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Purchasing a professional practice during a global pandemic

May 03, 2021

Purchasing a professional practice during a global pandemic

Synopsis
6 Minute Read

Tips for navigating the changing world of professional practices from our experienced advisors.

Taking the bold step to purchase a professional practice has always been a complex task. COVID-19 has only added to the complexity. In this article, we’ll provide an overview of what is happening in different markets, how COVID-19 is impacting sales, and how you can navigate this dynamic period.

Market Trends

 Professional practice values have risen substantially over the past 15 years. Now, we are seeing new markets that we had not before. In addition to dental, pharmacy or veterinarian practice purchases, we now have a market for medical practices and an interest in acquisition of medical clinics. That trend is strongest in Canada’s major urban centres but has also taken hold across the country, including in rural and remote areas.

One of the key drivers behind the rise in prices is a dramatic increase in the number of licensed professionals wanting to buy a practice. The increase in foreign-trained practitioners practicing in Canada as well as investor groups (professional groups or corporations owning multiple practices and large corporate groups) has led to an oversupply of professionals competing for the same number of patients. This is causing market saturation.

If you’re a first-time buyer, you may need to consider finding a practice you can turn around and improve on and the location will likely need to be further away from large urban centres.

Building a start­up is another option. Think about moving outside of a major city centre where there is a higher ratio of patients to professionals. This could be a more affordable way to generate positive cashflow.

Impact of COVID-19

Over the last five years, there was a steady increase in demand for professional services. However, due to COVID-19, 2020 saw a decline in certain services.

The outlook for 2021 is mixed and will depend on many factors. With unemployment rates increasing and personal disposable income expected to drop, non-critical revenues will likely be impacted.

Not all provinces and territories will face the same challenges. There are various factors, including market saturation, COVID-19 spread, or provincial closures and guidelines, that will determine the reduction to professional services occur in 2021.

Canadian professionals have faced significant challenges in 2020, from full office closures earlier to capital improvements requirements, extra personal protective equipment and cleaning costs, and preparation of health and safety plans for both patients and staff. Government recovery aid has provided some assistance to the industry for programs like wage subsidies, interest free loans, and rent subsidies.

Your Purchase

Even with all of the challenges, professional practice acquisitions are still continuing across all markets.

Understanding that you need a strong advisory team assisting you on your practice purchase is critical. This will likely be the biggest purchase of your life and you will want a well vetted plan with comfortable debt repayment terms. Your advisory team should include your financial advisor, banker, and lawyer.

Though there may be a projected reduction to profitability for 2021, valuations will take into account extraordinary items and a year of a global pandemic would be considered extraordinary by most. Preparing a cashflow projection with various repayment options and considering any impact of COVID-19 will be important for your piece of mind and will likely be a requirement for borrowing purposes.

With interest rates at a record low, this may be a great opportunity to purchase a practice. Work with your advisor to see if this is the best option for you. In general, when preparing to buy a professional practice, it’s a good idea to consider a variety of factors, such as: location, an existing lease of a minimum of 10 years and no demolition clause, associate contracts and employment contracts for employees, including a strong non-compete clause for associates and all key staff. When contracts are in place for everyone, it strengthens the value of your practice.

Borrowing Requirements

When lending money, banks will look at several factors, primarily the practice’s cash flow and a personal guarantee from the practitioner.

The bank will do a combined analysis between a practice’s cash flow and the purchaser’s personal information — their income and debt — to determine whether the purchaser can support 100 percent financing up to the purchase price. Financers are also considering the impact of COVID-19 and may be more conservative on the determination of practice cashflow. If cash flow is not significant enough to support 100 percent financing, the prospective buyer may have to contribute money or collateral.

We recommended borrowing from banks who understand the professional industry that you operate in and have niche specific financing. Contact your banker early to get pre-approval for your practice purchase as it may take several months to finalize the deal.

Starting up

Remember to factor in the start-up costs of a practice. This can include moving, improvements to the location, new equipment, and more. Additionally, it may take anywhere from six weeks to three months before you begin to collect any substantial revenue. Include these details in your developed cashflow plan so that you have enough operating funds to manage for the first few months.

The timing for a professional practice may be right for you . To achieve personal and professional success, ensure that the expectations are realistic and that you have undertaken the proper planning. This can be an exciting event and allow you to set up your professional life and meet your future goals

To learn how MNP can support you through the purchase or creation of a professional practice, contact your local MNP professionals niche provider.

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