How practice-acquisition lending works
Established dental practices are financed by the major banks' healthcare and professional lending teams, which routinely lend most or all of the purchase price against the practice's cash flow rather than against hard assets. Patient revenue is recurring, default rates among dentists are historically low, and every large Canadian bank competes for the file, so financing an established practice is usually easier than financing a much smaller business in any other industry. Amortizations commonly run ten years or more, far longer than ordinary commercial loans, which is what makes the payments workable against practice earnings.
The loan is sized on two anchors: an appraisal of the practice and the cash flow the practice actually produces after normalization. Lenders will also fold real needs into the facility beyond the price itself, working capital for the first months, transition costs, sometimes planned equipment, so the request should be built around the total project, not the sticker price. Security is standard and personal: a general security agreement over the practice assets, an assignment of the premises lease, assignment of life and often disability insurance, and your personal guarantee.
Because several banks want the deal, terms are genuinely negotiable: rate, amortization, prepayment room, covenant weight and guarantee scope all move. Competing term sheets, built on the same clean package, are the buyer's main leverage, and assembling that package is accounting work before it is banking work.
Asset deal or share deal: the choice that sets your tax cost
Whether you buy assets or shares matters more than the interest rate, because it decides who borrows and what kind of dollars repay the loan. Vendors almost always prefer selling shares: a share sale of a qualifying practice can shelter up to $1.25 million of gain per shareholder under the lifetime capital gains exemption, so the vendor's after-tax outcome is dramatically better. Buyers generally prefer assets, and the gap between those preferences is settled in the price and the indemnities.
| Question | Asset purchase | Share purchase |
|---|---|---|
| Who borrows | Your dentistry professional corporation | Usually you personally, since only a dentist can hold the PC's shares |
| What repays the loan | Practice income taxed at the 12.2% Ontario small-business rate on the first $500,000 | Salary or dividends you draw, after personal tax, then the payment |
| What you get for tax | Fresh cost base: equipment to depreciate, goodwill in class 14.1 written off at 5% declining balance | The vendor's old cost base inside the corporation; no step-up |
| What the vendor gets | Gain and recapture taxed inside their corporation, usually worse for them | A capital gain, potentially sheltered by the $1.25M exemption |
| What you inherit | The assets and staff you choose to take on | The corporation's entire history: tax filings, liabilities, disputes |
| What happens to price | Vendors ask more, or resist, because their tax bill is higher | Buyers pay less, or demand indemnities, because their tax cost is higher |
The middle row of that table is the one that quietly costs the most. In an asset deal your corporation borrows and repays the debt with lightly taxed corporate dollars; in a share deal Ontario's professional corporation rules mean the shares generally sit in your personal hands, so the same loan is repaid with income that has already passed through your personal tax return. The interest can still be deductible, since the shares are bought to earn income, but every principal payment needs more pre-tax practice earnings than the asset-deal equivalent. Hybrid structures exist that can move debt closer to the corporation after closing; they are technical, fact-specific and worth pricing before you accept a share deal rather than after.
The package the lender underwrites
A practice loan is approved on a file, and the buyer controls how good that file is. Expect to assemble, and have your accountant test, all of the following:
- The practice's numbers: two to three years of financial statements and corporate tax returns, plus production reports from the practice management software, by provider and by procedure.
- The appraisal and the purchase agreement or letter of intent, with the price allocation if assets.
- Your own story: associate production history, CV, licence in good standing, and a personal net worth statement.
- Financial projections showing debt service, your compensation and tax, built from the practice's normalized earnings rather than the appraisal's optimism.
- The lease, because lenders want the premises secured, with renewals, for at least the life of the loan.
Two observations from the accounting side of many of these files. First, the quality of the vendor's clinic reporting sets the tone: statements that reconcile to the chairside production reports make underwriting fast, while gaps between them raise questions that cost weeks. Second, the lender's request list and your own diligence list overlap almost completely, so run them as one exercise; we cover the diligence half in what financial due diligence is needed before buying a dental practice. Building lender packages and the financial projections inside them is core work for our financing support practice.
Set up the borrowing entity before you need it
The borrower should almost always be a dentistry professional corporation, and it should exist well before closing. An Ontario dental PC needs articles that meet the professional corporation rules and a certificate of authorization from the RCDSO, and that sequence takes real calendar time, so incorporating during the conditional period, not the week of closing, keeps the financing on schedule. If you are still deciding whether to incorporate at all, the trade-offs live at should a dentist incorporate in Ontario; for a leveraged purchase the answer is almost always yes, because the corporation is what lets the loan be repaid with small-business-rate dollars.
Ontario's shareholder restrictions shape what the structure can be. Only a dentist may hold voting shares; your spouse, parents and children may hold non-voting shares, with a trustee arrangement for minors; and no holding company may own the PC, which takes the classic holdco financing structures off the table. Some practices also run a separate technical or hygiene services corporation alongside the PC, a genuine multi-entity setup that changes both the lending structure and the shareholder analysis, so tell your accountant and the bank early if one exists or is contemplated.
Interest deductibility follows the borrower and the use of funds. The PC borrowing to buy practice assets deducts interest against practice income; you borrowing personally to buy shares deduct interest against the income the shares produce. Both are legitimate; they are just worth very different amounts after tax, which is the asset-versus-share point again, arriving through the side door.
Life with the loan: debt service, your pay and the transition
After closing, the practice's cash flow has to cover four claims at once, in order: operating costs, debt service, your household income, and tax, with a reserve for equipment. The projections should prove this works in the first year, not the third, using the practice's normalized earnings with your clinical production replacing the vendor's. How you draw your income interacts directly with the loan: principal repayment inside the PC argues for keeping more income at the corporate rate, and the salary-versus-dividend mix that balances debt repayment, RRSP room and household needs is its own decision, worked through at salary vs dividends for incorporated dentists.
The transition period protects the asset you just financed. A vendor who stays on as an associate for a defined period, introduces patients and hands over referral relationships materially improves patient retention, and lenders read a sensible transition plan as risk mitigation. Non-competition and non-solicitation terms belong to your lawyer; the accounting side is making sure the vendor's associate costs are in the projections and the retention assumptions are conservative.
Expect ongoing lender reporting: annual financial statements of the borrower, delivered on the bank's timetable, sometimes with a coverage covenant tested on them. That is not a burden if the practice's books are run properly month to month, and it is one more reason the accounting engagement should start at the purchase, not at the first year-end. We do this year-round for dentists across Mississauga and the GTA as a CPA firm built around incorporated healthcare professionals; see how we work with dentists.
The facts that change the answer
Six facts decide what your financing should look like, and whether the deal works at all:
- Asset deal or share deal. It sets the borrower, the kind of dollars that repay the loan and the liabilities you inherit. Price both structures before negotiating either.
- Normalized cash flow against proposed debt service. The practice's real earnings, with your production replacing the vendor's, must carry the payments and your income with a margin.
- Your production history. Lenders finance the practice, but they underwrite you; an associate record close to the vendor's production profile is worth real basis points.
- The lease. Term plus renewals must run at least as long as the amortization, without a demolition clause that can end the practice mid-loan.
- Down payment and guarantees. Full financing is common, but cash in reserve and a negotiated guarantee scope decide how the first rough quarter feels.
- The vendor's transition. A staged handover protects patient retention, which is the collateral the whole loan really sits on.
We take buyers through this as defined-scope work: normalize the practice's earnings, price asset against share, build the projections and the lender package, then run the bank process to competing term sheets. Scope and fee come in writing after a free 15-minute discovery call.
