Buy or Build?
Shayan Rashid: Hi I’m Shayan Rashid, partner at SRJ Chartered Accountants. I’m joined by my colleague Craig Gibson, Senior Manager at Scotiabank Healthcare Banking. This is the final addition to our series in healthcare finance, and accounting for doctors and dentists. We’re going to discuss a very important topic that we get asked a ton. It’s “Should I buy an existing practice? Or should I build it up from scratch?”. So Craig, let’s get right into it. When a doctor or dentist comes to you and this question is asked. Let’s start with buying an existing clinic. What are the considerations? What should they be looking out for? And from the banking side how can you meet their needs?
Craig Gibson: That’s a great question. We get asked that one the most also. Should I buy a practice or should I start? We can help them do either or, but usually it’s a comfort thing with the doctor and/or dentist. Some will only look at purchasing a practice that’s existing. Some will only look at doing a startup. We really leave it up to the client. Can they afford it? Can they cash flow? Do they know what they’re getting into? Some of the advice we would give them is, when they buy an existing practice, things come along with that such as staff, location, things that you can’t just change. When you build a practice from scratch, you have the ability to customize it, your color, your size, your style, your location, and your area. So, it’s really client-dependent. We can provide the financing either way, as long as there’s a business case there.
How to Buy an Existing Practice
Shayan Rashid: Okay, so specifically with now buying an existing practice, what’s the process there, in terms of the individual and going about that?
Craig Gibson: An existing practice, if they want to buy it, you would usually get provided with an appraisal because it’s sold through a brokerage company. You would need the client’s financial statements for the existing practice, which is sometimes included in the appraisal. We’d need at least two years’ financial statements. Two years’ tax returns from them. A personal net worth summary and then also projected cash flow with the help of their accountant to show how they would improve or add more value to that practice they’re buying.
Buying the Shares or Assets
Shayan Rashid: I guess from the accounting and tax point of view, one of the issues we always face is, whether buying the shares of the existing corporation, or whether just to buy the assets? So, there’s a lot of, many implications there that need to be considered, which will differ based on each case. Also, there’s specific HST implications in buying assets that all the doctors and dentists need to be aware of when looking at an existing clinic. The other challenge is, if you’re buying the shares, there could be tax liabilities or other liabilities that you’re not aware of. So, generally when you’re a purchaser, you want to look in to buy assets rather than shares of a corporation.
Craig Gibson: Yeah, we always leave that up to the accountant and the lawyer to discuss what’s best for the client. We could finance either assets or share purchase. As long as the client is alongside with what they’re getting. And then we let the partners, and the accounting, and the legal department help them negotiate through the tax.
How to Build a New Practice
Shayan Rashid: Alright, now let’s switch gears and discuss building out the practice from scratch. Which has its own challenges of course. From the financing perspective, any specific advice you want to give there?
Craig Gibson: Our thing is just to always consider are budgets. We always make them get a budget with the help of the accountant, the lawyer. Do cash flow projections. Talk to a builder or a contractor as to how much it would cost to set up the office. What size do you need? Talk to a person in the industry who supplies dental equipment. Also, location is really important. In the GTA, there are a lot of dentists and dentists are getting more and more prevalent in every plaza, every location. So, we usually advise them to go to an area that is under serviced or needs more dentistry, rather than locating where every other dentist is. More advice, based around say marketing, if they have a specialty, if they have a particular niche that they’re good at, trying to exploit that, whether it’s through signage, advertising, Google searches, we would help them look at the whole business overall.
Solid Foundation and Advisor Team
Shayan Rashid: Yeah, I guess it also makes sense for say a new associate, looking to build up their own practice, to keep working at other clinics, so they can build up cash flow, or have cash flow to meet their personal needs. In the first year or two years at least. You know otherwise, I think you’ve nailed it right on the head that having a solid planted foundation and advisors behind you to make sure that if you do build out a practice, you have a solid marketing plan, you’ve budgeted for large expenditures, and you can pay your staff. So, having a line of credit and everything else set up is really important in the first few years, when you’re really building up your client base.
Craig Gibson: Yeah, they should have an advisor team. They should have a banker, an accountant, a lawyer, a supply rep and even some time some will have mentors, where they work with older dentists and they’ve helped them along the way in getting a location, lease premises, how to set up my office, how to make it attractive, services I offer, freebies, giveaways, there’s lots of considerations, and they need to bring in advisors, they can’t do everything by themselves.
Shayan Rashid: Even an experienced office manager whose been in the space would really help out someone who’s doing this for the first time.
Craig Gibson: Yeah, yeah very much.
Which one is Better?
Shayan Rashid: Okay, so I guess the last question is, what’s better building it out, or buying it as an existing practice?
Craig Gibson: I would say that’s up to the client because I have clients that have built I have clients that have had a purchase, or some that have done both, depending sometimes on the area, if there is no dentist, they would have to do a purchase. Or sometimes they would really want to target a particular dentist and a name, because they have a great name, a great reputation and they would want to assume that name and that reputation and take over. It’s really up to our client and we can help finance it either way.
Shayan Rashid: Alright, thank you Craig for your wonderful advice. If you have any questions for Craig, feel free to reach out to him directly at Scotiabank Healthcare Banking. If you have any questions about accounting or tax you can reach out to me. That concludes our series about healthcare finance, and accounting. We hope this was useful for you.