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 info@dentalcpas.com.

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 info@dentalcpas.com.

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  www.dentalcpas.com/news-events/.

How to Conquer Leadership Challenges

It’s always great to hear about young dentists starting their practice, establishing a new partnership, or purchasing an existing practice.  While some dentists are more comfortable with embracing the change and smoothly transition into their new roles, others have difficulties. Sometimes it’s hard being the new kid in town or one of the youngest members of your staff. Let’s face it; some people make the assumption that with youth comes lack of experience and regretfully, that can translate into a lack of respect. If you are a young dentist or new partner, it can take some time to establish your role of authority with another staff member who may have been around for 15+ years. Here are a few tips to consider for taking the lead:

• Promote A Respectful Work Environment
  
  
  1. Always handle yourself in a positive manner; set the standard and hold all members of staff to it.
  2. Ensure that you and your partner(s) are on the same page before taking action on employee relation issues. All partners need to be willing and committed to making changes if the current staff cannot handle their positions. Without a mutual understanding, your attempts at change will be tested.
  3. When dealing with contentious issues, prepare yourself before approaching, it will allow you to have a clear mind and better handle any backlash.
• Establish Yourself in a Position of Authority
  
  
  1. People will only treat you how you allow them to, so grab the bull by the horn and take ownership of your role. If you plan to grow with the practice and eventually become the owner, it’s never too early to start acting in the best interest of YOUR practice.
  2. Managing a staff of people who are older than you can be challenging, however, stand your ground is a respectful manner.
• Be specific when addressing employees
  1. Broad or general statements give the employee room to come up with an excuse.
  2. Ensure manuals are updated and all staff members are aware of their role and responsibilities in the practice.
• Hold Employees Accountable
  1. Review the portions of his or her job duties that are crucial steps in office operations.
  2. For example, if an employee is consistently failing to update health charts, have a direct conversation with that individual. Address that you have observed the job was not being done, stress the importance of the task to the patient’s safety and express that the problem will not be tolerated is no corrected. After all, patient’s safety is a top priority.

These tips are to get you started. We also recommend you doing some research on management styles and tackling leadership roles. For more information and articles on practice management, visit our blog page at /http://www.dentalcpas.com/news-events/

Six Mistakes to Avoid When Filing Taxes

1. Filing out tax forms with incorrect SSC numberThe IRS computers will automatically reject your deductions and credits if your Social Security number is wrong. This mistake seems careless and trivial, but it is paramount to have the right Social Security number when filing your taxes.  Your social security number is your tax ID number, which is linked to numerous transactions such as income statements, savings account interest, and retirement plan contributions. It is also vital to claiming tax credits. Since the majority of returns are now being filed electronically, a correct social security number is crucial. An incorrect social security number will result in the reject of an e-filed return. Double check all the numbers before submitting your return to ensure they are not transposed or missing digits.
   
   
2. Incorrect Federal ID number used on 1099 MISC.Although your accountant can easily fix this, the less the IRS has to contact you, the better it is. The IRS matches 1099MISC and the Social Security number or Federal Identification number used. If you provide services, and the client you did the work for issues a 1099MISC, be sure they know to use the federal identification number of your business and not your social security number.  If they use the wrong number, the IRS will send you a notice that you did not report income on your personal return, when in fact it was reported correctly on your business return. Also, watch out for spelling your business name incorrectly. Simple spelling errors can lead to rejected returns.
   
   

3. Not reporting non-deductible IRA contributions.Any contribution to an IRA, whether it is deductible or non-deductible, should be reported, so when you withdraw it, you are not taxed on it.  Plain and simple, all contributions to an IRA must be reported.
   
   

4. Incorrectly reported estimated tax payments.If your accountant instructed you to make quarterly estimated tax payments, be sure to let him or her know the details of the payment for each installment.  Provide the check numbers, dates of payment, and the amount of each payment.  What often happens is people claim they made the payments as their accountant told them, but did not keep any records and inadvertently forgot a payment or two.  If the accountant includes all of the estimated payments on the return when they all were not really made, the IRS or state government will send a notice of tax due with penalties and interest.
   
   

5. Incorrect bank account information entered for refunds.If you are having your accountant file your returns electronically and want your refunds directly deposited (or payments automatically) withdrawn from your checking or savings account, provide the correct account information including name of bank, bank routing number, and account number. This will avoid delays in processing your refunds and/or payments.
   
   

6. Forgetting your signature on your return!You must sign your taxes for the IRS to process your taxes.  Filing your taxes electronically is a foolproof way to ensure your taxes will not go unsigned.  These software packages do not allow documents to be sent unless every step is completed.