Practice succession: What is it and how to plan for it

By Cutcher & Neale Accounting and Financial Services - May 20, 2022

Running a dental practice can be all consuming and, with most of the focus on profitability, succession is often overlooked and undervalued.

Planning for what will happen when the time comes to exit a dental practice can safeguard the practice and facilitate an easier transition of ownership.

The transfer of ownership can come in many forms. It may be a practice transferring between family members, gradual reduction in ownership as key staff buy-in, or the sale of the dental practice to an unrelated third party. Consideration must also be given to the unwelcome fact that not all dental practice exits are planned, and succession planning can alleviate undue stress in these circumstances.

Commonly, the dental practice value forms a significant portion of the wealth of the owner and a well-designed dental practice succession plan is essential to maximise the dental practice value, manage tax implications and maintain the practice legacy.

It is never too early to plan and beginning with the end in mind can help to reduce the burden of practice succession. Nonetheless, considering practice succession at any point is a valuable exercise.

Some key considerations for succession planning include:

  • Structure
  • Extracting dental practice value
  • Tax implications
  • Leadership & key staff
  • Formal agreements & insurance

Succession planning is most effective when professional advisors are involved to guide the process. This can include an accountant, lawyer and depending on the desired outcome, a practice broker or financial planner.

Often advisors see a dental practices’ needs change through its lifecycle. Sometimes, those changing needs mean that a dental practice will require a restructure to continue to operate effectively.

The dental practice structure also needs to be considered as part of a succession plan. There is a seemingly vast selection of dental practice structures available and whilst there is always a preference for simplicity there needs to be balance between competing demands such as tax implications, asset protection outcomes and flexibility for dental practice succession.

As mentioned, often the practice value forms a significant portion of the wealth of the owner, and understanding the value of the dental practice and how to get that into the hands of the right people is a fundamental part of a succession plan. Extracting the value of the dental practice involves transferring the ownership of the dental practice and realising its value which will have tax implications.

Consideration needs to be given to such things as capital gains tax, access to the small business CGT concessions, GST and going concern issues, superannuation and liquidation.

A priority of dental practice succession is choosing who you will transfer the ownership to on your planned or unplanned exit. This could be family, key employees or an unrelated third party. Providing adequate leadership experience and training are among some of the considerations required.

A succession plan should also include critical documents such as a buy/sell agreement and shareholders / unitholders agreements. A buy/sell agreement is a contract that sets out how an owner’s interests in a dental practice will be transferred on exit. A shareholders/unitholder agreement covers the operations of the dental practice including structure, management, and direction of the dental practice. Insurance should also be reviewed in line with these agreements.

If you are ready to start the conversation, contact Cutcher & Neale to start your dental practice succession plan today.

 

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