Buying or Selling a Dental Practice: Shares or Assets?
Kutner Law LLP is pleased to be presenting to the Canadian Iraqi Dental Society on Saturday, October 18, 2014. We will be giving legal tips for both buying and selling a dental practice. Please click the link below for more information. Download Presentation now
When one of our dental clients approaches us about buying or selling a dental practice they often ask if they should do it as an asset deal or share deal. An asset deal is when the dentist (or his/her dentistry professional corporation “DPC”) buys the assets of the Seller’s practice whereas a share deal is when the dentist or his/her DPC purchases the shares of the Seller’s DPC. Determining how to structure the deal is often dependent on several factors. Whether to buy or sell assets or shares normally always comes down to tax considerations and the needs of the Seller (as it is presently a Seller’s market).
Sellers who have not used all of their $800,000.00 capital gains exemption in the past almost always want to make use of the capital gains exemption and will generally want to do the deal as a share deal. A share deal allows them (and/or their family members who are shareholders) to make use of the capital gains exemption assuming their dentistry professional corporation is eligible (for more information on the eligibility of a DPC in regard to the capital gains exemption see our blog post “Have you prepared yourself to sell your Dental Practice?”).
Buyers generally want to buy the assets of the practice rather than the shares of the Seller’s DPC. There are a number of reasons:
– In theory this helps avoid the buyer from assuming the liabilities of the DPC, in reality however even if the deal is structured as a share deal we ensure that the Seller discharges any liabilities before closing. It is always important to remember that there may be some warts left with the DPC like unpaid taxes that you will not be assuming in an asset purchase. We always ensure that our buyers are indemnified by the seller, however it can be a pain to go after the seller for these liabilities after closing.
– If the Buyer purchases assets he/she (or the purchasing DPC) will be able to depreciate the assets being purchased against income. However, as most dentists utilize a DPC the DPC tax rate is only approximately 15.5% and therefore the tax saving is fairly marginal. Also, there is always an argument between the Seller and the Buyer as to how to allocate the purchase price between the assets being purchased (i.e. goodwill, leasholds, equipment, etc.). The Seller will want to allocate what is known as the undepreciated cost to the hard assets such as leasholds and equipment and a large amount to goodwill. Also, the Buyer will have to pay HST on the amount of the purchase price allocated to leasholds and will not be able to get the paid HST back as dentists are not normally registrants for HST.
– Our clients often ask which is more advantageous with regard to dealing with the employees of the practice, often they think that an asset deal is to the buyer’s advantage. The truth is that regardless of whether it is an asset or share deal the Seller is going to insist that you assume the employees. Sellers do not want to pay the costs of terminating employees. In regard to employees usually we can negotiate a clause whereby the Seller will be responsible for 50% of the costs of any employee terminated within 90 days of closing.
There are additional factors that go into deciding whether the transaction will be structured as a share or asset deal with some criteria set out below:
– It is a Seller’s market and the Seller has all of the power and virtually always dictates that it be a share sale. If you as a Buyer want to purchase you will have to purchase to some extent on the terms dictated by the Seller;
– The Seller may have used his/her total capital gains exemption and therefore may be willing to negotiate an asset sale;
– The Seller may have substantially non-practice (passive assets) assets in the DPC and does not want to sell shares as it may be too difficult to get the DPC to qualify for the capital gain’s exemption; and
– The DPC may not qualify for the capital gains exemption for a number of other reasons.
When contemplating whether to structure the purchase or sale of a dental practice as a share or asset deal it is important that you discuss your situation with both a dental lawyer and accountant who are well versed in dental law. If you would like to meet and discuss any of the topics in this blog post, please don’t hesitate to contact us.
The information set out in this blog post is for information purposes only and should not be construed as legal advice.