Factors that Determine theValue of Dental Practice “To put it simply, the more cash flow a practice generates, the greater the value of that practice,” says Chong Yen. “You can think of the value of a practice as an estimate of the amount of money it will make in the future—expressed in today’s dollars. Future cash flows and cash streams must be converted into today’s dollars using prevailing interest rates. For example, $1.10 one year from now would be ‘equal’ to $1 today if interest rate was 10%.” Chong Yen says that when interest rates are high, the value of dental practices fall, all things being equal. The higher cost of borrowing money makes purchasing a practice more expensive for buyers, which can soften demand. Many of his clients ask Chong Yen how to increase cash flow before they have their practices appraised for sale. “I often suggest to look at what kinds of treatments they currently refer to specialists and see if they can upgrade their clinical skillset to perform those treatments competently,” he says. “Or they can consider bringing in another dentist who can do these treatments in-house. The goal is to maximize patient satisfaction and simultaneously enhance cash flow.” least 3 years in advance. “There are opportunities not only to maximize value but also minimize taxes when selling a practice,” he says. In Canada, small business owners, including dentists, have the option to use the lifetime capital gains exemption when they sell their business. But to qualify for it, the business must pass various tests, which includes having the shares in the business owned by the dentist, their spouse or family members usually for at least 24 months before a sale. “The lifetime capital gains exemption in 2023 is about $970,000, which would result in saving about a quarter million dollars in taxes. Let’s imagine your dental practice is going to be sold for $4 million, if you could plan it perfectly, you might distribute shares to five eligible individuals who could each use their own exemption for maximum tax savings. Check with your advisors 3 years before you sell your practice, so you have time to figure out the best plan for your circumstances,” he says. The lease for the premises of a dental practice is another important factor in the value of a sale. “If your premises lease allows the landlord to evict you or terminate the lease within 6 months, the value of your practice is going to be significantly affected in a negative way,” Chong Yen says. “To maximize the value of your dental practice, you want to ensure that your premises lease has a term plus renewal options totaling at least 12 years. The buyer of your practice might need to borrow money and the bank generally require a 12-year premises lease including renewal options in order to lend.” He also recommends making sure that the premises lease does not contain a demolition or relocation clause, which also might affect the ability of the buyer to borrow and also may negatively impact the value of the practice. Many dentists have demand for treatments and have the operatories and the equipment available, but not enough human resources to provide them. “This is a real challenge right now for dentists who might want to sell their practice, as cash flow has been inhibited by lack of staff,” he says. Tips for Preparing a Practice for Sale ChongYen suggests that, especially for taxpurposes, practice owners should begin preparing for a sale of the practice at Many dentists have demand for treatments and have the operatories and the equipment available, but not enoughhuman resources to provide them. To maximize the value of your dental practice, you want to ensure that your premises lease has a term plus renewal options totaling at least 12 years. 32 | 2023 | Issue 5 SupportingYour Practice
RkJQdWJsaXNoZXIy OTE5MTI=