Many dentists never consider the business side of their industry until they are faced with buying or selling a practice. In many cases, dentists have staff or outside help to manage the intricate legal and financial side of their business. This is fine during the normal course of ownership, but more involvement becomes necessary when buying or selling a practice. The huge milestones of entering and exiting a practice have major implications in the sale and transfer of the business. With the right information and enough planning, the process of transitioning in or out of a practice can be made significantly easier.
When faced with leaving a practice, it can be difficult to separate emotional ties from the true value of the practice and to make the right decision about selling. Likewise, a dentist looking to buy a practice can get carried away with aesthetics, location and other surface factors and miss deeper issues lying under the surface. By having valuation performed, dentists can find out the true value of a practice and identify their options.
An appraisal can clarify whether it is best to sell the practice outright or offer an “earn out” option with cash contingency. In addition to a practice’s hard assets, the “goodwill” of a practice, or its current patients and dentists who send referrals, makes a major contribution to its total value. Both buyers and sellers can benefit from understanding this in regard to valuation.
How a transition should be carried out depends on the unique aspects of the transaction, with an emphasis on whether the seller plans to stay involved or not after the transition. In “internal” transitions, the practice is transferred to somebody already working there. This younger associate will have usually bought part of the practice’s equity. After a trial period, the outgoing practitioner can have more peace of mind about the future of the practice, and may become a non-active partner or may sell out completely.
Negotiations are normally completed early on during this type of partnership. Both parties need to address a number of topics, including how the transition will impact the business, potential events that could impact the deal, dividing the workload, handling human resources, creating a budget and determining how equity interest and other financial details should be handled.
In some cases, a dentist may wish to sell his or her practice to an outside individual or company. This type of deal should be planned out extensively ahead of time so the seller has time to profile the practice for earnest buyers interested in demographics and financial statistics. Only after the earnest buyer makes an offer and signs a confidentiality agreement will most of the contract documents be made and settled. There is less negotiation on how the practice should be run, but post-sale assistance form the seller may be part of the deal to ensure all patients feel comfortable during the changing of hands.
Buyers and sellers can often save significant money simply by allocating the purchase price properly. First, both parties should meet and discuss whether to choose an equity sale or asset sale. Buyers in equity sales usually make long-term capital gains from practice shares they have had for more than a year. However, buyers who go this route aren’t able to benefit from asset depreciation or a step-up basis in those assets after certain parts have been sold.
In an asset sale, both parties work together to determine allocation of the price to the practice’s assets. For example, goodwill may be taxed at the rate of long-term capital gains rather than as regular income and amortized. The seller is taxed for the sale of personal assets at the income tax rate, and buyer benefits from a quicker schedule of depreciation and step-up basis for the assets.
Assembling a Transition Team
Dentists transitioning in or out of a practice should spend time planning alongside a group of advocates and advisors who can clarify important aspects of the process and help avert problems. For best results, dentists should create a team that includes a consultant, attorney, appraiser, financier and CPA with relevant experience. This level of planning is vital for giving the buyer and seller an optimal outcome with a fruitful practice for the former and a comfortable income for the latter.