Dental Practice Purchase Offer.

I have been negotiating with a local dentist for a couple of months and recently, we came to what I feel to be very fair terms for an associateship opportunity with a delayed sale. Associate for 2 years, paid 40% of production. I pay my own lab fees. CE $$ as well. After 2 years, it would have been a 100% buy-out. That was the original plan.

Tonight, he brought up a unique structure of a transition. He said his CPA and attorney formulated the plan trying to improve the tax advantages for all involved. I need your advice on what tax advantages are present for both the buyer and the seller.

Asking price $840K

He is most interested in me having a "vested interest" in the practice. An interest so strong that he will not be caught in two years with me leaving and he having to begin the whole process all over again. I completely understand this. He'd like me to buy 25% of the stock of the business when I begin (210K) creating this vested interest. However, the associateship lasting 2 years would still apply. He then went on to say that he believes, based on his CPA and attorney's advice, that me, the buyer, would be able to borrow money from the corporation at year 2, paying for the final 80% of the practice. By doing this, am I able to pay the debt service pre-tax? And I assume I'd still be able to deduct my interest.

I told him I am obviously interested in owning 25% of the stock, but with that means that I'd be paying back the debt to that borrowed $$$. Because I'd own 25%, wouldn't that warrant that I receive 25% of the hygiene production? From the way he understood it, I would still only make my associateship compensation with no hygiene production. I am not educated in taxes and many of these matters, but to me, I don't understand how this can work. I understand that he wants a commitment and I'm willing to give that commitment to him, but I cannot borrow $210K without a means to pay it back.

This doc is a very generous and honest man and I know he is not trying to put me in a bad spot. I need your thoughts. Thanks in advance.


What they APPEAR to be suggesting is a buy-in\buy-out that is done with a combined stock purchase\earnings shift\deferment\differential method. The fact is this is a VERY common method and while I generally agree that an asset purchase may be preferable in most cases, buying stock isn't the devil that some make it out to be in reality.

That said, IF they continue to have you buy the other 75% in year two then you should stick to your guns and make it an asset purchase and DO NOT buy stock now. There's NO WAY to buy the other 75% as a stock purchase and do so with pre-tax dollars, can't happen and I think I'm missing part of the proposal simply based on that part of your post.

It almost sounds like they want you to pay 25% of the purchase price now for stock (or maybe a deposit against 100% of the stock to be held in escrow) and potentially pay him out over 5 years beginning in 2 years as some form of severance, deferred comp or mgmnt type compensation that the corporation can deduct.

Again, THAT's what it sounds like.

If they want you to have a vested interest, an approach would be that you DEPOSIT $25k now and in two years do the deal. If you walk within the two years, you lose the $25k or a portion of it depending on when you walk. If they terminate you within 2 years they give it back PLUS some add'l severance payment equivalent to approx. $2k per month you stay there (so if they terminate you in month 23 for no good reason, they give you back the $25k AND they pay you another $22k over a year). Of course there would be conditions placed on termination.

Now, is that a good deal for you? Who knows, I don't know you OR the situation.

The bottom line is that it's time for you to make a nominal investment (in the grand scheme of things) NOW (if you truly see this as your future) and hire a professional who handles transitions to represent you.

If you're buying 50% why consider an asset purchase? You purchase a 50% interest in the assets of the C-corp & maybe a 50% interest in the owner docs personal goodwill (that needs to be addressed by his advisers). There is an added level of complexity to this approach, however, for the buyer(s), who in theory will ultimately own the practice, they aren't stuck with an old c-corp they don't want or need and you use an entity that allows for more flexibility in future sales\purchases of interests in the business.

This post first appeared on DentalTown.

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Dental Associate Buying Out Older Dentist

I have a 'hypothetical' question on behalf of an associate friend of mine. In his situation, the owner is ready (sort of) to sell the entire practice, with the condition that he can still be some part of it. Basically, he doesn't have a golf course or anything else to retire to due to his disability, but realizes that it is time to sell the practice.

Then he should sell & get out of the picture. Would you buy a house & let the seller "hang out" from time to time? Well, maybe some would.....

The associate does NOT want to buy in. He only wants to buy OUT. He is perfectly happy to have the owner come into the practice as much as he wants to. He is a great asset in talking to patients, motivating the staff, and for general advice.

Buyer can always consult with the seller whenever they need to, make it on an as needed basis, DON'T put anything into a contract giving the seller the RIGHT to "hang out".

There is vast room for improvement that the associate believes can turn this classic car into a finely tuned machine.

That'll be easier to do without the seller "hanging out" telling buyer what they disagree with & potentially sabotaging any planned changes.....

This certain associate wants some opinions. When is it a good deal to buy a very large practice?

When it's a good deal AND the buyer can manage it.

Does it make more sense to start small and get big in a few years, or to just buy big?

Depends

More importantly, how would you structure a deal to keep the owner at the practice?

I wouldn't, in my opinion that's simply asking for trouble....

What are the advantages/tax implications to making the purchase price significantly less and keeping the owner on salary as a "consultant" or something?

Man, keep it simple, let your CPA advise you on price allocation that benefits you, don't worry about that now.

This post first appeared on DentalTown.

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Dental Practice - Should I Sell, Merge or Stay?

I'm 42 and I'm two years away from completely owning my practice.

At that point my income increases substantially.

I was poor and in debt when I bought the practice (which was overpriced and underperforming.) Now, it's productive but I'm questioning whether I want to stay. Right now I feel tired, burnt out, and not motivated to keep the leadership energy flowing. My question is - are group practices better?

For instance, I'd like to take a real vacation before I retire. (2 weeks would be nice) I'd like to discuss complex treatment plans, I'd like to share overhead, I'd like some company (an office manager would be nice.)

Yes, I've got a good staff but I'm their boss. Some have suggested finding a consultant - I'm burnt out on those. I've had three - and they really didn't help much. (One was a mentor, one was getting started in the business and one was way overpriced) I'm still paying off the last one. I feel like I could sell this practice and make a profit. Then, I could work as an associate as I find a group to become partnered with. Have people done this? What are some pros and cons?

Not knowing you (personally anyway), it's difficult to give any real advice, so I have to use assumptions.

Assuming you still want to own & work, it sounds like you want to have more time off, share the call (i.e. better quality of life) and hopefully maintain some ownership so you can maintain a share of the profits.

If those are some fair assumptions you could:

1. Look around for a younger dentist who currently owns their practice & wants to grow their practice, maybe with deferred payments & you could merge your practice into theirs & work out some type of deferred sale. For example, become 50/50 partners in one bigger practice, this way you'll have some security knowing if something happens & you need to retire or sell, your partner will buy your half. Keep in mind you'll have to buy theirs if something happens to them first. They can come into your space, or you there’s, whichever is a better location.

2. Find a young doctor looking to own a practice, hire them as an associate with the opportunity to buy-in.

I have 6 partners & have never worked alone, so I can only comment based on my experience. I was out of the office all last week and my other partners were able to handle any calls that came in for me that NEEDED attention. I can go away & not have to worry about a client’s ability to be serviced, just as my partners can do. If I were solo, last week would have been more stressful knowing that IF something came up that needed partner\owner attention the client would have to wait.

I doubt you really want to sell, that's just a guess though.

This post first appeared on DentalTown.

Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com

For more information or to sign up for our newsletter, please contact arose@dentalcpas.com

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