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The Antiquated Approach: Rethinking the Role of a Broker

Posted Aug 22nd, 2020 in the wire, thought leadership, 2020

Sarah Osman, Vice President of Legal, dentalcorp 

Prior to joining the dental industry, I acted as counsel to one of Canada’s largest IIROC-regulated brokerage firms – a hyper regulated space in the financial industry where regulators and business stakeholders shared one ultimate goal: the protection of investors and their investments. Regulators monitored broker activities, conflicts, and investor-facing communication, holding brokers to high ethical and professional standards, and enforcing strict disciplinary actions if their rules or standards were broken. After transitioning into the dental industry, it became alarmingly apparent that even though dental practice brokers are arguably involved in a dentist’s most valuable investment (their dental practice), they are regulated to a far lesser degree and held to a much lower standard. 

There was a time when brokers played a role in facilitating the sale of a dental practice by listing the property and sourcing potential buyers – essentially acting as the middleman. With the emergence of more sophisticated market players in recent years, however, brokers are increasingly finding themselves on the sidelines of dental practice sales, leading many practice owners to question whether they need the services of a broker at all.

Generally speaking, dentists retain brokers because they assume they have no choice. They are not aware that there are expert advisors better suited and more qualified to not only prepare sellers for the sale of their practice, but also drive more successful sale outcomes. If a practice owner is still considering engaging a broker—whatever the reason may be—there are key considerations to take into account before doing so.

Brokers can be costly.

It’s useful to understand the compensation structure of your service providers, and in the case of brokers, they are almost always paid on commission. Brokers routinely charge commission fees ranging from 7-10% of the sale price of a practice. Considering that Canada's average practice sells for $750,000 - $1.5 million, that's no small figure – and it almost always comes out of the seller’s pocket.

Not all brokers are reputable.

Sale transactions can be financially and legally complicated. Unfortunately, most brokers in dentistry do not have any formal business certification, professional designation or true financial acumen. If you are looking to sell your practice with a broker, it is important to retain licensed professionals with Chartered Financial Analyst (CFA), Chartered Professional Accountant (CPA), and/or Chartered Business Valuator (CBV) designations, who have the necessary knowledge and experience to guide you through the financial and legal terms of the transaction.

Brokers may be prone to conflicts of interest.

In contrast to other industries—the finance industry in particular—brokers within the dental space are minimally regulated, and thus expose clients to the conflicts of interest inherent in the role they play. In other highly regulated and more transparent industries, brokers must disclose the potential for a conflict of interest. However, dental practice brokers manage to fly under the radar in this regard.

As dental practice brokers are compensated based on the sale price of a practice, they are entirely incentivized to get any deal done regardless of the outcome. For dentists who care about the future of the practice they built, and the staff and patients they are leaving behind, fit and value go hand-in-hand. There needs to be trust that a good deal is not just any deal, but the right deal; and so, it is important that advisors’ interests are aligned with the seller’s – not the opposite. 

Options beyond a dental practice broker

The dental industry’s fragmentation and complexity, along with increased expectations of consumers, has led to the emergence of sophisticated buyers like Dental Service Organizations (DSOs) – which can be readily found by sellers today.

DSOs have become an increasingly popular option for dentists looking to sell their practices, due to the supportive infrastructure, economies of scale and opportunities for growth they can provide. Dentists are also drawn to DSOs as they provide the unique ability to continue practicing dentistry, while protecting the well-being of their practice team and patients, thus securing the legacy the dentist has worked hard to build.

With qualified advisors and the support of sophisticated buyers, practice owners now have more opportunities than ever to optimize their sale outcomes without involving a broker.

From origination to negotiation, DSOs have robust sales processes of their own.

The success of a DSO relies on their ability to source, evaluate and close deals, and the successful ones have spent a considerable amount of time investing in the resources and personnel to do this. From the onset of a conversation with a seller, a DSO is focused on achieving alignment between their values and goals, and those of the seller. Following the agreement between the two parties, the DSO will start their due diligence process, regardless of whether a valuation has already been conducted by a broker.

It is crucial to note, however, that a number of very diverse DSO models exist. As such, it is increasingly important to understand the differences between DSOs when evaluating potential buyers. Among other factors, a dentist’s autonomy, reputation, and potential for continued growth and development should also be considered when joining a DSO.

Leveraging the services of experienced professionals can save you money.

Regardless of whether you choose to engage with a broker or not, in order to sell your practice, you will require a lawyer, accountant, and other service professionals and will be subject to their various fees. An experienced transactional or corporate lawyer and accountant can help walk you through the sale process and prioritize your interest, ultimately saving you the money you would have paid a broker.

Looking beyond a dental practice broker and leveraging necessary professional services can ensure both your qualitative and quantitative goals are achieved, and ultimately keep more of the purchase price in your pocket.

About the Author

Sarah is responsible for leading the dentalcorp’s legal acquisition process, working closely with the Corporate Development team.

Sarah has a strong background in mergers and acquisitions, corporate and securities law, and corporate governance. Prior to joining dentalcorp, Sarah worked at a major international law firm before becoming counsel and officer to one of the largest asset managers worldwide. She has completed her brokers and investment dealers course through the Chartered Professional Accountants of Canada and received her Partners, Directors and Senior Officers certification from the Canadian Securities Institute. She holds a Juris Doctor from the University of Toronto and an Honours BA in Psychology from the University of Ottawa.

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