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This article was originally published in Profitable Practice – Dental edition.
It’s a sellers’ market for Canada’s dentists. Those who put their practices up for sale generally entertain multiple bids and realize a premium on the sale. But before you decide to capitalize on your years of hard work, you should know that careful timing and planning are needed in order to maximize financial returns. Following are three ways to put some teeth into your exit planning so you can realize top value for your practice.
A transition plan is a documented action plan setting out the specific steps and tasks required to successfully exit your practice. A plan typically includes:
Developing this plan helps you think about your goals and how to operate your business in order to achieve them. The success of your transition will be a direct result of the timing and execution of this plan. Since two components - structuring the practice and building its value - may require a number of years to put into place, it’s essential to allow sufficient time to properly address them.
Essentially, there are two options for selling a dental practice: a sale of assets or shares. While purchasers prefer to buy assets because there are tax advantages and fewer liability issues, most dentists prefer to sell shares. This option allows you to claim the lifetime capital gains exemption whereby you can shelter up to $800,000 (indexed after 2014) of the gain from the sale. This exemption can also be multiplied when family members hold equity shares and participate in the growth of the practice. So, for example, if you own a practice in Ontario and decide to sell the assets of your practice, which is valued at $1 million, this could result in potential taxes owing of about $322,000. However, if both you and your spouse are shareholders who qualify for the $813,600 lifetime capital gains exemption for 2015 and you sell the shares of the practice, over $1.6 million of proceeds from the sale of the practice can be received directly with no personal income taxes (other than some Alternative Minimum Tax which can be fully recovered with proper planning).
In order for a sale to be eligible for the lifetime capital gains exemption, a number of conditions must be met, including the following.
Professional corporation: Only the sale of shares of a small business corporation qualifies for the exemption. Therefore you need to have a professional corporation (PC) in place or to set one up at least 24 months before the sale of the dental practice. This is essentially a small business corporation that is subject to additional regulations established by the provincial or territorial governing body of dentists. The PC must be properly established and then the assets of the practice must be transferred into it.
Asset use: Substantially all (the accepted standard is 90%) of a PC’s assets must be used in an active business at the time of sale. This may require moving nonactive business assets out of your professional corporation.
Share ownership: Shares of the PC must be owned by you and any family members (spouse, parents, children) for a minimum of 24 months prior to a sale. If you wish to access the capital gains exemptions of other family members who are not currently shareholders, this would therefore require advance planning.
Active business: Also for a period of 24 months prior to a sale, at least 50% of a professional corporation’s assets must be used principally in an active business or to finance a connected active business. Since it is a common practice to leave retained earnings in a corporation in order to defer taxes, it is important to address any accumulation of non-practice assets to ensure the capital gains exemption is available.
CNIL balance: The cumulative investment loss balance on your personal tax return is another factor that needs to be considered if you wish to access the capital gains exemption. This balance (the amount by which total investment expenses exceed total investment income for tax years after 1987) factors into the calculation of the amount of the capital gains exemption available on the sale of shares. This amount might need to be reduced so that it doesn’t restrict access to the exemption.
When assessing a practice, the more value that prospective purchasers find, the higher the sale price is likely to be. Focusing on the following strategies can help to reduce liabilities, increase efficiency and enable you to realize higher returns.
Lease: If premises are leased it will be important to acquire the consent of the landlord to assign the lease or to secure agreement for a new lease, extension or renewal in order to prevent any delay of a sale.
Employees: Job descriptions, performance reviews, contracts and payments for employees and independent contractors should all be up-to-date to prevent problems for a potential purchaser.
Liabilities: Ensure that taxes, debts, loans, leases and other obligations are paid up to minimize potential liabilities.
Transition support: Consider ways to smooth the transition of the practice to a new owner and to retain the patient base – perhaps retaining certain key employees, or having associate or staff member assist in introducing patients to the new dentist.
Financial statements: Comprehensive, accurate, timely records should be available for review by a prospective buyer. These include the past three years of tax returns for the practice as well as profit and loss statement for the current year.
Accounts receivable: No buyer wants to pay for delinquent accounts receivable, therefore it is important to implement a strategy to collect any aging accounts receivable.
Systems: If your current systems are impeding the efficiency and productivity of your practice, consider a hardware/software update to enhance scheduling, production, billing, collections or financial reporting.
Typically, you may involve a number of different advisors in planning for the sale of your practice, such as wealth management advisor, lawyer, insurance broker and practice broker. Be sure that an accountant experienced with professional practices is included as a key part of this team. This individual can help to ensure that your business structure, practice value enhancement strategy and your retirement, estate and tax planning are all properly aligned to achieve your goals.
Timing is also crucial. With the aging of the baby boom generation, today’s sellers’ market for dental practices may rapidly evolve into a buyers’ market – so put your teeth into exit planning today and enjoy a taste of your future.
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