Selling Your Practice to a Dental Corporation
We all know that corporate dentistry is alive and well in Canada. The recent Dental Corp public offering is a strong testament to the vitality of corporate dentistry in Canada. If we follow the trends in the United States, we can expect to see corporate dentistry grow at a healthy pace for some time to come. It is also likely that you may have been contacted by one of the corporations with an offer to purchase your practice at a multiple of EBITDA which seems almost too good to be true. Be careful because in fact, it may be too good to be true. Before you leap you may want to look through my thoughts below, however, also consider a couple of thoughts about corporate dentistry in general.
Corporate dentistry has been somewhat controversial since it made its first big appearance around 1980 as Tridont Dental Centres. Dr Howard Rocket and Dr. Brian Price in fact blazed a precedent-breaking trail that while sometimes controversial ended up benefiting the profession as a whole. Prior to their groundbreaking advances in advertising and marketing regulations, I know of dentists that were censured for having their names on a Rotary membership list. Tridont was followed in 1993 when Dr. Sven Grail and Dr. George Christodoulou founded Altima Dental. From its inception, corporate dentistry has not been everyone’s cup of tea. A study conducted at U of T some time ago determined that dentists were the “most ego strong” of all the professionals at the university, including engineers, which could explain why corporate dentistry may not have been their first choice of practice modalities.
Over the last ten years, I believe there has been a big shift in attitude towards corporate dentistry to the point where today it is many dentists’ first choice.
If corporate dentistry is somewhere on the horizon for you there are a few things you should be cognizant of as follows:
1. The corps are well known for basing their purchase prices on very high earnings multiples.
The multiple however is only one part of what is often a very complex equation. There are two other functions that need to be considered, EBITDA (normalized net profit) and conditions.
2. Multiples and EBITDA.
The corps like to suggest that they will pay big multiples which is often misleading. We sold a practice out west just before COVID. We had reached out to all three corps and some private buyers. One of the corps indicated that they would pay a 9.5 multiple which was much higher than anyone else and the vendor thought he had scored big time. When we took offers from everyone, however, we found that the 9.5 multiple offer came with normalized EBITDA that was about 40% lower than the EBITDA that everyone else was proposing. The bottom line was that the group offering the highest multiple ended up offering the lowest price. (The ultimate buyer was none of the corps but a private buyer).
If you want access to any of the corporation’s highest multiples and prices their deals come with a variety of different conditions some of which are as follows:
a. Partial Sales and Profit Allocation: Most of the corporate deals are not done for the full “appraised” amount upfront. Often, someone, usually the vendor, will be required to maintain some practice ownership, usually 20%. These scenarios come with a variety of buyout options and profit-sharing conditions all of which are to the corporation’s advantage. For example, one of the strategies that we have seen requires that the corporation annually gets all the profit until they get a 20% return on their investment and then they split the profit with the vendor based on ownership %.
b. Earnouts: Earnouts are another popular strategy where the corporation holds back as much as 20% of the “agreed” purchase price. The holdback amount is only payable to the vendor if the practice reaches certain profit levels. The problem is that the vendor has little or no control over the operations of their practice once it’s purchased by the corporation. We had a client that entered into such an arrangement and was blocked by the corporation from having any input into the management at which point the corporation made sure that the profit milestones were never met.
c. Claw Backs: Perhaps the oldest strategy is the clawback where the vendor has to reimburse the corporation dollar for dollar on any profit shortfall based on the appraisal EBITDA. For example, if the corporation bought your practice based on a $700,000 EBITDA and then it fell to $600,000 you would owe them, in cash, the difference of $100,000 and would do so usually for the 5 years following the sale.
d. Reallocation of the Purchase Price: This is where a Purchase Price is agreed on but is then paid as income rather than a capital gain. I am aware of at least one situation where after the purchase price was agreed to ($2M) the corporation required that the vendor supply them with $200,000 of false invoices which the corp “reimbursed” them for. Instead of getting $2M for the practice, they got $1.8M (capital gain) and $200,000 (regular income).
e. There are as many conditions as the corporations can come up with and they change regularly but never to the vendor’s advantage.
4. Basic Tax Issues:
a. If you sell your practice to the dentist down the street and it is a share deal typically 100% of the transaction is treated as a capital gain with the following treatment possibilities:
i. If you or your spouse have not used your capital gain deduction of almost $800,000 each then each of you (assuming your spouse has equity shares) would get to deduct about $800,000 from the capital gain on the sale.
ii. Regardless of whether you still have a capital gains deduction, currently only 50% of the capital gain is taxable.
b. If you sell your practice to a corporation, they cannot buy the goodwill of the practice. Typically, what happens is their designated dentist buys the goodwill from your DPC which pays tax on that transaction and then the corporation buys the DPC without any goodwill. A little convoluted but the bottom line is you pay more tax than if you just sold the shares of your DPC to another dentist.
5. Selling Strategies
a. The corporations like to throw out high multiples in the hopes that they can get someone to bite with doing their homework, without considering the points above and many more. The corporations do not want potential vendors to talk to any advisors who may be able to fill in some of the blanks – that is why they tend to be aggressive buyers. From their perspective, this is not a bad strategy as it tends to catch the attention of dentists who would otherwise be more careful.
b. You should be aware however that all the corporations are under a lot of pressure to be buying practices. Their investors are not interested in having their money sit in a bank account somewhere at 1.5%, they want it invested in dental practices. When considering a sale to one of the major corporations you need a marketing strategy that gets all of the corporations and some private buyers bidding against each other. In the best-case scenario when we are working with clients interested in a corporate sale, we enter into long-term arrangements which allow us to guide our clients through the sale/retirement process to its ultimate destination based on the outcomes that work for our clients, the vendors not the purchasers.
A sale to a corporation can be the perfect transition strategy for many dentists and likely a strategy that all dentists should at least consider. If a corporate sale is anywhere on your horizon, make sure you do not try to consummate it on your own. Corporate sales are significantly more complex than dentist to dentist sales. If you want to come out a winner, make sure you do your planning in advance and use the expertise of a licensed broker.
For any questions about this and other questions about dental practice sales – send me an email to firstname.lastname@example.org.