This is the second blog I’m writing about how dentists and DSOs (dental service organizations) have gotten into trouble in the U.S. In the first blog, I talked about some Colorado cases that came out in 2007 and which found business services arrangements between dental service organizations and dentists to be illegal and unenforceable. In this blog, I’m going to look at cases for Washington State. While 3 / 4 cases resulted in business service arrangements being declared illegal (and the 1 / 4 case being so narrow in application that it’s not really giving anyone a green light on fee splitting), what’s important is that the courts repeatedly said that they would look beyond what was written to determine if the non-dentist was practicing dentistry in reality.
So here we go… by the way, you can scroll down to the bottom to see the NEW LAW (called SUBSTITUTE SENATE BILL 5322 that was passed in Washington State a few months ago (and which takes effect this month) that confirms dentists’ rights to contract with DSOs for business support and reaffirms existing state law that prohibits unlicensed persons and non-professional entities from interfering with a licensed dentist’s independent judgment on patient care. Importantly, SSB 5322 was a compromise Bill between DSOs and those who wanted to restrict them. Among other things that Bill defines the unlicensed practice of dentistry as interference with a licensed dentist’s independent clinical judgement. This could include a non-dentist doing things like imposing time limits for patient procedures; limiting or imposing requirements on a dentist’s decision regarding a patient’s course of treatment; requiring or limiting the use or choice of a laboratory, materials or equipment in patient treatment; limiting or imposing requirements on the referrals by dentist to a specialist or any other practitioner; interfering with a dentist’s access to patient records; and interfering with a dentist’s decision to refund payments made by a patient for treatment performed by the dentist.
It also prohibits a non-licensed person or entity from employing or contracting for the services of licensed dentists, licensed dental hygienists, licensed expanded function dental auxiliaries, certified dental anesthesia assistants and registered dental assistants. The legislation gives the state department of health and the attorney general authority to investigate and enforce the law, up to and including issuance of cease-and-desist orders to prohibit continued operation by those who violate those conditions. Violation of this law is a misdemeanour for those non-dentists that get in the way between a dentist and their patient.
Importantly, this new Bill says that there’s nothing here to prevent a non-dentist from: owning or leasing assets used by a dental practice except dental records of patients; employing people (other than those health professionals noted above); providing business and support services and management services to a dental practice and receiving fees for these “calculated as agreed to by the dental practice owner or owners”.
Also, that Bill noted that dentists should be able to determine the dental practice model would allow them to best serve the needs of their patients. Dentists should have the option to contract for administrative support services and dentists should also be able to lease real or personal property in a manner that meets their individual business needs. The legislature intends that these contract decisions must not interfere with the independent clinical judgment of the dentist entering the contract.
In other words: WOW!
BY THE WAY, on January 22, 2015, House Bill 1514 had been introduced (though it never went anywhere other than to get significantly watered down in Senate Bill 5322) that would have put SIGNIFICANT RESTRICTIONS on DSOs operating in that State. For example, that Bill would have prohibited unlicensed persons from having an ownership interest in the dental practice (although they could own equipment / leaseholds) or sharing in the revenues / profits / proceeds of a dental practice (including compensation for services that included a share of the revenues or profits of the practice). That Bill would have also limited agreements to 1 year, forbid non-competes, and required copies of all agreements be provided to the State Dental Board upon request. DSOs could now own patient charts or hire dentists or hygienists or otherwise interfere with a dentist’s independent clinical judgment. Dentists could also cancel their contracts at any time.
Now, let’s get on with the caselaw (which had to decide on laws that applied at that relevant time):
Washington (1950): Illegal
In State et al. v. Boren et. al., (1950) 36 Wash.2d 522, the State of Washington started an action against two individuals – A. E. Boren and W. W. Shepherd – for illegally practicing dentistry in that State. The State of Washington also commenced an action against two dentists in that state, C. D. Harlow and R. T. Stickels, for aiding and abetting Boren and Shepherd in such illegal practice of dentistry.
By way of background, Boren and Shepherd were partners. Their business was called Dental Management Company. It operated offices throughout Washington. One such Seattle practice was sold to Dr. Bergman, a licensed dentist. Dr. Bergman died and the business was eventually returned back to the partnership, which entered into a conditional sales contract with Dr. Harlow for $55,000. Dr. Harlow agreed to pay $750 / month on the contract. As part of that deal, Boren was employed as a manager at $500 / month. Boren managed the office, buying the supplies and watching the charts and making the accounts and payments, and general manager, and looking after the advertising.
Under this arrangement Dr. Harlow also drew a salary of $500.00. So we find that in addition to the ordinary costs of operation, there was each month paid out of the business, the following: To Dental Management Company, on the contract, $750.00; to Dr. Harlow, salary, $500.00; to Mr. Boren, salary, $500.00.
But for a period of time, there was paid to Boren ‘bonuses’ totaling thousands of dollars. Dr. Harlow testified that these amounts were given ‘in appreciation of the increase in business’. No explanation was given as to why this money was not paid to the partnership in reduction of the contract obligation.
From all of the foregoing, the Court found that Boren and Shepherd, with the knowledge and consent of defendant Harlow, owned, managed and operated that dental office in Seattle, contrary to Washington law.
The Court also addressed a constitutional challenge made by the defendants to that law on the basis that it restricted ownership of property (a natural right). In a previous case, State v. Brown, 37 Wash. 97, the Court found that a prohibition on one who doesn’t have a license to practice dentistry from owning, maintaining or operating an office for the practice of dentistry was a violation of the constitution of Washington.
But a majority of the Court in this case OVERRULED that decision in the following paragraph:
But there is a clear distinction between the right of the state to interfere with the owning and managing of property, as such, and its right, under its police power, to protect the health of its people. Experience has shown that the care and treatment of the teeth requires, not only skill, but the personal relationship between dentist and patient. It requires the services of a trained expert, learned in his profession. The care and treatment of the teeth is not a business. It is not a commercial transaction. It is a profession. A person may own and sell dental equipment and supplies. But the state, in the exercise of its policy power, has said that he cannot, without a license, practice dentistry. The state has said, in its wisdom, that a person practices dentistry ‘who owns, maintains or operates an office for the practice of dentistry.’ There can be no question but that the activities of Boren and Shepherd come within this definition. The state has decided that such a practice does not adequately protect the health of its people. Clearly, such a regulation is a reasonable exercise of its police power. For the reasons hereinabove assigned, the decision in State v. Brown is hereby overruled [emphasis added].
Washington (1951): Legal
In Prichard v. Conway, (1951), 39 Wash. 2d 117, the Court approved quasi-profit-sharing between a dentists and a non-dentist. Just keep in mind that this was a very limited situation involving a dentist’s widow (Constance Conway) who had sold her deceased husband’s practice to another dentist (Dr. James M. Prichard). Mrs. Conway reserved the right to manage the office, to receive instalment payments of the purchase price for 10 years, and to receive net profits of 70 percent the first year, 60 percent the second year, and 55 percent for years three through five. Thereafter Dr. Prichard was to have all of the net profits. It is to be noted that, before any profits were to be divided, $300 was to be paid on the purchase price and Dr. Prichard was to draw $750 each month, in addition to the payment of all other operating expenses. It is to be noted, further, that, without any investment on his part, Dr. Prichard was taking over an established dental practice.
Upon viewing these profit-sharing provisions in context of the entire transaction, the Court concluded that this arrangement was entirely lawful as a means of transferring the good will of the practice. Furthermore, the seller’s involvement in the office management was limited to tasks routinely performed by non-professional employees and was intended to facilitate transfer of the practice’s business operations to the buyer. For his part, Dr. Prichard, pursuant to the agreement, was to spend his whole time to the professional care of the office and have exclusive control over professional conduct and practice in the office. The Court basically found legitimate reasons for incorporating profit-sharing provisions.
In coming to its decision, the Court review the aforementioned State v. Boren case, and distinguished it from the present case. The Boren case, for example, dealt with non-dentists who, having a chain of dental offices, were ostensibly selling one of them to a licensed dentists but were actually pocketing all the profits from the operation through bonus payments. And in the present case, Mrs. Conway was allowed to own the property and interests which she sold to Dr. Prichard and didn’t employ a dentist to take over her late husband’s practice and operate it for her. As to whether the agreement between Mrs. Conway and Dr. Prichard was void for being against public policy, the court found that “it is a bona fide contract of sale calculated to protect and to benefit both parties, and none of the provisions of that contract brand it illegal or contrary to public policy. The fact that Mrs. Conway was to have a relatively large percentage of the net profits during the first five years does not establish that she owns, maintains, or operates an office for the practice of dentistry, but, rather, that she and Dr. Prichard had agreed upon a formula for arriving at a value of the ‘going business,’ which we conceive to be the good will of the established dental practice.”
The Court also noted that the delineation in the contract, between professional conduct and practice (which was Dr. Prichard’s domain) and the business management of the office (which Mrs. Conway was to superintend), at first may have supported the view that Mrs. Conway was not practicing dentistry illegally. But it was Mrs. Conway’s conduct – instead of anything written in a contract – that helped convince the Court that she was going beyond what was proper for non-licensed personnel to constitute practicing dentistry.
the fact that the same details are supervised by one who, instead of being an employee, is selling the practice under a conditional sales contract, does not of necessity constitute such ownership, maintenance or operation of an office for the practice of medicine or dentistry as is contemplated by [the statute], although it could well be, a factor requiring a closer scrutiny of the entire transaction to determine whether it is actually what it purports to be or, instead, is a scheme or subterfuge to violate the law.”
Bottom line: parties should be cautious about relying upon the Prichard case in support of fee-splitting between dentists and non-dentists.
Washington (2004): Illegal
In Ghorbanian v. Fallahzadeh, No. 50766–4–1 (Wash.Ct.App. Jan. 5, 2004), the Court of Appeals had to determine whether the combined effect of a rental agreement and a non-dentist’s discretionary power over a dental practice’s funds and physical assets resulted in that non-dentist illegally owning, operating or maintaining an office for the practice of dentistry (contrary to Washington law).
By way of background, Dr. Abraham Ghorbanian partnered with a senior member of the Persian American community, Akbar Fallahzadeh (who was not a dentist) to buy a building which would house Dr. Ghorbanian’s dental practice. They had a lawyer prepare a lease agreement providing for Fallahzadeh to lease the building to the practice in exchange for rent in the amount of 50 percent of the practice’s net profits. Net profits were defined as all profits after deducing ordinary operating expenses but before deducting the mortgage payment or Dr. Ghorbanian’s salary.
Fallahzadeh was also involved in Dr. Ghorbanian’s acquisition of the dental practice: Fallahzadeh signed a $200,000 personal guarantee for Dr. Ghorbanian to buy the dental practice. Fallahzadeh also became an office manager for the practice. As office manager, Fallahzadeh had check-writing authority and handled the practice’s accounts. Fallahzadeh periodically deposited personal funds into the accounts as loans to the practice. He routinely transferred funds, which included loan repayments, rent, and his $5,000 monthly salary, from the practice’s accounts to his personal accounts.
Dr. Ghorbanian soon became concerned with Fallahzadeh’s withdrawals from the practice’s accounts. He eventually called the police to report possible embezzlement and instructed Fallahzadeh not to return to the office, effectively terminating his employment. Fallahzadeh did not return.
When Dr. Ghorbanian stopped paying rent allegedly due, Fallahzadeh sued. In defence, Dr. Ghorbanian argued that their lease agreement was illegal and invalid. A lower court found the lease to be legal. But on appeal, the Court of Appeal disagreed and found that the lease agreement between the practice and the landlord constituted an illegal partnership between a professional and a non-professional and was thus not enforceable.
In come to its conclusion, the Court started off by stating that, pursuant to Washington law, any person who “owns, maintains or operates an office for the practice of dentistry” is engaged in the practice of dentistry: RCW 18.32.020(3). Furthermore, unlicensed persons and entities may not engage in the practice of dentistry. For his part, Dr. Ghorbanian argued that the “reality” of the parties’ business relationship resulted in an illegal partnership between a dentist and non-dentist.
Against this, however, Fallahzadeh argued that it is common commercial practice to include rent provisions based upon a percentage of the tenant’s profits and that these arrangements are legal and enforceable, as long as the tenant retains complete professional control. In support of this, Fallahzadeh pointed to a number of non-Washington cases upholding percentage agreements applicable to professional service providers – such as Bd. of Optometry v. Sears, Roebuck & Co., 102 Ariz. 175, 427 P.2d 126 (Ariz.1967) (holding that rent provision for 20 percent of optometrist’s gross sales, repair work, and services was not an illegal employment agreement); Wyoming State Bd. of Examiners of Optometry v. Pearle Vision Ctr., Inc., 767 P.2d 969 (Wyo.1989) (holding that 8.5 percent “franchise fee” on gross revenues did not violate statute prohibiting fee-splitting); and Bronstein v. Bd. of Registration in Optometry, 403 Mass. 621, 531 N.E.2d 593 (Mass.1988) (holding that 15 percent rent provision for gross receipts over $500,000 did not constitute illegal fee-splitting).
But the Court rejected these cases on the basis that they didn’t involve a percentage as high as 50%, didn’t involve tenants-in-common, and didn’t address the issue of whether a lease violates Washington’s statute prohibiting a non-dentist from owning, operating, or maintaining an office for the practice of dentistry.
Instead, the Court cited Boren (discussed above) and found many similarities – such as Fallahzadeh assuming sole responsibility for handling the practice’s finances to the extent that he routinely would transfer loan repayments, rental payments, and salary payments from practice accounts to his personal accounts.
Fallahzadeh argued that he was not involved in the delivery of professional services, but the court found that this was not determinative and that he still retained “a substantial beneficial interest in the practice’s profits”. Fallahzadeh also had significant rights under the lease as a landlord to control certain aspects of Dr. Ghorbanian’s practice, such as making physical improvements to the premises which might be needed for patient care.
What seemed to irk the Court in this particular case was that Fallahzadeh has offered no explanation for why he and Ghorbanian agreed to a rent amount that grossly exceeded the market rate. For the first six months of the agreement, monthly rent for the building averaged at $21,916, based upon the special master’s calculations. The market rate for the building during this period was determined to be approximately $3,700. When this disparity is viewed together with Ghorbanian’s inability to deduct standard expenses, such as the mortgage payment or his salary, from his monthly profits before paying rent, it is clear that the lease enabled Fallahzadeh to obtain a financial interest in the partnership in violation of Washington law.
Washington (2004): Illegal
In Engst v. OrthAlliance, Inc.,2004 WL 7092226 (U.S. District Court, W.D. Washington), the Washington District Court had to determine the legality of various types of agreements entered into between a group of orthodontists and their associate professional services corporations (the “Ortho Entities”) and Orthalliance, Inc., a non-dentist management company. Pursuant to these agreements (namely, purchase and sale agreements, consulting / business services agreements, employment agreements and personal guarantees), Orthalliance, Inc. was supposed to provide office facilities and equipment, personnel and payroll, business systems, procedures and forms, purchasing and inventory control, accounting services and financial reporting, legal services, marketing assistance, planning for the opening of offices in new locations, billing / collection services payment and disbursements of funds and record keeping. Orthalliance, Inc. actually assisted in staff scheduling and consulting with and advising the Orthodontic Entities about their equipment and office needs and efficient configuration of its office space. In return, the Orthodontic Entities paid Orthalliance a year fee of the greater of $194,703 or 17% of their Adjusted Gross Revenue.
With respect to the employment agreements, they were entered into by the individual orthodontists and their respective Orthodontic entity. In those agreements, the orthodontists agreed to be employed for a period of five (5) years, subject to renewal for successive one (1) year terms after that. The orthodontists also agreed not to practice orthodontics at any other facility or for the benefit of any other patients. Orthalliance, Inc. wasn’t a party to those employment agreements.
With respect to the personal guarantees, executed by the orthodontists and Orthalliance, Inc., the Orthodontists personally guaranteed payments of the amounts due to Orthalliance, Inc. from the Orthodontic Entities for a period of five years.
The orthodontists sued to get out of these arrangements complaining, among other things, that Orthalliance, Inc. had failed to provide services as required. Plus, they claimed that there were illegal covenants not to compete. Finally, they claimed that their relationship violated Washington’s law against the corporate practice of dentistry.
On the orthodontist’s motion for summary judgement, the court reviewed the jurisprudence. First, the court noted that Washington courts had previously ruled against non-medical corporations practicing medicine by employing licensed professionals because it was contrary to public policy. The court noted that this wasn’t necessarily the case here since the orthodontists were employed by their own Orthodontic Entities; but the court looked at the entire relationship with Orthalliance, Inc. and held that there was a de facto relationship between the parties ( based on the effect and purpose of the contractual agreements between the parties). This was supported, for example, by Orthalliance Inc. which stated that it could, as a third-party beneficiary, enforce the employment agreements (particularly the non-compete clauses).
In applying the law, the court found that, even though Orthalliance, Inc. had no involvement in delivering patient services, it was still in contravention of the law. First, the services that it was supposed to provide was beyond what was customary for an office manager, office secretary or bookkeeper. Next, Orthalliance, Inc. tried to claim that the dentist was free to select which services it wanted; this troubled the court because Orthalliance, Inc. was charging minimum amounts and if no services were selected by the dentist, it would be charging in exchange for providing nothing! The court also found that Orthalliance, Inc.’s claim to be a third party beneficiary of the employment agreement (and attempt to enforce non-competes there), combined with the personal guarantees of the orthodontists had the effect of putting Orthalliance, Inc. in the position of a virtual employer of the orthodontists and to enable Orthalliance, Inc. to retain a beneficial interest in the profits from the practice of dentistry. With respect to the minimum fees it charged, although the 17% was much lower than what other courts had observed, it was simply a percentage floor and not determinative of what could be charged; also, the $194,703 minimum could exceed the entire amount of “adjusted gross revenue” realized by the Orthodontic Entities in a given year!
For these reasons, the court found that Orthalliance was illegally practicing dentistry. It also noted the agreements were contrary to public policy and won’t be enforced. The Court refused to sever those parts of the agreements that were contrary to the law because it found the “entire relationship between the parties which is in contravention of the law”. For these reasons, the agreements were “void as illegal and against public policy”. Orthalliance, Inc. was ordered to retain ownership of the assets it obtained through the purchase and sale agreements; the orthodontists were ordered to retain the payments they received from Orthalliance, Inc. under those agreements. No party has any other obligation to the other party under the consulting and business services agreements.
Last week, David Mayzel and I attended the 4th Annual Definitive Conference on Dental Service Organizations in New Orleans put on by the leading U.S. law firm in that space, Dykema. It was packed (probably over 1,000 attendees) with vendors, DSOs, dentists, investors, and lawyers…. lots of lawyers ;-).
By way of background, DSOs are typically non-dentist corporate entities that provide business and administrative support to dental offices which they are affiliated with. They may own certain parts of the dental practice (not the professional goodwill), but they team up with a dentist who acquires the professional goodwill through a professional corporation. There’s also a business services agreement between the DSO entity and the dentist who owns the professional goodwill for the provision of such services to the dental office. The DSO can own the equipment and rent it back to the dentist, provide marketing and HR support, provide custom and enterprise level practice management solutions, etc.
Here’s what we learned:
So what does this tell us about DSOs in Canada? Well, we believe that they will start to make significant inroads into the dental marketplace. Right now, there are only a few players operating north of the border, but we believe there will be an influx for these reasons:
Over the next series of blogs, I’m going to get more and more into what’s been happening over the past few decades in the U.S. and talk about how things are coming along in Canada.
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).
The good news is that there wasn’t anything overly devastating for dentists. We were worried, leading up to the release of the 2016 federal budget, that the Liberals would try to mess around with dentistry professional corporations. For example, like requiring that they have a minimum number of employees to qualify for the small business tax rate (currently 15.5%). This would have been brutal for smaller practices and associates practicing through a dentistry professional corporation. Or eliminating or lowering or making it even more difficult for dentists to qualify for the lifetime capital gains exemption. So what big changes to corporate taxes did the Liberals introduce? Basically, they kept the small business tax rate at 15.5% instead of reducing it to 15% which is what the previous government has proposed. And for certain businesses carrying on business as a partnership (namely, law and accounting firms), it makes them harder for them to multiply the small business tax rate and save taxes where the partners have provided services to the partnership through a professional corporation. Although dentists are not out of the waters yet, they can breathe a little easier this year because the Liberals didn’t try to do anything overly devastating with small businesses which employ 90% of the private labour force in Canadians – particularly those which operate through the use of a corporation.
Here is the article I co-authored with Ontario Dentist editor Carlos Quinonez (and others) that appeared in April’s edition of Ontario Dentist magazine. You can click HERE to read all of our published articles that appear in Ontario Dentist and Oral Health Office magazines:
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.
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