Every business ownership will come to an end someday. In the best case scenario it is a planned transition whose timing and execution maximises the vendors return on their investment. Sometimes though it doesn’t quite work that way…
Sometimes the sale of a business is forced upon us or our family members at a time that is unplanned.
This past year we have been involved in the sale of three deceased estate dental practices. In all of the cases the death was sudden and unforseen. The family of the deceased were left to pick up the pieces and make sense of the affairs of their loved one at a time when they couldn’t be more vulnerable.
A dental practice loses value fast when the principal passes away. Decisions need to be made fast to keep the patient base intact in order to be able to sell the business. These vital decisions are often hampered by:
- Lack of documentation
- Lack of clarity over who can be a decision maker
- Lack of clarity as to the wishes of the deceased
- Lack of clarity over the business affairs of the deceased.
- Avoidance behaviour of the bereaved.
If you own a practice spend a minute or two to think about how well documented, understandable and transparent your affairs and wishes would be if a family member needed to make sense of them without help.
Every practice owner owes it to their loved ones to prepare their affairs in such a way as to help someone take control of and dispose of these assets easily and quickly if the worst case scenario happened.
Here are 8 things that every business owner should think about having in place to prepare for the worst case scenario:
1. If you share a facility, equipment, staff with a partner or associate in the practice.
a. Make sure that all arrangements are well documented and not just “handshake” deals or “understood ” between yourself and your partner. Your family should not have to trust the word of your business partner in these matters. Documentation needs to include:
- List who owns what (equipment, domain names, trading names) If equipment is jointly owned list them and how use is apportioned.
- Use of space and rooms ( exclusive use, shared use, how apportioned)
- Arrangements for any resources or expenses like staff and rent that may be shared (is it shared equally or are these expenses apportioned according to usage)
b. It is natural for these arrangements to change over time. It is important that you regularly look at this agreement/ documentation and update it.
c. Have a buy-out clause in any associate agreement that includes:
- How a practice will be valued in case of emergency.
- How jointly owned assets will be separated in case it is not sold to the surviving partner.
2. Make a will, look at it and update it regularly (Every 5 years). A will provides written instruction on who will manage the estate, distribute the property and the assignment of the assets upon a person’s incapacitation or death. It is vital that a person’s will exists and is clear in order for assets to be sold in a timely manner. Lack of clarity in this regard can lead to extremely costly (and stressful) delays in being able to sell the assets.
3.Keep management accounts of your business. The official profit and loss of a business can, over time, become an exercise in minimising profit in order to minimise tax. There will be personal expenses mixed in that will need to be itemised and separated when the business is sold. Sometimes these personal expenses are easily identified and other times they are hidden within expense categories. It is good practice for “management accounts” of the business need to be kept separate and privately so that you know the true profitability of the practice.
4. Have insurances in place. In particular life insurance, total disability, etc.
5. Letter of instruction for loved ones. Your loved ones will be in a stressful, bereaved state. Even if everything is documented and in place there will be avoidance behaviour when it comes to acknowledging what has happened and finding a replacement for you in the practice. They will search themselves for hints as to what it is that you would have wanted and they will not know who to turn to for advice. In times like this a “letter of instruction” is invaluable. In it you should contain:
- Instructions that they get a locum in to work at the practice as soon as possible, even if it is only part time and not to wait for the practice to sell for this. The longer the practice remains idle the more of the goodwill that will be lost and the lower the price that your practice will be able to achieve.
- A list of key individuals who will need to be contacted in order to take appropriate action. Advisors can include your accountant, your attorney, a practice valuer or broker that you respect and a dentist friend that you respect that can help with any industry specific knowledge that the family might need in the transition or in selecting or managing an interim locum.A practice broker familiar with these transactions should be able to help the family write a letter to the patient base that helps keep the practice together for sale. Such a letter usually informs patients of what has happened, tells them how much the practice and all of them meant to the deceased, that they are trying to find a replacement that fit the deceased’s high standards and that they trust they can count on the patients to let him introduce himself. We have found that a well worded letter like this can keep a patient base together for a considerable time and ensure that a large percentage try the new dentist when he begins.
6. Have a conversation with your family so that they know your wishes and where to find the above documents. It is not enough to have everything documented. If your family can not find the documents they are worthless.
7. Make sure all your business affairs are kept up to date. All tax returns, BAS statements need to be current and up to date for ease of a practice sale and so that your loved ones aren’t left needing to pay back taxes and penalties out of the money they get for the sale of assets.
8. Make sure you have someone you trust who knows your passwords to computers, bank accounts
For more articles on deceased estates and practice sales please click here: