By Steven Jamison, CFP®, CPA
Whether you’re a dentist just starting out or a physician looking to make a change from the hospital setting to private practice, navigating a practice buy-in can be an overwhelming experience in many ways. In addition to the legal and financial complexities, there are also tax consequences for both buyer and seller. Consider these 4 key pieces when it comes to your acquisition.
With the sale, there can be many line items to consider, some tangible and some intangible. Intangibles can have different values for different people, while tangibles, such as accounts receivable, are more straightforward. Let’s review the basic components.
The monies collected from patients is a line item on the balance sheet called accounts receivable. This is not always a cost of buying in to a practice. In fact, less than half of practices require you to purchase accounts receivables when you buy in. (1) If you are not required to do so, this can be quite a savings.
Goodwill is an intangible that can represent myriad concepts, such as the practice’s brand, reputation, location, stable staffing, procedures, and so on. Simply put, goodwill usually translates into the profits the practice generates that can be passed on to the new owner.
The book value of the practice is basically a balance sheet or equity, which are its assets minus the liabilities. While the book value can give you a good baseline idea of the practice’s value, it is not the purchase price, as the purchase price will take into account future cash flows and other intangibles. Here are some questions to ask as it relates to book value:
- Does the book value include real estate holdings?
- If there are real estate holdings, will the purchase include an ownership in the real estate?
- Will any part of the book value be excluded from the purchase?
If book value is the practice’s balance sheet, cash flow is the profit-and-loss statement—it’s the practice’s income minus its expenses. The cash flow will typically come into play when calculating your salary and dividend payments.
The Hybrid Buy-In Solution
Practices currently structured as an S corporation looking for a buyer will often find that a hybrid structure of a partnership parent organization with two S corporation partners will allow the seller to achieve goodwill treatment for the sales proceeds enabling a preferential lower tax rate on those proceeds, while also enabling the buyer to amortize and deduct the acquired goodwill. Furthermore, this structure allows for profits to be specially allocated at the partnership level, providing much greater flexibility in determining an allocation of income between the owners. This structure also offers the professionals much greater latitude in setting salaries and managing expenses specific to each professional.
Work With Specialized Professionals
At Jamison Hanson, we help professional practice owners connect with other financial professionals that specialize in this process. We coordinate efforts with a variety of specialists to help bring about a prudent practice buy-in transition.
Working with a lender that specializes in professional practice lending can work in favor of both buyer and seller. It enables the seller to receive cash up front for the buy-in, and it gives the buyer a competitive interest rate.
An experienced dental or medical professional CPA will be able to help the buyer with the acquisition while minimizing taxes, but also accommodate the seller’s capital gains treatment he or she will likely advocate for. (2)
Hiring a lawyer to handle the agreement and sale is important, but asking questions about the legal decision-making process is also important. For instance, in a buy-in, will the senior partner maintain legal control? If not, when will you earn legal control? And what happens if you decide to leave the practice? Make sure your legal counsel is well aware of your concerns—for both the short and long term.
Now that you will be working in private practice, it’s important to discuss pay structure. Not only will you want to receive a salary, but you will be part owner now. How will the business be paying you?
When negotiating your compensation plan, be sure that it’s communicated clearly and concisely. You will need to decide if you want equal pay or incentive-based pay, and you will likely have many questions regarding pay structure, such as:
- What are the prior year’s profits?
- What percentage of profits will I be entitled to?
- Are there any large expenses planned in the next few years?
- Is the compensation plan subject to change?
Get Started Today
As you can see, there are many complexities involved in a professional practice buy-in. We at Jamison Hanson work with a number of professional practice owners, including dentists, veterinarians, optometrists, attorneys, and medical specialists and have a depth of understanding in this process.
As with all our services, we will build a custom plan to put your money to work for you, so you can feel confident in your financial future and get back to the life you love. Our simple solution to wealth management: Save time. Build wealth. Live life. Schedule a 15-minute introductory call online or reach out to me at (503) 391-1040 or firstname.lastname@example.org.
Steven Jamison is President at Jamison Hanson, a full-service, fee-only financial planning and accounting firm. As a Certified Public Accountant and CERTIFIED FINANCIAL PLANNER™ professional with more than 10 years of experience, Steven uses his specialized knowledge of tax, financial, and management matters to enhance the lives of personal representatives and trustees and professional practice owners (especially dentists) in Oregon and along the West Coast. With a passion for simplifying finances, optimizing opportunities, and saving money, Steven provides customized wealth advisory and accounting services, including investments, income and estate tax planning and compliance, and retirement planning, so that his clients can stress less and feel more confident about reaching their goals.
Steven prioritizes his clients, building long-lasting relationships that make a significant impact on their financial lives. He graduated cum laude from Brigham Young University with a Bachelor of Science in Accounting and is a member of the Willamette Valley Estate Planning Council and American Institute of Certified Public Accountants. Outside of work, Steven enjoys spending time with his wife, Rachel, and their five children. You can often find him adventuring in the outdoors—biking, hiking, traveling, and swimming. In addition to the Willamette Valley, they enjoy the splendor of the high desert of central Oregon and the lush beauty of the Hawaiian Islands. To learn more about Steven, connect with him on LinkedIn.