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