Planning the Sale of Your Practice

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.

Financial Review

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 advisors 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 advisors 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. 

Tax Planning

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. 

Purification

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:

• You, or someone you were related to, owned the shares of the corporation for at least 24 months prior to the sale of shares;
• The corporation is a Canadian-controlled private corporation;
• 24 months preceding the date the shares are disposed of, more than 50 percent of the corporation’s assets have been used principally in an active business carried on primarily in Canada; and
• At the time of sale, the corporation has more than 90 percent of its assets being used principally in an active business carried on primarily in Canada.

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.