Setting your dental practice up for a potential sale should ideally start about three to five years in advance. This will give you enough time to develop more value in your business. Planning for things like staffing costs, expenses, and large purchases within the perspective of a potential sale will help you make better choices in the interim that can improve your selling position. You may have to evaluate the pros and cons of selling the shares of your business (if incorporated) or the assets. Assets of the practice may include intangible assets such as the client list or tangible assets such as equipment and inventory. An appraisal or valuation will be required to determine the value of your business assets.
If you are operating as a sole proprietor or partnership, it may be beneficial to incorporate as a professional corporation (link to other article) to alleviate some of the personal tax implications upon closing the sale. These include tax deferral and the Lifetime Capital Gains Exemption (LCGE), depending on how your professional corporation is structured.
You will also have an opportunity to review all documentation, renegotiate contracts, align partnerships, and shift intangible values to more tangible ones. For example, if you have been operating under your professional name, you may consider rebranding to a company name. Building up brand value in the company name will offer more transferable value.
As you get closer to sale time, it should be noted that certain liabilities and debts are typically required to be paid out by the seller before or upon closing. The buyer may also require that all redundant assets be extracted out of the corporation. This could include transferring out any life insurance policies held in the corporation’s nam which can have significant tax implications and may require the involvement of experts such as an actuary. It is critical to start the planning way in advance of the sale so as to avoid last minute surprises.
As noted above, one important tax benefit to incorporating a dental practice is the ability to claim the $913,000 lifetime capital gains exemption upon the sale. Where certain criteria is met, , the practitioner can sell the shares of the corporation and the first $913,000 of capital gains are potentially tax exempt. It is critical to review such criteria with your tax advisor as there may be some planning required 24 months prior to selling so as to qualify for the lifetime capital gains exemption. To put it in perspective, proper planning to utilize this lifetime capital gains exemption may result in tax savings of up to $240,000.
Succession planning or selling a dental practice can be a life-changing event on many levels. With proper legal and accounting counsel in the early planning stages of a planned or potential sale, you will be able to improve the value to the seller and ensure a smoother transition on your end. That includes the ability to take advantage of tax deferrals and capital gain exemptions. For more information on rules regarding the sale of a dental practice, please refer to the Royal College of Dental Surgeons of Ontario. To start the planning process, please contact us.