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Volume 48: Overpaid Long Term Staff

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Following up from my last article, A Potential Pitfall of Selling Shares in Professional Advisory #46,there are other situations that can be very detrimental to your expectations of the net realizable value of your practice. This next potential problem is overpaid long term staff.

 
You have seen the effect. It is review time and your long term staff member gets her raise of let us say, $1.50 per hour. Sounds innocent enough? So now she is getting $38.00 per hour. She is your assistant, is 55 years old, and has been with you for 30 years and works 40 hours per week and your billings are about $800,000. You are now anticipating selling your practice. Do you think that a purchaser would want to hire this person if they were to purchase your practice? I am afraid not!!
 
So the purchaser wants to purchase your practice but not hire the assistant. She now becomes your problem to terminate. How bad can that be? Statutory law would be one weeks pay per year of employment to a maximum of eight weeks. This would be $12,160. High enough but it could be worse. The common law could require you much greater termination pay than the Statutory minimum. Generally speaking such termination pay could equal one month of pay per year of service, although there is typically a cap of about one year total termination pay but not always.
 
If she sues for wrongful dismissal, under common law it becomes a legal matter. Capped at one year, it would cost about $78,000. Uncapped it could cost $196,000. This is for only one employee. If your entire team is paid well over the standard remuneration for your dental community, your practice may not be salable.
 
How to avoid this problem? 
1) Become informed about the standards of pay in your community.
2) Let your staff know this pay range.
3) Remuneration can take different forms, i.e., gifts, outside training (team trips)
 
Once you have the problem you can:
1) Negotiate to pay the employee a lump sum payment to reduce their salary. But even this has its problems. Negotiation without compensation to the employee would probably not stand up in court. Negotiation without the employee being given an opportunity to consult a lawyer would probably not stand up in court either.
2) A reduction in pay could be construed constructive dismissal and this again could become a legal situation.
3) Give the employee a years working notice. The employee is put on notice that at the end of the one year period, her salary is being reduced, and if she does not agree then her employment is terminated at the end of the one year period. This should reduce your exposure but then you could lose that employee if they find another job and it would put off the sale for the year.
This is a tricky area. Consult your labour lawyer before you make any attempt to solve your problem.
 
The sale could go forward if the Vendor agrees in the sale agreement that the Vendor remains liable for her termination pay for an extended time period if the Purchaser terminates her after closing. Another remedy could be that the Purchaser puts into the sale agreement that the deal is conditional upon the employee agreeing to reduced pay, failing which the Vendor must terminate her at the Vendor’s cost.
 
As you can see, overpaying staff limits your net income on a year over year basis and even the net value of your practice when you sell it.
 
Graham Tuck, H.B.A., C.A. is the broker of record for Professional Practice Sales Ltd., which specializes in the valuation and sales of dental practices. He can be reached at   (905) 472-6000 or 1-888-777-8825 or e-mail at: grtuck@ppsales.com

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

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