Tax, Retirement & Wealth Advisors in Salem OR | Jamison Hanson

As Financial Advisors in Salem, OR, we specialize in Wealth Management and Retirement Planning. Schedule a free review today!

Call: (503) 391-1040

Structuring a Tax-Efficient Practice Buy-In: What you Need to Know

Structuring a Tax-Efficient Practice Buy-In: What you Need to Know

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. 

Buy-In Basics

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.

Accounts Receivable

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

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.

Book Value

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?

Cash Flow

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. 

Lenders

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. 

CPA

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)

Legal Aspects

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.

Pay Structure

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 steven.jamison@jhadvisors.com. 

About Steven

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.

______________

(1) https://www.whitecoatinvestor.com/evaluating-medical-practice-buy-ins/

(2) https://ignitedds.com/2022/04/acquiring-a-dental-practice-and-some-of-the-pitfalls/

The Tradesperson

Carl didn’t have to go to college to carve out a solid career. He’s skilled at what he does, puts in hard work every day, and has the callouses to show for it. That competence and reliability have paid off in making him an asset to his employers, so the income he brought in over the years coupled with a commitment to living beneath his means has allowed him to create a nice nest egg. “I’m starting to feel the years,” he told me. “That’s the tradeoff for doing work you enjoy, I guess. I’m looking forward to another ten years on the job, but my body might have other ideas.” Carl confessed that his back was starting to feel stiff some days. He wasn’t in pain or injured, but it was taking him a little longer to loosen up in the morning, and he was ready to hit the couch when he got home at night. He wanted to make sure he was protected. “I’d rather have a stiff back from wiring a building than sitting at a desk all day,” he joked as I shifted in my desk chair and laughed. “But I want to make sure we’ll be okay in case I have to hang up my gear earlier than planned.” With a son in college to become an engineer and a teenage daughter who plans to follow in her father’s footsteps by learning a trade, he and his wife, an RN, still have tuition and child rearing expenses to cover. But they’ll be empty nesters soon, and he wonders if downsizing their lifestyle could leave them with more options in the long run. Other than setting money aside regularly, he’s not familiar with investing or tax strategies. So he doesn’t know where to start. “We’re not extravagant people, but we chose a good school district and mortgage to go with it. When the kids are gone, Sheri and I are thinking it might be easier on the budget and more enjoyable to move out of the suburbs into a smaller house with some land.” “That sounds like you’d be living the dream, Carl,” I said. I knew we could make some adjustments to give him the freedom to retire earlier if need be. “Your toolbox is different from mine, let’s make sure you have the tools you need in place to be comfortable in retirement.”

Primary Concerns

How We Helped

The Widow

That’s why there’s no time like the present to meet with an attorney and get your documents updated to make sure they are in good order. The eventual (if not immediate) need for a power of attorney, and health care proxy to be filed is of the utmost importance. Heart disease is one of the leading causes of death in America. And although we know this to be true, it seems that dementia is right up there with the clients we help. The onset is often young (late 50’s, early 60’s), and to date, there is no cure, no surgery to be done. “We’re coming to see you,” Laura said. “Just so you know, he is having some memory issues and is having some testing done. Please don’t mention the ‘D’ word in front of him. It’s early in the process for him, and he knows what it means and what the outcomes are.” We had a conversation, the three of us. His comprehension was good, but there were differences. I checked my notes as to the last time their wills were updated… it had been a while. On a subsequent visit, Laura let me know she was having difficulty grasping the enormity of the potential expense to care for him. By choice, long-term care insurance had not been part of their plan. She was now projecting the harsh realities around the cost of care, not to mention the taxes on their IRAs to access those funds. “He has life insurance,'' she said, “but it expires in 5 years. I can’t stop feeling awful, but I’m counting on that being there for me, assuming I have to use our retirement assets to pay for care.” “It’s not selfish; it’s survival,” I said. “Remember, your goal is to provide him great care while he’s alive. His goal was for the two of you to enjoy your lives together. He would be upset if, after 40 years of professional work, you spent all of it on him.” By the end of our conversation, she understood that the death benefit is for the survivor, not the person whom the policy is on. As to the timing of it, my experience is that spouses who survive their loved ones have already mourned the very essence of their being, well before their bodies have given up. The willingness to do what is right for him now will somehow be balanced out later. She still maintains the family home, stays close to her children and lifelong friends, and travels when she can. Because of our work together, Laura is more at ease and confident in her financial future.

Primary Concerns

How We Helped

The Single Mom

Life doesn’t always go as planned, but the more dedicated, disciplined, and prepared we are, the better financial future we can enjoy—no matter the circumstances. Paige had been to a presentation I did about her workplace benefits. The company was having on-again, off-again “reduction-in-force” offers to take an early retirement, or to simply leave. When I answered the phone, the caller sounded a little nervous. She had never met with an advisor before, but after attending the presentation, she thought I might be able to help her. She started working at the phone company right out of high school. A few years later, she was married, and soon after that, well, you know those newlyweds! By the time her daughter was five, her husband had left. It turned out, fatherhood wasn’t for him… nor was consistently making child-support payments. That didn’t stop Paige from working and raising her daughter to become a healthy, productive adult, or from making her 401(k) contributions. As the years went by, she had questions. “Am I saving enough? Do the investments make sense? How am I going to pay for college? Can I afford to buy a new car when I retire? Should I pay off my mortgage? The dream trip to Tuscany… is it doable?” She looked to me for advice and guidance. I admired (and still do) her commitment to providing for her daughter and her consistent resolve to save and invest for her future retirement. Paige accomplished a lot—a whole lot, really. But the best offer yet from her company came in her mid-50’s. She had been saving, waiting, for this moment for over 30 years. It was scary—no, intimidating, for her to really contemplate not having that paycheck, paid vacation, and benefits. “How do I evaluate the early retirement offer?” she asked. “How will I live? Where will I get money from? Will I pay taxes on my retirement? What about the company stock?” “You know,” I said, “we’ve talked about this many times. You did some great prep. Work with me.” “I know,” she said. “But big decisions like this are stressful, especially with the deadlines. And I know you can explain it to me again so I can be confident in my decisions.” Paige did take that offer. She works part-time now and spends one to two days a week caring for her parents. “Do they have health care proxies, powers of attorney, and wills?” I asked. She laughed, “Does it ever end with you?” As long as time marches on and the world keeps changing, then no, it never really ends. The topics of conversation and how I am trying to help keeps our relationship fresh.

Primary Concerns

How We Helped

The Married Couple

Corrine retired first. One of the largest razor blade companies was headquartered in Boston, and they treated their employees well. A pension combined with a 401(k) match in the form of a stock that did very well gave her a comfortable nest egg and monthly income…not to mention a Medical ESOP plan. Her husband Ed retired many years later. An employee of the federal government, he wanted to work longer to increase his pension benefit. He too did well with his Thrift Savings Plan (TSP). But he had some credit card debt, so we devised a strategy to pay it off over two tax years, using vacation buyout money at retirement and TSP funds the following tax year. The couple had been clients of mine for several years, and he had put off retiring more than once. When I saw them call in, I figured he was calling to let me know he had finally decided to retire. Unfortunately, he was calling to let me know that his son died very prematurely. They came in, still reeling from grief, to discuss what they wanted to do next. Corrine and Ed come from a small island nation where family customs favor the eldest son. At the time of his death, he had two young children, the older of which was two and the other only months old. “We want to provide for our grandchildren,'' they said, “to make sure they can be educated when the time comes.” Neither Ed nor Corrine had attended college, but they made sure their sons did, and now, in their son’s absence, they will provide for his children. Given their young age, I suggested they speak with a local estate planning attorney to see if she thought setting up some type of trust to put assets in (and to name as a beneficiary) would help them accomplish their goals. She agreed, drafted the relevant documents, and they are now comforted by having a plan in place. Their son’s death triggered Ed to retire immediately. He and his wife now care for their grandchildren daily when their mother goes off to work. Their involvement in the grandchildren’s lives helps to ease their pain, pass on family values, and keep the legacy of their son alive.

Primary Concerns

How We Helped