We’ve helped many dentists sell their practices to dental organizations over the past few years. Here are some thoughts from the front line…
Why Is It Happening?
It’s pure economics: there’s a strong demand (lots of people want in), coupled with limited supply (dentists can cash out).
On the demand side, there are lots of dentists and investors who want to own and / or operate a dental practice. And who wouldn’t want to? Anecdotally, our law firm reviews a lot of appraisals and we expect to see an efficiently run practice operating above 30% adjusted profit margin (revenue minus expenses and without considering the dentist’s take home salary or discretionary expenses). Some practices can control their costs better – particularly rent, staff and advertising – while producing a lot more than other practices due to niches, specialities, good locations, strong team, etc.! And we’ve seen these practices operate at close to 50% adjusted profit margin.
Now for some facts… Based on the 2014 tax returns of all the dentists in Ontario (both incorporated and unincorporated):
Just keep in mind that these figures likely overstate expenses (because they were submitted for tax purposes). That means the dentists were probably doing things like including family members on salary (who weren’t actually working) and putting other personal discretionary expenses through the business (e.g. car, etc.). But it’s still a good gauge. Bottom line: dental practices are GREAT BUSINESS investments. Much better than what you could be getting by investing in stocks and bonds and with much less risk!
I guess-timate that there are a few thousand dental practices that will need to be sold in Ontario in the next five years – and that’s just based on the number of dentists with their own practices and who have been at it for a while. Have we seen a FLOOD of dental practices hit the open market? Not really… but there is definitely an uptick in people getting appraisals (from Matt Bladowski of Dental Strategy for example), which means they are 1 step away from listing with us (on www.DentalPlace.ca). What this also means is that there is a shortage of dental practices on the market. With banks (like TD) giving 100% + financing, dentist buyers don’t really pay for anything out of their pockets up front. Even legal fees are covered (that means they’re either amortized over the term of the loan or used in the Line of Credit). So it’s a seller’s market and sellers with good practices can generally dictate the sale structure (shares instead of assets to get the better tax treatment) and other terms of the sale. So why would sellers sell to dental organizations? Simply put: they are serious buyers offering more favourable terms (price, associate remuneration, taking over leases, dealing with staff, etc.) who can GET THE DEAL DONE fast and don’t have financing problems.
Like I said: it’s pure economics. Can you (or should you) blame a dentist who worked their entire lives and wants to get the best deal possible for their practice – if that means selling to a dental organization? And what’s wrong with dental organizations anyways? Is there any hard evidence that they put profits before patients? Aren’t they supposed to be following the same legal, ethical and professional obligations that any other dentist owner / operator would? Part of the reason I think some dentists don’t like them is because they don’t understand them, have heard horror stories from a disgruntled few, or don’t want dentistry to be perceived as a BUSINESS, but rather as a PROFESSION. The latter is how it used to be with LAW as well. I entered into law and I met some lawyers who thought we were professionals first and not business people. They were repulsed at the idea. I think we’re way beyond that now. And market forces have gotten us there: because when you apply business principles to a profession, it’s supposed to give greater access to the general public, increase competition, and reduce fees (think: Walmart).
Yeah, but is it Legal?
Dental organizations are sophisticated. They have resources. They can command big discounts on supplies (like 20%). They can get financing privately or borrow from a traditional bank. They have lots of people at their disposal. They are constantly hiring new talent. They can take care of all the business and administrative functions of running a dental practice. So naturally, the question that comes up is: can they LEGALLY own / operate a dental practice? If it’s a dentist on their own, that’s not an issue… of course they can own the assets or the shares of a dentistry professional corporation. But what about a dental organization that involves both a dentist and a non-dentist person (like a corporation)?
Well, the answer to that isn’t straightforward. Let me explain. First, if you look at the definition of practicing dentistry in Ontario’s Dentistry Act (which differs from province to province and state to state in other countries), it’s a very clinical definition. That means that non-dental persons CANNOT practice dentistry. But what about all the business and administrative tasks / functions that go into operating a dental practice? Can a non-dental person fulfill those functions? Yes. They already do. Landlords provide space. Marketers run campaigns. HR companies hire staff. Order equipment / supplies from vendors. All for the dental office. So what if one person performed all of these functions on behalf of the dental office? I recently found out that almost anyone reputable can PURCHASE dental equipment from a supplier, but only those with HARP qualifications can actually use them. What about dental records? Well, that’s where things get even more interesting. I’ve written a lot about this in articles you can read HERE. There are arguments on both sides of the equation in terms of who can OWN vs. ACCESS them. And until we have a judge ruling on them (because the legislation is pretty silent on this topic) in light of a public dispute, some things will just be kept underground.
Preparing to Sell to a Dental Organization
When preparing to sell a dental practice, if you want to maximize the sale price and other terms, you’ll want to make sure you:
Now, some dental organizations will try to buy a dental practice before a lot of these steps to ‘clean up the practice’ are done. If they offer a seemingly good price, it could be worth it to move forward with them. BUT remember this: you only have 1 option to sell, so you should do it properly. And you’ll never know if they’re offering you ‘fair market value’ unless you actually market the practice and have offers in hand from willing buyers. Even if you do plan to sell to a dental organization, if you’re wondering if they’re giving you a good price / terms, it would be worthwhile to put it on the market (just for the purpose of getting offers and a better bargaining position).
In my experience, dental organizations don’t necessarily offer better / worse remuneration than what the rest of the market offers (e.g. 40-45% being the average) for sellers who stay on to associate afterwards. They do, however, push the limits on restrictive covenants. With their business minded hats on, they definitely build in a number of extra protections for themselves – some of which I question are necessary or even legally enforceable. They come in the shape of chart fees (e.g. you pay $1,000 for treating a patient elsewhere) or genuine liquidated damages (e.g. paying $250,000 for hiring an existing staff member elsewhere or violating a non-compete), which could resemble a punishment (which is not legally enforceable). Just be sure to equip yourself with the right legal team (eh hem…) before starting negotiations with any purchaser – including a dental organization.
Selling ASSETS vs. SHARES
Some dental organizations (non-dentist persons) are weary of purchasing professional goodwill directly in case it turns out that they cannot do so legally (which is a grey area as noted above). So instead they want the seller to sell professional goodwill (an asset) to a dentist or dentistry professional corporation on day 1. Then, the dental organization (usually non-dentist corporation) will purchase the shares of what’s left of the selling dental practice on day 2. I know this sounds complicated. And it is. It adds to the seller’s legal and accounting costs because of the extra steps involved. And, starting January 1, 2017, there will be an additional 13% of taxes (that would otherwise have been paid) on the sale of the goodwill on day 1. Now, if you don’t compare this to what was happening January 1, 2017, it won’t make a difference. But if you do compare it and if you’re able to take advantage of the lifetime capital gains exemption (and hopefully multiply it) and would rather sell shares entirely to a dental organization in one shot but they refuse, then it becomes a question of PRICE: is what they’re offering a good deal when you look at things like: what are they offering when compared to the increased taxes, legal and accounting costs you’ll be paying, as well as what other purchasers would be offering (who would probably be doing straight up share sales)? Just some things to consider…
Irrespective of who you’re thinking of selling to, make sure you do some homework: it’s highly advisable to pay a little bit NOW to clean up your practice to maximize the PRICE and BEST TERMS you can get when you eventually sell. You only get one opportunity to sell, so do it properly. I would also recommend marketing the practice (regardless of whether you’re going to sell to any one particular person – including an associate, friend, or dental organization) so you can appreciate what you can get for it and create leverage during the sale process.
As always, if you need assistance in preparing for sale, contact me (firstname.lastname@example.org | 647.680.9530).
Here’s some recent feedback we received from a dentist who just sold their practice:
“Hi Michael, thank you for all your hard work, you have incredible people working with you and I am really happy that everything went without any problems. Thank you again and have really good time with your family , with best wishes.”
To read all of our dentist testimonials, click HERE.
As an employer in Ontario, it may be necessary to complete a written investigation on a number of issues. You may need to investigate workplace harassment, workplace violence, privacy breach, a criminal act, some other misconduct, or perhaps to settle a argument between team members. Read more
Here is a question I often get from our dentist clients and one that might sound familiar to you, if you’ve ever had a bad employee:
My dental assistant is not very good at her job. She has poor interpersonal skills and she’s often late for work without excuse. She talks down to patients and makes them feel uncomfortable. I haven’t talked to her about any of this before, but I’ve documented it all and now I’d like to fire her for cause. Can I do that?
My answer is always a resounding NO! Here’s why…
“Just cause” for firing an employee must be either
Our incompetent assistant example above falls in the “cumulative” category, so it may seem like our dentist has got enough dirt on the assistant to fire her for “just cause”. But, alas, that is not so!
The courts have said that employees in this situation are entitled to “progressive discipline” in the form of a clear warning and an opportunity to mend their ways and remedy their weaknesses. An employer cannot treat matters of which he/she was previously aware but didn’t bring to the employee’s attention as cumulative cause for dismissal. Here’s a visual aid on how progressive discipline may work:
Progressive discipline must be applied even in the absence of a progressive discipline policy at the office. But, having a progressive discipline policy and not following it when required is even worse, as evidenced in a 2007 case where a senior manager was fired for cumulative just cause but only one of a series of minor incidents of misconduct was brought to his attention (Laszczawski v. Aluminart Products Ltd., 2007 CanLII 56493 (ON SC)). The judge in that case decided that the employee should have had the benefit of having the progressive discipline policy applied and the dismissal was held to be unlawful (meaning without just cause) and awarded the employee pay in lieu of notice.
In some instances, employers are convinced that they have a case of grievous misconduct on their hands and attempt to bypass the progressive discipline process only to get burned in the end. In a recent Ontario court case, Sinnathamby v. The Chesterfield Shop Limited, 2016 ONSC 6966, the plaintiff, Ms. Sinnathamby was a long time employee of the Chesterfield Shop who took ill and didn’t report to work and didn’t provide a doctor’s note for the absence, despite being asked to do so by the manager and being warned that failure to do so will result in termination. The manager terminated the employee for cause and the employee subsequently gave proper documentation for her medical leave of absence. The judge in this case acknowledged the employer’s right to ask for a doctor’s prognosis but found that the employer was not adversely affected by Ms. Sinnathamby’s absence or her failure to provide the documentation by the date requested. The manager’s mere frustration at not receiving proper documentation in clear defiance of the office policy was NOT enough to constitute just cause in this case. The judge once again reiterated the need for proportionality in an employer’s actions against employees and the need for progressive discipline in cases where misconduct is not considered grievous.
Despite the countless court decisions about what behaviour constitutes just cause and what behaviour warrants progressive discipline, the fact of the matter is that termination for just cause is a mine field. Tread carefully and always seek legal assistance when deciding to terminate an employee for just cause.
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Ljubica Durlovska), Jonathan Borrelli, David Mayzel or Michael Carabash. We are your legal dental team.
Stop spending money on your websites. Don’t hire “professional” dental marketers. Stop Your Google Ads. Don’t pay for direct mail. Forget Facebook. Don’t do what everyone else does.
And here’s why: it doesn’t work to bring in and keep high need / high IQ patients. You’ll get bottom feeder patients who will simply look for deals, have no loyalty and will leave you once your campaign ends. Websites and direct mail, etc. have limited chance of success UNLESS they are part of an overall brand and marketing campaign. If you’re just going to do what everyone else does, then be prepared to be disappointed (and be out of pocket LOTS OF MONEY!)
Understand this: 90% of your ideal patients come from word-of-mouth referrals. Read that again. Now take a look at your marketing budget (if you have one) and DECIDE RIGHT NOW to invest in your existing patient base. And here’s how:
Step #1: Identify Your Ideal Patient Within Your Patient Base. How old? Male or Female? Single, Professional, Family? Where Do They Come From? What Language(s) Do They Speak? What’s Their Income Level? What Life Stage Are They At?
Step #2: Develop a brand that caters to your ideal patient. If you want to know more about what a brand is, read this blog and this blog too! I also HIGHLY recommend you read Contagious, Sticky Branding, and the Brand Within.
Step #3: Get Your Brand Out There. Your Brand should be both online and offline. It should be in the hands of your patients (don’t depend on REFERRALS from third parties; go direct to your ideal patient!). And not just any patients: but those who will help spread it through social dissemination (likely in person to others). I high recommend you read the Tipping Point to understand the3 types of patients who help spread brands.
Let’s look at an example, shall we?
Step #1: my ideal patient is a wedding couple about to get married. They aren’t afraid to spend money to make their smile more aesthetic before their big day. And their afraid of those pictures (which Photoshop won’t be able to correct).
Step #2: I want to make my dental office look like a banquet hall. I want a giant chandelier. Bright white everywhere. Elegant. I want my ideal patients to seem like I’m part of the wedding process. My team should be trained to help promote that brand. Using the right language when they speak to patients is so important. Having the right smell and imagery in the office is equally important. I want to show patients what they look like how their life would be significantly better by having me fix and whiten their smile (instant gratification using the language of lifestyle enhancement).
Step #3: I need to be present where wedding couples are looking. That includes trade shows, in bridal magazines, etc. I should network with other wedding professionals (photographers, banquet halls, florists, etc.). AND ONLY NOW should I spend money to promote my practice online (including Google Ads, Facebook, Websites, etc.) but keeping my brand in mind at all times. I’m not interested in targeted everyone; only wedding couples. I’m not wasting money. I’m engaging my ideal patient and niching my practice to survive and thrive in a competitive environment.
Other tips and tricks: when I’m promoting my brand, I need to show my target patients that I CARE about them; that I’m trying to solve their pain; that I’m not just trying to ‘sell’ dentistry. I need to understand what motivates them; what they’re afraid of; and what would make them want to SWITCH to my practice from all the other practices near their home / work. It may take 18 months to get the word out there that I cater to couples about to get married, but by the time I’ve invested in this niche branding, I should be on solid financial footing.
Note: this is just an EXAMPLE. You can use this example to give you ideals on how to target just about any ideal patient. Also remember to review the RCDSO guidelines on ADVERTISING and read this previous article I wrote so you don’t get into trouble. Also take a look at this article that was published about niche dental practices – are they the future?
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or email@example.com.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or firstname.lastname@example.org.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or email@example.com.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or firstname.lastname@example.org.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or email@example.com.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or firstname.lastname@example.org.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.