Prepare Now to Realize Top Dollar for your Professional Practice in the Future

Most professionals who own their own firms intend to sell their practices one day to fund their retirement or sometimes, a second career. To maximize the value you receive for the practice you’ve built through years of hard work, careful transition timing and planning are needed. Here’s how to get started.

Develop a transition plan

A transition or exit plan is a documented action plan setting out the specific steps and tasks required to successfully exit your practice. For a professional firm this typically includes the following components:

• Your financial and business goals
• A valuation of the practice
• The preferred form of the transition (e.g. successor, merger, sale)
• Anticipated proceeds
• Strategies to properly structure the practice
• Strategies to enhance the value of the practice
• Timetable

Developing this plan helps you think about your future goals and how to operate your business 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.

Structure the business

Essentially, there are two options for selling a practice: a sale of assets or shares. While purchasers generally prefer to buy assets because there are tax advantages and fewer liability issues, most professionals prefer to sell shares because this allows you to claim the lifetime capital gains exemption to shelter up to $866,912 (for 2019) 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. 

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. If you are a licensed professional who has a professional corporation (PC), it must be in place at least 24 months before the sale of the practice. If you wish to access the capital gains exemptions of other family members who are not currently shareholders, this would require advance planning.

Also, for a period of 24 months prior to a sale, at least 50% of the corporation’s assets must be used principally in an active business or to finance a connected active business. Since it is common practice to leave retained earnings in a corporation in order to defer taxes, nonactive business assets may need to be moved out of the corporation in sufficient time 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 to access the capital gains exemption. Since this balance factors into the calculation of the amount of the exemption available on the sale of shares, it might need to be reduced.

Increase value

When assessing a business, 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 

• Clients: Transitioning client relationships takes time and strategizing. In the case of partnerships, it’s important to review partner agreements to ensure compensation is linked to transitioning client relationships.
• Employees: Job descriptions, performance reviews, contracts and payments for employees and independent contractors need to be documented and up-to-date.
• Liabilities: Taxes, debts, loans, leases and other obligations should be paid up to minimize potential liabilities. 
• Lease: If premises are leased it’s important to secure agreement for a new lease, extension or renewal.
• Systems: If current systems are impeding the productivity of the practice, consider hardware/software updates to enhance scheduling, production, billing, collections or financial reporting.
• Financial statements: Prospective purchasers or successors expect comprehensive, accurate, timely records including tax returns and profit and loss statements.

Typically, you may involve a number of different advisors in planning for the sale of your practice, such as a 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, business value enhancement strategy and retirement, estate and tax planning are all properly aligned to achieve your goals.

By planning now for future transition, you can significantly increase the value of your practice and be well prepared for the most appealing opportunity when it arises.

To learn more, contact Brandon Gilbert, BMath, MAcc, CPA, CA, Partner, at 519.679.8550 or [email protected]