How to generate more buyers for practice transitions

January 30, 2017 News

by Bruce Bryen, CPA, CVA

 

Practice brokers and other sales people

Any dentist ready to transition his or her practice wants to have every potential buyer available. The highest price and best terms are what the dentist is probably thinking.  What needs to occur to put the practice in position for the sale?  Is the dentist receiving expert advice in pricing and how to receive the most efficient net proceeds?  What does “most efficient net proceeds,” mean?  Is the dentist listening to the practice broker because no advisor with experience is available?

There are plenty of questions. How about some answers?  

Getting the practice ready for sale does not occur quickly. Advisors will recommend taking time to produce the most revenue possible prior to signing the listing agreement so buyers see high revenues trending.  State of the art equipment, a pleasant atmosphere, good visibility and location are terrific selling points. 

Most practice brokers transition a dental practice in a standard manner. They want the highest price, all the money at closing and no complications or sophisticated methodology.  They hope the buyer gets financing to accommodate this.  There are other methods where a good advisor can assist the dentist and the practice broker with more buyers than thought possible.  The phrase, “thinking outside the box,” is a commonly used expression.  Saying it and achieving results  are different.  When the practice broker finds a buyer, usually taking a good number of months, there is the normal negotiation and search for financing for the acquiring dentist. The selling dentist starts thinking about what “efficient net proceeds,” means.  What will remain after paying the practice broker, expenses of sale, and the taxes on the gain. Sometimes there are consultants involved where allocations are discussed about points such as equipment value.  Other considerations are goodwill, supplies, inventory items and accounts receivable.

Trade offs within the transition. Wins and losses

The net amount received by the seller is a driving force. What are the seller’s taxes?  This is usually resolved while the assignment of assets is settled between seller and buyer with assistance from advisors.  The seller wants a capital gain and the buyer wants quick tax write offs. These are opposite sides of the table discussions.  Normally, the better it is for the seller, the worse for the buyer.  The capital gain is normally the cheapest tax the seller can pay.  The buyer then records a write off over 15 years in a typical situation.  There is usually some trade off on assignment where the purchase price is listed so seller and buyer give up some benefit to allow the transaction to occur.  There is another way when one “thinks outside the box,” to create additional buyers.  Certain sellers are better off not receiving all the funds with tax on the gain today.

Thinking outside the box

The dentist with sophisticated and experienced advisors and practice brokers who listen to a theory that has been tested and works well in certain situations will allow many more buyers to appear and will defer the tax of the seller for years. The buyer receives an immediate tax write off. It will allow the buyer to use a cheaper “most net efficient tax approach,” when paying for the acquisition.  Conceptually, the seller may be older and the staff younger.  This is almost an ideal situation in which to adopt a defined benefit plan for the practice.  The buyer writes off the unfunded liability due to this type of retirement plan based on one of its criteria, which is the age of the participants.  The older the seller the better as more of a practice write off for the buyer occurs, which replaces the purchase price. Substituting a direct payment to the seller at closing, he or she must wait until the actuarial age of retirement. This approach does not work for everyone. While the funds are in the retirement plan, its income is not taxable as well as all the assets being protected from creditors.  The distributions are taxable and the  money comes from income in the retirement plan that would not have been available except for its creation. The comparison for the seller is that taxes are paid later rather than now.  The buyer gets write offs now instead of amortizing the write offs over fifteen years.

Where is this information available?

Look for this advice from an experienced dental CPA who understands the power and use of retirement plans.   A $750,000 transition can save upwards of $400,000 compared to the typical approach used by practice brokers not ready to listen.