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Are you contemplating the sale of your practice? If so, the time to start planning is now. There are many factors that professionals need to consider to maximize the value of their practice and ensure a smooth transition to a future purchaser.
A financial review and a valuation of the practice are recommended to be completed prior to deciding on the sale of your practice. This ensures the value, and more importantly, overall after-tax proceeds are consistent with expectations and align with your personal objectives as you transition. The valuation is based on the past and future earnings of the practice and valuators will typically review the current and future performance with management to determine the overall value. COVID-19 and the resulting temporary shutdown of practices caused significant concerns with purchasers, however, this has been industry specific and not all geographies or medical fields were impacted the same way. Depending on the circumstances, valuations may have been impacted; however, pre-COVID values are still possible, provided vendors can demonstrate the practice’s ability to return to pre-COVID income and cash flow levels. On the other hand, in certain health care industries business valuations are at all time highs. Purchasers have also considered earnouts or a calculation of earnings based on specific periods (i.e. July 1, 2020 to September 30, 2020 income) to allow the vendor to demonstrate their ability to return to pre-COVID income levels. Transaction structures have increased in complexity as risk gets priced in, increasing the importance of advisors in any potential transaction.
Advisors can provide insights for increasing the profitability of the practice well in advance of a sale. There are often opportunities for increasing the revenues of the practice or decreasing the expenses. Advisors can also help drive significant value through understanding and “normalizing” non-recurring or abnormal costs on your historical financial statements. These changes play a large part in increasing the overall value of a practice. Purchasers will always seek practices that are profitable and have the capability to generate sufficient cash to service the expenses, as well as support the purchaser’s personal living expenses. Debt is one of the most important factors that a purchaser considers and financial institutions are being more vigilant in their review and approval processes.
Reviewing the financial metrics of your practice with your advisor can provide opportunities for maximizing the overall value of your practice. MNP’s Corporate Finance team of transaction experts are well versed in mergers, acquisitions, and divestitures, and can assist in all aspects of the transaction. With a proven track record in a number of health care related industries, our team of experts can provide guidance on valuation, manage and execute the sale process from start to finish, market to prospective buyers, solicit offers, negotiate deal terms, and assist you through the buyer’s due diligence and closing.
Professionals should begin planning for a sale a minimum of two to five years in advance. From an income tax perspective, advanced planning ensures the professional can capitalize on all the potential opportunities while ensuring the best overall income tax result. The sale of your practice could take the form of an asset sale, a share sale, or a combination of the two (often referred to as a hybrid sale). A share sale or a hybrid sale requires advanced tax planning to ensure certain criteria are met a minimum of 24 months prior to a sale, and to review the overall corporate structure to ensure it is structured to facilitate the sale.
It is common for professionals to have non-practice assets owned by their professional corporation, including marketable securities, rental properties, and life insurance policies. These assets are generally not sold to a purchaser and planning is required to transfer these assets out of the professional corporation. Permission from the applicable provincial dental college may be required to allow for this transfer.
In addition to transferring these non-practice assets out of the selling corporation, this purification may also provide the ability for the professional, and any family members who are also shareholders, to claim the capital gains exemption on the sale of qualified small business corporation shares. The capital gains exemption limit for 2020 is $883,384 and provides an exemption applied towards the capital gain generated from the sale of the shares of the professional corporation.
Generally, in order to qualify for the exemption, there are certain criteria that need to be met:
The transfer of non-practice assets needs to be completed a minimum of two years prior to the sale of shares to meet the requirements above and to mitigate any adverse income tax implications. If your professional corporation has non-practice assets and the practice can be sold, consult your advisor to review and determine if a purification transaction is required.
With advance planning, there may also be opportunities to introduce family members into the ownership of your professional corporation. This may allow these family members to also benefit from the potential use of their capital gains exemption on the sale of the corporation’s shares. However, it is important that the shares qualify for the capital gains exemption for this to be advantageous, and that there is time for value to accrue on the shares held by newly introduced family members. The importance of planning, well in advance of a sale, should not be underestimated as it can have significant financial benefits to you and your family.
It is always important to have discussions with your corporate legal counsel in advance of a sale, as there are many items from a legal perspective that need to be considered. Location and premises’ leases are very important items to review. The value of your practice is dependent on a purchaser’s ability to maintain the location and the lease for their future. Lenders need to be comfortable that the lease and applicable renewal periods will cover the term of the loan for the purchaser. In practice, leases often pose challenges on a sale and in some cases can negatively impact the value and/or the ability to sell the practice.
Associate and employment agreements are also highly recommended and can enhance the value of your practice. A purchaser wants to ensure they are purchasing a stable practice and these agreements are important in determining the viability of the business.
Restrictive covenants and non-compete agreements are also very important in maintaining the financial value of a practice, as they restrict the ability of the professional from operating in certain areas or from soliciting employees or patients in certain circumstances. As indicated above, it is important to consult with your legal counsel on these matters.
Purchasers of professional practices have significantly changed in the past decade. Transactions occurring between professionals in the same specialty area are still very common. However, in recent years, corporate purchasers (i.e. corporate consolidators) are becoming more common and are challenging the prices of practices. The deal structures and valuations will look different depending on the type of buyer you chose. We have a depth of experience advising clients on the sale of their practices to all types of buyers, from an associate buying-in to the largest of industry consolidators. Maximizing your options can not only enhance value, but give you the desired type of transition once the deal is done.
A vendor needs to define and plan their future, giving consideration to their retirement. Do you anticipate fully or partially retiring, or perhaps continuing indefinitely as an associate of the practice? Planning is critical to your future and warranted given the amount of effort you have put into building your practice. With proper planning, all your hard work will pay off.
Congratulations on setting yourself up for financial success!
MNP has a team of experts that will work together to help you navigate the sale of your practice. Our income tax specialists, succession planning experts, business valuators, and corporate finance specialists are all available to help you reach your overall financial goals.
For further information, please contact Nicholas Talarico at (780) 733-8602 or [email protected].
Related Topics:Dentists; Doctors; Optometrists; Lawyers
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