets their needs they may have to pay over the asking price.

Letter of Intent and Agreement of Purchase and Sale

When you have found the dental practice you are interested in your 1st step may be to sign a non-binding letter of intent with the seller. Please speak to your lawyer to ensure that the letter of intent will at least bind the seller to not market or accept other offers for a specified period of time.

Your lawyer should be able to prepare a draft agreement within 2 to 3 days of obtaining your letter of intent. Once the initial draft agreement is prepared it should take about a week to have a signed agreement.

Shares of the Seller’s Dentistry professional Corporation vs Assets from the Seller’s Dentistry Professional Corporation

10 years ago virtually all offers were for assets which benefits the Buyer, as the Buyer could allocate a higher amount to certain depreciable assets of the practice giving the Buyer a tax benefit.

5 years ago approximately 50% of purchases were assets and 50% were for shares. Now, more than 90% of the transactions that I deal with are for the purchase of shares as the Seller (along with the Seller’s family) is attempting to benefit from the $800,000.00 capital gains exemption.

Sellers will no longer give a reduction in the purchase prices for shares as they did in the past. If you want to purchase the practice then you will have to purchase what the seller wants to sell.

As many of our clients have been involved in multiple offers through letters of intent and have lost practices it is our policy not to charge for reviewing and finalizing letters of intent. We maintain the same no charge policy if the agreement never gets finalized.

Due Diligence

The Agreement will contain a due diligence period during which period the offer will be conditional in your favour on you satisfying yourself that you are satisfied with the due diligence review of the practice, its financial information and chart count and condition of the hard assets. I strongly recommend that Buyers have their accountants review the financial statements and information and confirm that they reflect the financial condition of the Practice. Most appraisals will have a chart count including current charts. Some of these will be accurate but my experience has led me to conclude that not all are accurate and that the Buyer should spend adequate time in going through the charts and confirming the number of current patients.

You may also want to review the average age of the patients and the amount being billed per chart and for what. If the amount being billed is low you may determine that the seller is only doing general dentistry and no specialty and this may give you the opportunity of improving the billings per patient. You may also want to know if the patients are old or young. The charts will also give you a breakdown between dental and hygiene services. Either the broker, your lawyer or accountant will be able to introduce you to a banker that will be able to finance your purchase. The Banker will require the agreement of purchase and sale, the financial statements for the Practice and the lease. Most banks require that the term of the lease with renewals is at least 10 years.

There will be a condition in the agreement for you (your lawyer) to obtain the consent to an assignment of the existing lease with any amendments that you may want. We have more and more difficulties with landlords and leases, including leases that contain clauses giving the landlords the right to terminate the lease for demolition or sale of the property. In most cases the landlords have no interest in terminating leases and these can be appropriately dealt with in the assignment of lease with proper amendments. Often banks will want to ensure that the terms (including renewals) are at least 10 years and more. Landlord are notoriously slow in giving approval to an assignment and therefore we apply as soon as possible to obtain such approval. Landlords sometime charge exorbitant administrative or legal fees to approve the assignment and give consent in most cases we put most of the burden on the seller.

Non-Competition/Non-Solicitation clause in the Agreement

It is very important to have a proper non-solicitation/non-compete covenant from the Seller. I would suggest that it be for at least 3 to 5 years and a radius wide enough to ensure that the patients do not follow the Seller to another practice.

If the Seller has other practices patients may be in the habit of simply going to a different practice each time and therefore for sellers with multiple practices you may want to insert a provision that the seller will pay you for each patient that leaves the practice being purchased to go to the Seller.

The college rules provide that you cannot prohibit a patient from moving but if a patient does move ensure that you are getting compensated.

Employees

If it is not your intention to assume all of the existing employees you should have the right prior to the closing to have the Seller terminate those employees you do not want to keep on. However, the employees provide continuity between the patients and you, and I would suggest being very careful not to terminate an employee that has long term connections with the patients until you are comfortable enough that the patients will come to you.

We suggest having a clause in the agreement providing that if you terminate an employee within the 1st 90 days of closing then the termination costs are shared equally between the seller and the buyer.

Should Seller Associate Following Closing?

Many buyers want Sellers to associate following the closing in order to ensure a smooth transition between the patients, the staff and the Buyer which can be provided by the Seller associating. It is better to pay the Seller a higher percentage than you may normally pay to an associate to ensure that he/she remains happy following the closing and will assist you in the transition.

I would suggest that following closing that you change all passwords to the computer to ensure that no patient records are copied. We would also suggest that there be a right to terminate by the Buyer in the event that the association does not work as you want.

Should you use a Dentistry Professional Corporation as the named Buyer?

In a previous blog we set out the many tax benefits of utilizing a dentistry professional corporation in your practice. Normally, buyers incorporate prior to the closing and then on closing after buying the shares of the seller’s dentistry professional corporation the 2 corporations amalgamate into 1 corporation.

There is a practical reason for this. If you do not incorporate then the Bank will lend the purchase monies to you personally and you will utilize the funds to purchase the shares from the shareholders of the dentistry professional corporation that you are purchasing. However, each month you personally will then have to make a loan payment to the Bank by taking monies out of the dentistry professional corporation that you purchased. The effect will be that you will be taxed at a high rate when you take the monies out of the corporation to have funds to make payments to the Bank.

By setting up you own dentistry Professional Corporation to become the buyer your corporation will end of owing all of the shares of the seller’s corporation. When you amalgamate the 2 corporations into one the amalgamated corporation which will be the corporation operating the practice and earning the active income. It will also be the corporation owing the bank. Therefore, the operating amalgamated corporation will have the funds to pay the bank loan without 1st having to pay the monies out to you personally saving you double taxation.

Certificate of Authorization with the RCDS

Once you have completed the purchase and amalgamated the 2 corporations the college deems there to be a new corporation and will require you to complete and file a new application to the college and pay the new fee of $750.00 to the College.

We prepare the application and other required documents for the college and ensure the new amalgamated corporation has a certificate of authorization.

In Summary

As can be seen the steps required to complete the purchase are complex. We handle all aspects for you to enable you to minimize your stress and complete your purchase in a seamless fashion. Kutner Law LLP has been assisting dentists in buying and selling dental practices for over 35 years and we are very interested in meeting with you to discuss your purchase, at no charge.