If you’re a doctor or a dentist near retirement, you may need to decide how to go about selling your practice. But do you know if your business is actually ready to be sold? Kim Parlee talks to Jeff Halpern, Business Succession Advisor at TD Wealth, about what you need to know when it’s time to sell your business.
Great to be here.
So let's just start with the beginning of our thoughts. I've got a practice. I'm doing something. How do I know whether I'm going to sell or just wrap it up? I mean, how do I know if my business, I can sell it?
Right. Well, it would depend on the type of practice that you're operating. And obviously, you'd have to look at whether the practice has any value. Right. Is there a buyer out there, or somebody that wants to purchase the business? A good example of that in Canada are dental practices. They're very popular for the simple reason that there's not as many practices available for the amount of people that want to purchase a practice, so that makes them pretty valuable. They have got consistent clients or patients as well, too, so that adds value to the business. And so they're quite valuable, and most of the times they are able to be sold.
And so does part of this also depend on the fact of, you know, you've got a lot of patients that come a lot of the time?
Right. Exactly. And regularly. Right? So they'll come for their checkups and that sort of thing.
And I guess I would almost, because I think some people-- and again, not having come from this world, but I think maybe if you're a specialist, you may not have the regular business where somebody who is not a specialist, but more a family practitioner or that it may has people more frequently, so which one is more--
Well, it depends also on how many people or how the area is being serviced. Right. So if it's an area that's being over- or isn't serviced enough--
You're the only one.
If you're the only one, then it's easier for a new professional to come in and set up shop and grow their business organically instead of purchasing a business.
So when you start deciding, OK, yeah, I think I have something saleable, I have to decide then how much do I want to sell it for beyond as much as possible. So you need to bring in, I assume, a valuator.
So how do you-- what are just some more details in terms of how you determine the value of the practice?
Right. So I'd recommend working with a business valuator. They'll help you-- they have a better sense of what the market looks like and what your business could be valued at. And they can also help in identifying weaknesses in your business and help you strengthen those weaknesses so that you can get top dollar for your practice.
That's interesting. I mean what about-- I mean if you-- and again, I'm getting into the nitty-gritty here, but I mean, if you're thinking about you can identify the witnesses to the valuator, but then what are some things you can actually do to make it more valuable? I mean, I'm assuming is it like staff and retaining key staff or those types of things?
Right. And the contracts-- looking at the contracts that the business has and seeing if those are favorable. Right. So a lease, for example, looking at the lease and making sure that the terms of the lease are favorable for the practice, you know, no demolition clauses or relocation clauses. Looking at the contracts with the staff as well too, making sure that you've got a strong non-compete and non-solicitation clauses in those contracts.
And also looking at the financials. The financial statements are very helpful. And you can maybe clean them up. Show that revenue is recurring. Show that there's been growth in the revenue over a few years. Those are factors. They're actually drivers that can enhance the value of the business.
I think the one thing that's interesting about all this stuff is none of it's quick. I mean, you can't say, oh, I want to sell my practice tomorrow. I mean, this is something you should be thinking how far in advance?
I personally think that you can never be too early to start thinking about it. For tax reasons, often times you definitely want to start thinking about it at least two years in advance.
And why is that?
Because you may be-- if you're selling a corporation and selling the shares of the corporation, you might be able to take advantage of the lifetime capital gains exemption. And to be able to qualify for the lifetime capital gains exemption, the corporation needs to meet certain tests. And there's one test in particular where you need to meet it for the two years prior to the sale. So you want to make sure that you're not offside.
And one of the reasons that most corporations are offside they're carrying too many passive assets, so cash that is not being used in the operating business, an investment portfolio, maybe real estate that's not associated to the business. Those could all be passive investments-- passive assets that would make the corporation offside. And so you could miss out on taking advantage of the small-- or the lifetime capital gains exemption, which is $850,000.
And when you say those things are offside, refresh me, too, because I know the latest-- the federal government has made changes to the types of income that can be inside these things. Is it related to this, or is that another thing you have to watch out for?
That's another thing that you need to worry about. Completely different. Yes, unfortunately.
OK. So there's another one there. You know, I guess if the other thing, too, is you can sell the practice, and sell the shares, the corporation.
You could also sell the assets I assume too as part of this. Is that a good idea or is it--
Well, most of the time a seller would prefer the share sale, because of the lifetime capital gains exemption. And in certain situations, depending on what province you are in and what type of practice you have, you might be able to multiply the lifetime capital gains exemption with other family members. So you can see, if you double that up or triple that up, you can probably sell the full practice for a full price, tax-free.
Wonder-- I mean, I guess you deal with people doing this. I mean, this is what you do. Do people plan this well, generally speaking, or is it kind of touch-and-go?
Unfortunately not, because being a business owner takes a lot of your time. And so for professionals, they're very busy. And so they're mostly focusing on their business. And they're not really thinking about succession planning. And so when they do start thinking about it is when they start thinking about retirement or too close to retirement, or maybe somebody comes up with an offer and they might not be ready to act on that, because they haven't prepared.
And I guess the downside of really not preparing is they're leaving money on the table. I'm sure this happens, right?
Absolutely yes. Yeah.
I mean, again, I know you can't give me an exact number, but I mean, is that what you see, like people coming in and saying, you know, you probably sold your business for like 70% of what it was actually worth?
Well, it depends on the market. Really depends on the market. But yeah, that could be the case, or that you just aren't selling it as tax-efficiently as possible.
Which, yeah, can have a lot, too. In terms of times, is this a good time to be selling your business? Or I mean-- and I know there's a lot tax considerations and personal things too, but is this a buoyant market right now?
Well, it depends again on the practice area. Dental practices have been being sold for large amounts, so that's an area that's doing quite well.
But that might not be the case with all practices.
Got it. Pierre, always great to have you. Thanks so much.
Thanks for having me.
Pierre Letourneau, he's a High Net Worth Planner with TD Wealth. He joined me here in studio.