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.
Let's say you're a doctor, a dentist, a health care practitioner, and you've decided it's time to retire. So here's the question. Can you sell your practice? And if you can, how much is it worth?
Big question when you're getting ready for retirement. And here to provide us with some answers is Jeff Halpern. He is a Business Succession Advisor at TD Wealth. Great to have you here.
Thank you, Kim.
So let's start with a real scenario. I've got a practice. I've been running it for years. I'm planning my retirement. Best case scenario, I can get some money from the practice that I've been building over the years. Question is, how much and even can I sell my practice?
Great question, Kim. Well, first of all, most businesses are the most valuable asset that our clients actually own. And so doing a little bit of upfront planning makes a lot of good sense. Practices differ, frankly.
Someone who is operating a medical practice is different from someone operating a dental practice or a vet practice. So they're all different. They're all valued different, and there's a difference between how many buyers are standing at the sidelines ready to buy them.
OK. Give us a little insight. Again, I know it's going to depend on the, like you said, the type of practice and the type of-- whatever it is, the type of medicine the people are involved in. But generally speaking, what makes a practice valuable?
OK, well, right now, for example, in the dental world, there's a lot of dentists who are graduating from university. And there's an influx of foreign dentists into Canada. On top of that, you've got these big corporations aggregating the purchase of dental practices to have these large dental practices. So you have more buyers than you have available practices for sale right now, which means that they're very easy to sell.
So let's take dentistry. What is it about dentistry that makes it valuable? I mean, I'm assuming it's the regularity the clients, constant checkups.
Well, there's great profitability in it for dentists, and they can have an enhanced profitability by bringing in things like dental hygienists and doing cosmetic dentistry. A lot of people are concerned about their appearance these days, and so they're spending money on their appearance. And that means more revenue.
What about things like-- number of patients and regularity. And you're saying, again, more services they're providing. Location? If you're under-serviced, is that a good thing?
Well, it can be or maybe not because if it's under-serviced, it means that if another practitioner actually sets up shop next door, maybe they can take the patient load away from the existing practitioner because there's pent-up demand. So it really depends.
Startup costs? I know it costs a lot to get the equipment, get the people, get the infrastructure going. Good or bad for selling a practice?
Well, the young dentist who's just graduating typically has a student loan debt that they've got to pay off. So to start up a new practice from scratch means they're not going to make any money for several years. So the idea of buying an existing practice where they get that profitability, that cash flow, much more attractive than trying to do it on their own.
So if someone is listening to us right now and saying, OK, I've got this. I don't have that. Check, check, check. How do they decide what their practice is worth?
OK. Another great question. There are people who specialize in business valuation. And essentially by them coming and taking a look at your practice, they'll be able to tell you how your practice compares to other practices, number one. Number two, how you can change your practice to tweak some of the value metrics to have a higher value in time for the time that you actually want to exit.
Well, for example, if you don't have any contracts with your employees, you could enter into contracts to make sure that those employees are all locked in and there's non-competition clauses in their employment contracts. Similarly, if you have a lease on your premises but it's going to mature next year, the idea of renewing that lease to have a longer-term duration would be much more attractive or appealing to the buyer.
So these don't sound like things I'm going to do in a week. So and this is not something that's saying I'm going to retire in six months. This is, I am retiring in a few years. I need to start thinking about this when? How much advance timing should I give myself?
I like to recommend to any business owner to take a two to five-year advance time horizon in terms of preparation. There are things as fundamental as doing some advance tax planning that typically requires at least a two-year window in order to take advantage of the tax planning opportunities.
Any specific ones there? Any one [INAUDIBLE]?
There is. There's something called the lifetime capital gains exemption where an individual who owns a business sells shares of the business. They can enjoy an exemption for the first $800,000 of the capital gain on the sale of those shares adjusted for inflation. This year, the exemption is $866,912. And you can multiply, which means you can use it not just for one individual but multiple shareholders of the business who happen to be shareholders at the time the business is sold. But this has to be done in advance of the sale to optimize.
Now you said something though when we were talking about selling shares. I mean, there's that the structure of the sale when someone decides to sell their practice, if they can. And that is what? I mean, you can sell shares, or what else can you do?
Well, you can sell shares, typically, or assets. Now, from the buyer's perspective, they typically prefer to buy assets because they then get to markup the value of the asset to the fair market value of what they pay for the asset. The seller, on the other hand, would prefer to sell shares because they get access to things like the lifetime capital gains exemption. They might be able to get the proceeds completely tax free. So it depends who's in the driver's seat.
Yeah. Yeah. And I guess part of being in the driver's seat is having your business ready as attractive as possible--
--and getting things done.
So by tweaking those value metrics before the sale, you're going to make your business more attractive, and then, hopefully, be in the driver's seat at the time of sale.
OK. Once again, for someone who's listening-- I'm a few years away. Is there any watch-outs I should be careful about, or is there anything I should start doing right now?
Well, I think you have to be careful about looking at your client base, your patient load, and identifying whether or not they're aging and whether or not they are a patient base that is going to be passing on and dropping off over time, or whether or not it's a growing trend of your patient revenue. Because the buyer wants to buy a growing patient trend. So you might have to invest in the growth of your practice, in effect.
KIM PARLEE: Right. Attract some new patients and get ready for that.
So last question for you. Someone's watching, thinking about retiring. What do they need to do today?
OK. The very first thing I'd suggest is to speak to your professional advisors, whether it's your banker, your accountant, your lawyer, your valuator. Get some professional advice. Try to understand what your practice is worth, what kind of plan and you have to put in place to take advantage of all the opportunities that are available? Also, it's fine for you to get one offer for your practice, but maybe you're eligible to get multiple offers and to create a bit of an auction. And that's what, perhaps, a business broker would bring to the table, the ability to have multiple offers to get to the best value.
Jeff, always a pleasure. Thanks so much.
Thank you, Kim.