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Ready to sell? If not, you could be facing major heartaches

November 23, 2021

Ready to sell? If not, you could be facing major heartaches

Synopsis
6 Minute Read

When it comes to securing your future, ask yourself this key question: are you set up to sell now?

Partner, Taxation Services

As a professional and business owner, you likely have heard about the benefits of planning your exit years in advance of the actual event. Plans which include things like completing improvements on a regular basis to attract the highest bidder or maybe grooming key employees or family into leadership roles and feeling confident your future is being taken care of now.

This article isn’t about the good things. Here, we are going to be looking at what happens when you don’t have a plan in place to sell your practice, and the substantial losses you could face in not being able to utilize your capital gains exemption.

New world, shortened timelines

If you have an established practice, you might have a timeline of when you want exit, somewhere between five and 10 years from now. In the past, many professionals hit that seven-year mark in their head, started planning to transition out of the practice, and sold it at the 10-year mark.

But the business landscape has changed dramatically, along with what you might have normally anticipated as regular sales in the past. Today’s deals are finalized more quickly and the players in the market have changed. In the past, the buyer landscape was concentrated on younger professionals opening their first practice or associates buying in. Now, there are a range of different types of prospective buyers and options, ranging from multi-practice local and regional groups, national strategic consolidators, private equity backed consolidators, to publicly traded consolidators. Each has their own unique attributes, pros and cons, and different valuation and transaction structure considerations.

Consolidation in the professional sector is also becoming the norm across all areas of retail health care. The consolidation trend is sweeping health care industries such as dentistry, optometry, veterinary, pharmacy, cosmetic dermatology, sleep labs, mental health, and more recently, medical practices. Further, with technology advances in telehealth delivery during the pandemic, there is a keen interest on digital platforms and technology enabled health care businesses. You never know when you will receive a phone call, asking if you are interested in a sale. In fact, you may have likely already received many of these phone calls.

And when that call comes, most people aren’t thinking about what’s on their balance sheet or assets they would not intend to sell as part of the sale. It’s easy to miss details such as transition terms, deal structure, form of proceeds, contingent payments, or if there is alignment and fit with the purchaser. They’re thinking about the offer, if they like it, or if they can negotiate the number. And that’s when trusted accountants and advisors start getting calls. Or not.

Being Prepared

Without speaking with your advisor, it’s easy to leave money on the table. Knowing there are many options in terms of prospective purchasers, the earlier you can start planning for the exit, the better positioned you will be.

Being prepared includes many considerations, including a stable employee base with no vacancies, a focus on profit maximization in the years leading into a sale, proper tax planning done in advance of a sale, real estate considerations such as renewing a lease, and solid record keeping and clean accounting. By simply jumping into an offer, these areas, if neglected, will create significant value impairments.

An advisor experienced in corporate finance can guide and lead a divestiture process to maximize purchaser options and get multiple offers. The best way to assess the true market value of your practice is to obtain offers from qualified and interested parties. The first offer is rarely the best deal possible. 

Challenges and solutions

Often a single owner-operator is involved in a sale. But how about if your spouse and family members are shareholders? A large practice could have multiple capital gains exemptions available for family members depending on the size of the practice. 

The key is to know which shareholders will actively be involved in a sale and if there is a way to maximize savings from a family perspective. As a business owner, you might not be aware your spouse and or children can access the capital gains exemption as shareholders, and miss out on potential tax savings in excess of $200,000 each. There are also other tax strategies that can be implemented to increase the overall tax savings.

However, the question remains: are you set up as a corporation with the right balance sheet to be a saleable business today, if the opportunity comes up? The next question to ask again is if your balance sheet allows you to qualify for the exemption.

If not, there still are solutions, such as transferring assets you want to retain into a separate holding company so these assets can be retained post sale. For example, if you own the land and building your practice operates from, you could hold these assets in a separate company. This provides an opportunity to earn rental income from the post sale. 

Expect the unexpected

Let’s say your balance sheet is strong, the market is hot, and you decide to capitalize on it. Maybe you have more than $5 million in an investment portfolio. However, if you did not plan right, and if the practice assets are not worth more than 50 percent of the fair market value of all the assets of the corporation in the prior 24 months, you may not qualify for the use of the capital gains exemption.

In this case, your advisor could suggest waiting several years to sell the shares of the corporation and proceed with transferring the non-practice assets at that point to a separate holding company. With that being completed now only the practice assets would be owned by the corporation that is to be sold in the future. However, if the sale must occur, it is likely that the shares of the corporation would not qualify for the capital gains exemption and the shareholders are likely to incur an overall higher effective tax rate on the sale. 

Timelines have changed; where you might think you’ve got a few more years to plan, the competitive business environment is demanding you be prepared now. Valuations in health care are robust and strong, with a very competitive buyer landscape. Speak to a trusted advisor to help position yourself for the unexpected – and set yourself up for success.

Contact us

For more information on avoiding exit pitfalls and planning a successful succession, contact:

Erik St-Hilaire, CPA, CA, Managing Director with MNP Corporate Finance Inc. 
204.336.6200
[email protected]

Nicholas Talarico, CPA, CA, Specialty Tax Partner 
780.733.8602
[email protected]

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