When doctors are ready to transition their practice, the majority will agree that the key feature in this venture is the purchase price. They are unaware that, although the purchase price is important, other stipulations of the sale can have financial implications on the final purchase price. Many variables must come together successfully to complete the transition with the desired results. As with the sale of many businesses, the key factors that the buyer and seller must agree upon are the assets included in the sale, the assignment of the purchase price between the value of all the assets, the best time of the month to sell the practice and all arrangements necessary for a successful transition.

Dental Practice and Equipment

An important factor often overlooked is the time of the month to finalize the sale. More often than not, receivables are part of the package, especially with an orthodontic practice. Sellers often prefer to sell during the middle of the month once receivables have been collected. Of course, buyers lean more towards the beginning of the month so they can collect the receivables right away to have some cash flow from the start. The difference between the two timeframes can mean the difference of thousands of dollars for the buyer. If the date of sale is mid-month, the buyer loses all potential receivables already collected by the seller and starts the practice with less money coming in.

As mentioned before, generally, with an orthodontic practice, receivables are included in the sale, but there are times when they are excluded. This matter is easier to address when the entire practice is sold, because physical assets such as office and dental equipment, furniture, supplies and intangible assets like goodwill (the value of a company’s name and reputation, its solid customer base, and good employee relations) are part of the sale. If the assets of the company being sold, especially receivables, is not discussed during the early stages of the transition and agreed upon at the onset of discussions, it could cause the transaction to fall apart and result in no sale.

The allocation of the purchase price between all of the assets is important and must be identified, as the tax ramifications are determined by this. Sellers would rather assign more value to the assets that are taxed at the lowest rates. Intangible assets, such as goodwill, are favored by sellers because they are taxed at a maximum current capital gains rate of 20 percent. Tangible assets, however, such as dental equipment, office equipment and supplies are taxed at a higher ordinary income tax rate, which is currently 39.6 percent.

On the contrary, buyers prefer to allocate more value to assets that will provide the fastest depreciation deductions. The majority of tangible assets can be written off over a five to seven year period whereas goodwill takes closer to 15 years to write off. An additional motivating factor for buyers is that tangible assets may be eligible for even faster depreciation, for qualifying equipment, under the Section 179 expensing election. All of this therefore creates a conflict between the buyer and seller, since the lowest tax rates have the longest write-offs and the other way around. The allocation of assets has a great impact for both parties involved, therefore careful negotiations should be conducted to reach terms and conditions that are agreeable to both, noting also that the allocation of individual assets should be based on current fair market values.

Many doctors frequently come to an agreement without considering all of the fine details and find themselves thinking that all of the hard work has been done once they hire an attorney to finalize the deal. Unfortunately, they come to realize that there are numerous issues still to be discussed and agreed upon, which at this late stage, can become problematic and lead to an end to the potential sale. This is why it is of utmost importance to negotiate all terms and conditions from the start of all discussions to avoid any misunderstandings and acquire the desired results for both parties in a timely manner.