Volume 25: Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates

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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

  1. One Year Later

  2. Dealing with Unsolicited Offers

  3. Covid-19 Practice Sales Update

  4. When is the Right Time to Sell Your Practice and Why?

  5. Partnership Pitfalls

  6. The Real Cost of a Dental Practice Set-up

  7. Smaller Practice Realities

  8. Dental Market Update - 2019

  9. Creating Your Own Most Valuable Practice (MVP)

  10. Small Practice Economics

  11. The Market is Very Efficient

  12. How Can Dental Practice Values be Rising and Declining?

  13. Hygiene as a Value Driver

  14. The Value of a Good Team

  15. Is it Time to Move?

  16. Staging A Dental Practice

  17. The High Cost of Dying

  18. Deal-Busters

  19. Patients - Attract and Retain

  20. Should I Stay or Should I Go?

  21. Is There a Buyer for Every Practice?

  22. Good, Better, Best - The Market has Spoken

  23. Smooth-Sale-ing

  24. Buying Time

  25. Patients, Patience, Patients

  26. A Real Patient

  27. Why Do a Practice Valuation? I'm not Selling

  28. Irrational Exuberance or The New Normal?

  29. Do dental equipment and dental technology affect a practice value?

  30. Finding and Being a Mentor

  31. Bigger is Better

  32. Dave's Top Ten List for Buyers (Vendors should read this too!)

  33. How Well Do You Know Your Practice?

  34. Dave's Top Ten List for Vendors

  35. What will happen to dental practice Values in the next 10 years?

  36. Your Premises Lease is an Important Asset

  37. What are Associates Thinking?

  38. There is Life Outside the GTA

  39. When Is the Right Time to Sell My Dental Practice?

  40. Mergers are a Viable Option

  41. Is Your Associate an Asset or a Liability?

  42. Has your Practice Facility Kept Up With Your Billings?

  43. The 100 per cent of Gross Myth

  44. The Past, The Present and The Future

  45. Caveat Emptor

  46. Overpaid Long Term Staff

  47. Selling your Practice in Stages

  48. A Potential Pitfall of Selling Shares

  49. Value in Your Practice Through Balance

  50. Only Trusted Staff Can Defraud You

  51. To Own or Not to Own Practice Real Estate? That is the Question.

  52. Coping With A Large Patient Base

  53. Successful Dental Practice Transitions

  54. Taking Care of Business

  55. The Investing Dentist Phenomenon

  56. Two areas to focus upon that could negatively impact the value of your practice

  57. Organize your Debt in Order to Sell your Practice

  58. Having a Better Team

  59. How Do I Prepare My Practice For Sale

  60. How Do I Prepare My Practice For Sale? Part 3

  61. How Do I Prepare My Practice For Sale? Part 2

  62. How Do I Prepare My Practice For Sale? Part 1

  63. Advice to My Son or Daughter Graduating from Dental School

  64. Transition - What to Expect

  65. Discussion on Digital X-Rays

  66. Partnerships and Shotguns

  67. Strategic Planning - How to Get Started

  68. Calling All Vendors - Practices have Gone Up in Value

  69. Purchasers: Expect to Pay More for a Practice because of Lower Professional Corporation Tax Rates

  70. Matrimonial Practice Valuations

  71. Purchaser's Guide to Affording a Practice

  72. Location Improvements Throughout Your Career

  73. Small Practice Valuations

  74. Partnerships – The Best and The Worst

  75. Changing Location When the Opportunity Comes Along

  76. Visual Presentation of Your Practice

  77. Presentation of Charts

  78. Your Premises Lease Can Be Your Worst Enemy

  79. How to Select an Appraiser for Your Practice

  80. How Are Your Billing Ratios?

  81. It Pays to Invest in Your Tangible Assets

  82. The Importance of Separate Financial Statements

  83. Five Time Frame Levels to Sell a Practice

  84. 12 Suggestions to Safeguard Computer Data

  85. How to Buy a Visible Practice

  86. Why is there a shortage of good practices today?

  87. The Importance of Equipment in the Purchase of a Practice

  88. The Balanced Practice

  89. Will My Practice Be Saleable in The Future?

  90. Buyer Be Aware

  91. Excess Profit - The Second Key

  92. Patients and Profits are the Keys

  93. Plan Ahead