Wednesday, August 24, 2016

Protecting Your Goodwill

The most valuable component of the price of a dental practice is the portion allocated to “goodwill.” Goodwill represents the intangible assets of a business—the difference between an established, successful business and one that has yet to achieve success. In an established dental practice, goodwill consists largely of the name, reputation, and skill of the dentist and team, which have led to a strong, loyal patient base and consistent inflow of new patients. For the buyer, goodwill greatly increases the likelihood of continued cash flow from retention of that patient base and from new patients.For you, the seller, preservation of the goodwill of your practice is paramount to a successful transition. 

Keep on Building Goodwill

In order to assure that you retain goodwill not only prior to selling but also through the critical transition time during and after the sale, you should maintain your reputation and good name within the practice and community at all times. Through the transition process and even afterward, remain involved in study clubs, the local dental association, community organizations and volunteer groups such as Rotary. This not only will help ensure that you receive proper compensation for your years of practice building, but also that your buyer receives full value. Even after you retire, positive support and praise for the new dentist (such as in social settings) will go a long way toward continued retention of  patients in the new practice.

Choose the Right Broker

Working with an experienced and ethical transition broker is also invaluable in preserving goodwill and value. The right broker will perform a legitimate appraisal and value the practice in a manner that reflects the true anticipated cash flow following the sale, rather than telling you what you may want to hear and subsequently luring a buyer into a bad deal that destroys goodwill. The right broker will also work to find a buyer who is an appropriate fit for the practice, one whose abilities, ethics and practice style match your own, preserving your reputation and the reputation of the practice. Additionally, the right broker will guide the entire process, working with lenders, accountants, and counsel who are knowledgeable in dental transitions. The right broker will also work toward the ultimate goal of having a satisfied seller and buyer, preventing negative interactions that can sometimes occur when working with an inexperienced or self-serving advisor.

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Thursday, July 14, 2016

Buyer Beware – Practice Prices Based on Rules of Thumb

We’ve recently seen an uptick in practice purchase/sale transactions involving specialists such as endo, oral surgery, perio, and prostho. Obviously, the vast majority of practice purchase sales we see are general dentistry because the vast majority of practices out there are general dentistry.

A common problem we’re seeing when reading through reports prepared by brokers for these specialty practices to determine selling price is using general dentistry rules of thumb to determine that price.

Here’s what I mean:

One very common rule of thumb as it relates to the selling price for a general dentistry practice is that statistically, the “typical” general dentistry practice will sell for between 60-75% of the practice collections. I know, some will use 80-85% as the top end of the range and even bump the bottom number to 65-70% when using this as a valuation method, at the end of the day it’s still a statistic, a rule of thumb, NOT a valuation method.

The problem we see in some of the reports used to establish the price for these specialty practices is that they’re using the general dentistry statistics of 60-75% to determine the asking price for these practices, and these are NOT general dentistry practices.

You see, most specialty practices are uniquely different than general dentistry practices in that their revenue is derived AND dependent on referral sources from other professionals. Rarely will a specialty practice’s location, name, signage, telephone number or website be the driving force behind their revenue like you’ll see in many general dentistry practices.

Practices, where revenues are driven by referral sources, present a higher degree of risk to any buyer of these practices since these referrals rely mainly on personal relationships with the selling doctor, especially when the practice has only ONE doctor/owner or a part time associate. IF it’s a group practice where the buyer is buying in to an interest of less than 100%, some of that risk is mitigated since there are other doctors/owners who are still working and can retain those referrals and assist in transitioning those referrals to the buyer.

Because there is a higher risk with retaining these referrals and transitioning the personal relationships from seller to buyer, the capitalization rates used to value profits are generally higher than you’ll see for general dentistry practices. Or said another way, the multiples of profits are generally lower for specialty practices compared to general dentistry practices.

Therefore, using general dentistry statistics or rules of thumb to determine the asking price of a specialty practice that depends on referrals will almost certainly provide a false or misleading number in terms of the value of the practice.

So for those specialist buyers out there looking to purchase a practice, just beware of this and make sure you do your own assessment of the practice financials to determine if the asking price is reasonable.

Written by Tim Lott, CPA, CVA. For more information on our services, please feel free to contact one of the members of the Dental CPA team by calling 844-DENT CPA or emailing

Thursday, July 7, 2016

What Percentage of the Purchase Price should be Allocated to Goodwill?

I see this question frequently, and occasionally I get asked this question from potential buyers. I see claims made by sellers’ advisors that goodwill should be at least 80% of the total purchase price or worse, they suggest that anything lower than 80% will draw the attention of the IRS. This is just plain FALSE!

I hate to break the news to all the folks who believe that there are “standard” percentages that should be used, there aren’t! In fact, I often define goodwill for my buyers as “the difference”. That’s right; goodwill = the difference. Here’s what I mean by that.

Let’s assume you have two practices, each 4 Ops with nearly identical equipment and it’s valued at $150,000. Let’s also assume they’ll have the same allocation to the covenants of $5,000 and the only other remaining assets that need to be allocated are dental supplies and goodwill. Practice A has revenue of $1.5 mil and is selling for $1mil while practice B has revenue of $750k and is selling for $500k. Here’s the proper way to go about allocating the purchase price:

                                                            Practice A                      Practice B

Furniture and equipment                  $150,000 (15%)                  $150,000 (30%)
Dental Supplies                                     20,000                                  10,000
Covenants                                                5,000                                   5,000
Goodwill (the difference)                 825,000 (82.5%)                   335,000 (67%)

You’ll note that goodwill is listed last as it should be the last item that is assigned a value. That’s because every other asset above it should be relatively easy to value and after you’ve agreed upon the values of them, the difference goes to goodwill. Furniture and equipment can be appraised, and dental supplies can be estimated based on practice revenues. You might even see allocations for other items like net contract receivables, consulting agreements, leasehold improvements, patient charts, etc. in every case, a value should be assigned to those assets FIRST then the remainder of the purchase price is allocated to goodwill, LAST!

Technically you’ll see the definition of goodwill, an intangible asset, as the excess amount paid for a business over & above its tangible and other asset values. In my world that’s the same as saying “the difference,” it’s that simple. Statistically speaking I would agree that with the “typical” dental practice sale, 75-80% of the allocated purchase price is usually goodwill, but it’s just a statistic, that’s it.

So don’t get sucked into someone else’s world when they tell you “goodwill should be at least 80% of the purchase price of a dental practice” and any other allocation will draw the attention of the IRS. If you hear a seller’s advisor say that then you know they’re NOT being truthful with you and you have to begin to wonder what other statements they’ve made that aren’t truthful.

Written by Tim Lott, CPA, CVA. For more information on our services, please feel free to contact Tim or one of the members of the Dental CPA team by calling 844-DENT CPA or emailing

Tuesday, May 31, 2016

Buyer of A/R Beware

About a year ago we were engaged to represent a buyer in their efforts to purchase a dental practice. The transaction went fairly smooth and it was one of those engagements where the client wanted to try & handle much of the transaction themselves…or at least as much as they felt comfortable with.

As the settlement day approached, the seller of the practice suggested that the buyer purchase the A/R (unbeknownst to us) and they even agreed on what seemed to be a generous allocation, 0-30, 90%, 30-60, 75%, 60-90, 60%, 0% older than 90 days. On the day of settlement the seller did what they normally do, generate a current A/R report, less patient credits so the parties could do the math and make that part of their settlement.
Things seemed to be going ok for the first 30 days or so, then the buyer started to notice a couple of things. EOBs were arriving with amounts MUCH lower than what the A/R balances were showing and in some cases the EOBs showed services dates much older than what was reported in the various aged buckets.

Here’s what the buyer learned over a period of time -  A) the seller was posting the charges WITHOUT posting the appropriate PPO/Insurance adjustments or at least an estimate of what the PPO/Insurance should have been and B) the software they were using retained any insurance A/R as a 0-30 balance even after 30 days.

So not only did the buyer pay 90% of inflated 0-30 balances because the PPO/insurance adjustments weren’t made, if there were any rejected claims that weren’t handled within 30 days those balances remained in the 0-30 bucket and the buyer overpaid for those balances as well. In the latter case they got hit twice as hard because not only would they have paid less than 90% on those older insurance balances, they also WAY overpaid on those balances because the adjustments weren’t made as well.

As a buyer if you’re going to purchase A/R, make sure you do your due diligence. Make sure all credits are removed, make sure the buckets are aged by date of service, make sure balances have been adjusted for actual or estimated PPO/insurance adjustments.
We’ve seen situations where a software will take a 6-month-old balance and included it in the 0-30 day bucket because the software starts the aging at 0 days whenever an invoice is issued, even when the date of service is 6 months old !

-The DentalCPAs Team

For additional information and/or questions specific to your practice,contact one of our Dental CPA team members at 844-DENT CPA or

Tuesday, March 29, 2016

Should You Employ Your Children? What are the Tax Benefits?

Did you know? If you hire your children as employees to do legitimate work in your business, you may deduct their salaries from your business income as a business expense. This can be a substantial benefit for some as it allows you to shift part of your business income from your tax bracket to your child’s bracket. This can be a win-win situation for both you and your child. Not only does it allow your child to learn the value of work but it also provides them with insight on the family business. And, it’s a great tax deduction for you! You can pay your child under the age of 18 up to $6300 tax-free by taking the standard deduction. That’s money your child will have to spend on a car, college, clothes, gas, etc.
Here are some things you need to know
  1. Your child must be a qualified dependent.
  2. Pay real wages for real work, paying in pizza and still taking the deduction won’t fly with the IRS.
  3. The job must be age appropriate and salary should reasonable match job responsibility.
    Contact us for a list of jobs kids can do in a dental office.
  4. Document the job description and employee agreement. To avoid unnecessary scrutiny, maintain proper payroll documentations.
  5. Keep a timesheet of hours and day worked. This will help substantiate the amount of money received for work. It is good practice if the child deposits the paycheck in a bank account rather than cashing them as it shows the IRS the child took possession of the funds.
  6. Be aware of the tax requirements, payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the business is a sole proprietorship or a partnership in which each partner is a parent of the child. However, children who employed by S Corporations or partnerships that include nonparent partners or corporations are not exempt. Also, payments are not subject to federal unemployment tax if the child is under 21.
If your child qualifies, you can avoid paying approximately 22 percent of their wages in tax. Before making the final decision of adding your child to payroll, consult with your CPA as the actual tax savings depends on your tax rate, your child’s rate, and the entity under which the business operates. For more questions on the benefits of employing your child contact us at 844-Dent CPA or visit our main blog page at