Negotiating a Practice Sale

In order to maintain the best possible relationship between buyer and seller during a practice sale, it’s important to have an intermediary or buffer such as a broker, attorney, or accountant to assist in the negotiation of the sale of the practice assets.

Selling a dental practice usually requires some negotiation, and having this  intermediary helps decrease any conflicts that may arise between the two parties. As one might suspect, one of the first things that usually requires negotiation is the sale price of the practice. Occasionally the buyer may agree that the asking price for the practice is fair and there is no negotiation, but typically some negotiation occurs. Not too long ago, before lenders started offering 100% financing, it was necessary to negotiate the terms of the sale, i.e., how much was the seller willing to take as a down payment, would the seller carry back the acquisition note and if so, how many installments and what interest would be charged? Currently, the seller is typically cashed out at the time of closing.

Another area requiring some negotiation early in the purchase process is agreeing on a list of the assets that are or are not included in the sale. To try to head off any
misunderstanding between the parties, the seller should make a list of things that will not be included in the sale. In doing so, when a potential buyer visits the practice and
asks what things are included in the sale, the seller is prepared.  If that issue is not dealt with early, it can lead to disagreements.

One area that often requires time and effort is the allocation of the purchase price. The sale price of the practice is allocated into various categories, and the allocation assignments have significant tax consequences to the buyer and seller.

The tax burden can be minimized with good advice from both parties’ tax advisors. Once a Letter of Intent is signed, both parties’ accountants should start working on the allocation agreement. Some of the more basic categories used in the allocation process are:
1) Tangible Assets — consists mainly of equipment, furniture, fixtures, hand instruments, and supplies.
2) Intangible Assets — usually lumped together as goodwill and consists of patient records, telephone number, office location, use of seller’s name for a limited time, and
trained staff.
3) Covenant-not-to-compete.

The greater part of the allocation usually goes to the intangible assets. Goodwill of the practice can be further broken down into personal goodwill and corporate goodwill. There is not enough space here to go into the tax ramifications of each category for both buyer and seller.

Another area of negotiation involves the receivable accounts of the practice. If the buyer is purchasing a healthy accounts receivable, this will give him or her cash flow and he or she will probably not need to borrow as much operating capital. The accounts receivable are discounted based on the age of the accounts, and that discounting is usually negotiated, although there is a fairly standard discount rate
that both sides can accept.

The continued employment of the seller during the transition after closing is another area that requires negotiation. The transition is highly dictated by whether or not the facility is adequate to accommodate both doctors, and whether or not the patient base and practice revenues are sufficient enough to support both doctors.

The last primary area of negotiation has to do with the office facility. If the office is being leased, the buyer must negotiate a new lease. Note that the lender in the practice sale will require the buyer’s lease to be the same amount of time as the practice acquisition loan. If the seller owns the office building, the buyer can either purchase the building or lease with an option to purchase later, and both scenarios
require negotiation.

Bill Avery, DDS, PhD

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