Volume 25: Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates
Reality today is that purchasers are incorporating when buying a practice. The tax rates for the first $300,000 (and by the new Federal budget $400,000 in 2007) net income after payments to the all doctors for their remuneration, is only about 19%. This means there is about 81 cents on the dollar left over to pay the loan to purchase the practice. In the past, we used personal tax rates to calculate this excess earning capacity and often there would only be 60% or less left over to pay for the loan.
The new Federal budget also proposed a reduction in the Federal Professional Corporation tax rate from 13.2% to 11.5% in 2008. In 2009, a further reduction proposes to reduce the Federal tax to 11%. The provincial rate is scheduled to remain at 5.5%.
All our valuations, using the 2005 financial statements, are now being valued using the new Professional Corporation Tax rates. This generally means that the "Goodwill" value of the practice will go up. The extent of the new increased goodwill value will reflect very strongly on the number of recall and active patients. The more patients, the higher the value will increase. All the additional value will go to "Goodwill" as the "Equipment", "Leasehold Improvements" and "Supplies" are set values. The total assets do not become more valuable because the practice makes more net income after taxes.
The most positive impact will be noticed in practices with a lower billing per patient, which in turn has produced a low net income. The least impact will be on practices with a high billing per patient and a low overhead as there is a limit on the value of a chart – few charts with high billings per chart is a high risk for most purchasers.
Does this mean that practices are less affordable? No, the practice value in general should still be equal to five or six times the net income after tax. Due to the taxes being lower with the Professional Corporation Tax Rate the purchaser will have more money remaining to pay for the practice.
What does this mean to the Vendor? Your practice will be worth more. It would not be unreasonable to have a 33% increase on the “Goodwill” component of the value. Some practices with conservative dentistry could be worth even more.
If you are incorporated you can sell assets or shares. The sale of shares may be very tax advantageous for you even when the value will be lower – again, consult your accountant, as your situation is unique to yourself.
What does this mean to the Purchaser? You must incorporate to purchase a practice. If you do not incorporate, your personal tax rate will not allow you to afford the purchase of a practice.
What is going to happen in the future? It appears that taxes are going to drop and your practice will become more valuable, although most of the gain is already in place with the current lower tax rate for Professional Corporations.
The Professional Advisory
- One Year Later
- Dealing with Unsolicited Offers
- Covid-19 Practice Sales Update
- When is the Right Time to Sell Your Practice and Why?
- Partnership Pitfalls
- The Real Cost of a Dental Practice Set-up
- Smaller Practice Realities
- Dental Market Update - 2019
- Creating Your Own Most Valuable Practice (MVP)
- Small Practice Economics
- The Market is Very Efficient
- How Can Dental Practice Values be Rising and Declining?
- Hygiene as a Value Driver
- The Value of a Good Team
- Is it Time to Move?
- Staging A Dental Practice
- The High Cost of Dying
- Patients - Attract and Retain
- Should I Stay or Should I Go?
- Is There a Buyer for Every Practice?
- Good, Better, Best - The Market has Spoken
- Buying Time
- Patients, Patience, Patients
- A Real Patient
- Why Do a Practice Valuation? I'm not Selling
- Irrational Exuberance or The New Normal?
- Do dental equipment and dental technology affect a practice value?
- Finding and Being a Mentor
- Bigger is Better
- Dave's Top Ten List for Buyers (Vendors should read this too!)
- How Well Do You Know Your Practice?
- Dave's Top Ten List for Vendors
- What will happen to dental practice Values in the next 10 years?
- Your Premises Lease is an Important Asset
- What are Associates Thinking?
- There is Life Outside the GTA
- When Is the Right Time to Sell My Dental Practice?
- Mergers are a Viable Option
- Is Your Associate an Asset or a Liability?
- Has your Practice Facility Kept Up With Your Billings?
- The 100 per cent of Gross Myth
- The Past, The Present and The Future
- Caveat Emptor
- Overpaid Long Term Staff
- Selling your Practice in Stages
- A Potential Pitfall of Selling Shares
- Value in Your Practice Through Balance
- Only Trusted Staff Can Defraud You
- To Own or Not to Own Practice Real Estate? That is the Question.
- Coping With A Large Patient Base
- Successful Dental Practice Transitions
- Taking Care of Business
- The Investing Dentist Phenomenon
- Two areas to focus upon that could negatively impact the value of your practice
- Organize your Debt in Order to Sell your Practice
- Having a Better Team
- How Do I Prepare My Practice For Sale
- How Do I Prepare My Practice For Sale? Part 3
- How Do I Prepare My Practice For Sale? Part 2
- How Do I Prepare My Practice For Sale? Part 1
- Advice to My Son or Daughter Graduating from Dental School
- Transition - What to Expect
- Discussion on Digital X-Rays
- Partnerships and Shotguns
- Strategic Planning - How to Get Started
- Calling All Vendors - Practices have Gone Up in Value
- Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates
- Matrimonial Practice Valuations
- Purchaser's Guide to Affording a Practice
- Location Improvements Throughout Your Career
- Small Practice Valuations
- Partnerships – The Best and The Worst
- Changing Location When the Opportunity Comes Along
- Visual Presentation of Your Practice
- Presentation of Charts
- Your Premises Lease Can Be Your Worst Enemy
- How to Select an Appraiser for Your Practice
- How Are Your Billing Ratios?
- It Pays to Invest in Your Tangible Assets
- The Importance of Separate Financial Statements
- Five Time Frame Levels to Sell a Practice
- 12 Suggestions to Safeguard Computer Data
- How to Buy a Visible Practice
- Why is there a shortage of good practices today?
- The Importance of Equipment in the Purchase of a Practice
- The Balanced Practice
- Will My Practice Be Saleable in The Future?
- Buyer Be Aware
- Excess Profit - The Second Key
- Patients and Profits are the Keys
- Plan Ahead