A buyer needs to be able envision him or herself in the practice they may be purchasing. A dentist should be a good fit to the basic philosophy, skill level and personality style of the seller. This increases the likelihood that this practice is a good match.
There are numerous methods of transferring ownership in a practice: complete purchase; delayed buy-in/buy-out through partnership or merger.
A seller needs to decide if he or she wishes to continue to work at the practice and how many days if necessary. If the time frame is less than two years, in most cases the complete sale is the method of choice.
No, most dental practice sale transactions do not require the previous owner staying on as an associate particularly if the practice being sold is a general private practice. If the practice is large enough and supporting more than one working dentists it could be an advantage to the buyer to have the seller stay on if they are agreeable to do so.
Most practice sale transitions are quite brief. The keys to a successful transition are: a good letter of introduction and a staff who will help endorse the new doctor. In many general practices, the transition lasts only until the owner finishes the cases that were in progress as of the closing date. If the practice can support more than one doctor and the seller would like to stay on, then the transition can last as long as agreed to by both doctors. In specialty practices, a transition may need to be longer to accommodate the referral sources introduction to the buyer.
The idea that a practice’s dentistry has all been completed is a misunderstanding form a buyer’s perspective. There is always new treatment plans to be found in the flow of new patients and recall patient visits. The primary reason one buys an existing practice is to acquire the new patient referrals from the active patient base. If the practice is established it would be incorrect to assume that all the dentistry is completed if so, then even the seller would not have any treatment to perform. An ethical seller will want you to be successful in your purchase of his or her practice. As part of your practice purchase analysis reviewing treatment planning and patients charts will assist your assessment of work that needs to be done and assess the amount of new patient flow.
All small businesses such as dental practices have two major components the tangible and intangible. Tangible assets include equipment, leasehold improvements, furniture, supplies, and instruments. An intangible component is the value known as goodwill. Goodwill is defined as the value a buyer is willing to pay over and above the value of the tangible assets. Goodwill is based on many factors with two key elements cash flow and the desirability of that particular practice. A buyer evaluates many factors such as location, patient base, staffing, fee structure and more. The more positive or desirable those factors are the more the buyer market is willing to pay and lenders are willing to lend. It is always advisable to have a practice broker professional knowledgeable enough about the dental marketplace do an appraisal/analysis of the practice.
Practice acquisition capital can come from several sources the buyer (cash) or lender. A seller also can take a seller’s note. Typically a seller’s note is for only a portion/ percentage of the sale at an interest rate that is agreeable to both seller and buyer. A seller should decide before the practice is put on the market whether or not he/she wants to finance any part of the sale. There are both advantages and disadvantages to seller financing. If a sale is fully funded by a loan a seller will not take a note as there is no need to assume the risk of being a lender.
The current lending environment for dental practice buyers is 100% of the purchase price plus working capital with re-payment option terms that vary three, five, seven to ten year or more. Financially strong buyers usually can obtain better loan rates and terms. Any lender will review the purchase of the practice, credit of the buyer and cash flow of the practice itself to determine sufficient income and revenue for debt service.
Buyer need not pay taxes. There is no sales tax on the sale of dental practices. The buyer will be able to write off immediate expenses such as supplies as well as write off from the depreciation of equipment. Goodwill is also depreciable over longer period of time this can be beneficial after the equipment depreciation write off has been exhausted.
It is always advisable for a seller to strategize with his or her accountant regarding proceeds from the practice sale. Sellers will pay income/capital gain taxes on any of the profit from the total sales price. Intangible assets such as goodwill and patient records are taxed at capital gain rates and the restrictive covenant is taxed at ordinary rates. Corporations are taxed at the corporate level and then the personal level.
As a broker and agent we recommend both seller and buyer seek counsel from an accountant and/or attorney. Only an attorney can offer legal advise and only an accountant can offer financial advise. Buyer and seller are welcome to use any attorney or accountant they wish, we just recommend that they use someone familiar with the business of dental practices so they will be adequately represented and protected. Referrals for accountants and attorneys are available upon request. First Choice Practice Sales is not a legal firm and all of our services are provided as a courtesy to both buyer and seller.
Accountants become necessary after an offer is accepted and the beginning of the due diligence period as well as to determine and review the allocated values of the purchase price for tax purposes. Attorneys generally become involved in the development of a purchase agreement or to review leases and escrow instructions if the buyer feels it is necessary. Accountant and attorney fees are independent of any broker fees or commissions. Fees charged by attorneys and accountant are typically at an hourly rate and can vary from company to company.
In addition to possible attorney and account fees other expenses include escrow fees, lease security deposits and lease assignment fees. Occasionally buyers will also hire consultants from time to time to review a practice purchase.
Seller owed real estate will be sold or leased to the buyer at an agreed upon value or leasing rate. If the real estate is purchased along with the practice a lender may require a down payment on the building. The current lending environment allows for 100% of the practice purchase price acquisition capital.
Once due diligence and loan approval has been completed it is typical for the broker to initiate the lease assignment request. A buyer will have to apply with the landlord and be approved as a tenant for the lease assignment or new lease if available. Most practice sales use an assignment of existing lease to prevent any increases in rent to the new owner of the practice which could occur by the negotiation of a new lease. Buyers will need to obtain a lease that is the term of their practice acquisition loan. When the lease assignment is initiated additional lease renewal options can be requested if needed.
Most partnerships are 50% ownership for each dentist. Issues to resolve and agree upon in contract negotiations include how to manage the practice, the agreed upon value of the practice and the applicable terms of the buy-in/buy-out or contract cancellation.