Volume 26: Calling All Vendors – Practices have Gone Up in Value

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If you had your practice valuation prepared a couple of years ago you should see a marked increase in today’s Goodwill value. Continuing on from my article in Volume 25 of Professional Advisory, vendors should receive a higher value for their Goodwill because of the lower tax rate for the purchaser when they incorporate to purchase a practice.

This is most noticeable in larger practices that are paying up to 35 and 45 percent tax on the excess earnings. Since the tax rate for the incorporated purchaser would only be 19% there is more money left over after taxes to put toward the higher purchase price of a practice.

Experience has shown that Goodwill in a larger practice has gone up as much as 30 to 35 percent. In a small practice where the personal tax rate on excess earnings is only, say 25 percent, then the tax differential is not as noticeable and therefore the Goodwill value does not jump as much.

Underachieving practices, with low billings per patient, will also experience noticeable increases. The limiting factor of low excess earnings will notice the benefit of the lower professional corporation tax rates. Too often the more conservative practices suffer in their bottom line. This new professional corporate tax rate for the purchaser leaves more excess earnings, which, with extensive patients, makes the higher value come together in balance.

Sale of shares or sale of assets for the vendor

It would be prudent to talk to your accountant about forming a Professional Corporation to sell your practice. Would it be good for you? Yes, you can incorporate to sell your practice and not have to wait an extended period of time. One must realize that a share sale will be at a lower value but the taxes also could be at a considerably lower cost. Potentially you would have the $500,000 exemption available in a share sale. Even the formation of a hygiene corporation owned by your spouse could double the exemption. Talk to your accountant. Note: the vendor does not have to incorporate for the purchaser to have the lower tax rate on excess earnings.

Upper limits on value:

In the right combination of billings per patient, reasonable equipment and solid excess earnings from ownership, it would not be unrealistic to have your practice value equal to your billings or higher. This kind of practice would be of limited risk because of the extended patient base, equipment that has a reasonable future life expectancy and overhead with controlled costs. After the sale, the results should be able to be duplicated by most purchasers.

Are practices saleable at these higher figures?

Yes, there is more money available to pay for the practices because the government share of the excess earnings has been reduced. This seems contradictory but the tax reduction on the excess earning capacity has a great impact in paying off the practice. I would say even faster than before when purchasers could not incorporate.

"Excess earnings" of the practice is the money left over after all true expenses including paying the owner and the associates for their professional services at 40 percent.

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