Putting Success into Practice Succession – Part 1: Options

According to a report from the CBC, a “micro-enterprise” has 1 – 4 employees and a “small: business is defined as having 5 – 100 employees. A total of 99.7% of all Canadian businesses are small to medium-sized (less than 500 employees) – a.k.a. SME. 9 out of 10 Canadians who work in the private (non-government) sector work for a SME business. No wonder that SME is considered the backbone of the Canadian economy.

As a percentage of small businesses, healthcare (including dentistry) makes up ~9%. Professional services is one of the top three industries in SME, attracting almost 14% of entrepreneurs.[1]

According to the CBC report, a “Business Succession Poll” surveying 609 small business owners said that only 24% had a succession plan for retirement. Of all those surveyed 27% weren’t sure what they will do; 23% said that they would close their business; 20% planned to sell to a 3rd-party; 18% would hand over the business to a family member; and 12% would sell to a partner or existing employee.[2]

How do these statistics relate to dentistry?

Since most dental practices have less than 100 employees, and are in the private sector, they would be considered part of the ~9% of Canadian SME.

From observation of activity in the dental marketplace, especially over the past decade, the one part of the reporting that appears to be contrary for the dental profession is the succession plan for retirement. Most dentists do intend to sell their practice, whether that be to a known or unknown party.

How do market conditions affect dentists entering and exiting practice ownership?

Market conditions affect price; not value. So, while value should be based on practice performance, the expectations and activity of those in the market will influence price.

The current market conditions in major urban and suburban centres support the theory of a “seller’s market” which is generally characterized by low supply and high demand. The low supply may be a perception, or manipulation of the market by brokers and corporate recruiters who target outlier[3] practices for acquisition by DSOs and “investor dentists”. These practices are not open to the market initially to give these preferred buyers first option, leaving independent dentists to choose from practice opportunities which do not meet EBITDA[4] criteria use by business investors.

Dentists at both ends of the transaction spectrum – exiting and entering practice ownership – have been and continue to be, affected by this biased influence.

Dentists planning for succession of ownership that relies on a transaction with a third-party through via the open market, often “test the waters” by listening to rumours and getting advice from their colleagues, friends and other trusted sources who often have limited knowledge and experience in the market. They may seek “ballpark”

There are also practices in more rural areas as well as some practices that are underperforming compared with market expectations, which may find it more challenging to attract prospective successors.

What options are available for a dentist when planning and preparing for succession of ownership?

Transition and transaction should both be considered and included in the dentist’s succession plan.

The transaction is the component that is usually emphasized in succession planning. The financing, legal, accounting, negotiating and drafting agreements on price and terms for the parties involved. In respect of this part of succession process, there are two basic options – transfer of ownership of assets or shares of the professional corporation (the Company). A dentist may also wish to consider structuring a buy-in/out, which can provide a more gradual exit strategy.

As with most things in life, there are pros and cons to any option. To make an informed decision, it is recommended that the dentist discuss these with their professional advisors (the Transition Team) in context of their particular circumstances, needs and expectations. It is recommended that the dentist first choose a transition option that best meets their criteria and situation, and then work out a transaction strategy that supports it.

The transition of ownership involves psychological management of change – preparing the individual, the practice and those that they work with and for to accept and support the doctor’s succession plan.

There are several transition options which can be one or combination of those listed below, depending on the practice performance, location, and the dentist’s particular needs and expectations before, during and after a transaction. In the first two following examples, the dentist-owner may encounter some challenges that are particular to those in intimate relationships transitioning into a business relationship. In my experience, these can be overcome or resolved through proactive planning and preparation, including clearly drafted, mutually-agreeable terms and conditions negotiated in good faith. These can also offer the added benefit of more flexibility for the dentists, as and if necessary – time, price and payment options.

  • Transfer of ownership to a partner or Associate – Ideally, the dentists in this relationship have discussed and prepared for this eventuality by having a written agreement that includes Right of First Refusal, as well as basic terms and conditions for practice valuation/assessment – mutually-acceptable valuator, responsibility for paying fees associated with the process, timeline to complete, etc.
  • Transfer of ownership to a family member or non-affiliated colleague – some practitioners are fortunate to have a “built-in” successor in the form of relative (usually adult child) or close family friend or colleague who is qualified to practice in their jurisdiction and has expressed serious interest in taking over the practice. Although for many dentists in this situation, it may seem unnecessary to have a written memorandum of understanding or other agreement, circumstances can change over time and memories may fade, giving rise to mistrust and other unintended consequences.
  • Offering the practice to the open market is what brokers promote to dentists, but in this option, it is usually all or nothing. It also may limit the exiting dentist’s transition options post-transaction. Still, many dentists choose this because they fail to plan and prepare so they are unaware that there may be other opportunities available to them.

The importance of planning for succession cannot be overstated. Planning strategically and preparation provide more options for the exiting dentist, and more opportunity for the dentist preparing to enter ownership.

Watch this space for more information to help you put “success” into your career and practice succession!

[1] https://blog.wagepoint.com/all-content/the-canadian-small-business-stats-everyone-should-know

[2] https://www.cbc.ca/news/business/10-surprising-stats-about-small-business-in-canada-1.1083238

[3] The term “outlier practice” in this context refers to a practice that is out-performing other practice models in the same community.

[4] EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization