Here I address some of the common questions I hear from dentists regarding their dental practice transitions.
Question: I’m in the process of selling my general dental practice to a recent graduate. My CPA told me that a portion of the purchase price should be financed by my practice to defer taxes. Is any seller financing something that I should consider?
Answer: Depending on the purchase price, the lender may require some portion of seller financing. The greater the purchase price, the greater the requirement from the lender that there be some portion of seller financing in place.
However, seller financing is generally not a good idea due to the risk of default. What you're doing is attempting to balance deferral of taxes versus the risk. For example, if the selling price of your practice is $600,000 and your CPA thinks you should finance $200,000, the payments owed to you would be in line with the purchasing dentist's loan from the lender.
In the event you do decide to provide seller financing, or if it is required by the lender, have your attorney draft a restrictive covenant for the sale and purchase that says if the purchasing dentist's entity defaults, the purchasing dentist, individually, would be prohibited from practicing dentistry in your geographic area and on your former patients to the extent permitted by state law and the FTC's final rule banning noncompete agreements.
Additionally, if you own your practice facility, consider including a provision under the lease with the purchaser that says if a default occurs on the seller financed portion of the purchase price, it triggers a default under the lease. Then the purchasing dentist, individually, would be required to vacate your facility. Bottom line is you get your practice back under a default.
Question: I’m in the process of selling my general dental practice and do not know whether it's best for me to have my corporation retain and collect the accounts receivable or sell them to the purchaser. What is the best choice?
Answer: Generally, it's best for the selling dentist's corporation or other entity to retain the accounts receivable and have the purchasing dentist's practice collect them for a time, often six months, less a reasonable administrative fee. Thereafter, the accounts receivable is turned over to your corporation for any further collection efforts.
While a purchasing dentist's practice can buy the accounts receivable, the purchasing dentist will do so only with the assurance that the accounts receivable price will not be more than what the purchasing dentist's practice will collect.
The problem with determining the value of the accounts receivable is—to the extent that there are insurance payments coming to your corporation for work completed and the period prior to closing—the purchasing dentist usually does not want to pay for those receivables. Rather than struggle with a mutually agreeable calculation of the accounts receivable immediately prior to closing, it’s simpler not sell them. For the time that the purchasing dentist's practice collects the accounts receivable, they are collected on a first-in/first-out basis, except for work completed by the purchasing dentist through insurance.
Question: My partner and I have disability buy-out insurance policies. The policies are very expensive, and we're not sure that they're worth keeping. How would a partner's buy-out for disability be calculated should we drop our disability buy-out insurance?
Answer: Disability buy-out insurance is expensive over the long term. Should there be no disability buy-out insurance in effect, the partner's buy-out for disability is usually a reduced value from the fair market value formula. That percentage reduction from fair market value of a partner's interest represents any reduction to the practice value due to a disabled partner's absence that the remaining partner cannot complete.
Additionally, the remaining partner must locate a successor to complete the production of the disabled partner. In such a case, there can be a drop in practice productivity due to the disabled partner's production loss. An exception is if there is a worthy associate or other partner in place who can complete the production of the disabled partner. In such a case, there may not be reduction for the buy-out value of the disabled partner's interest.
Question: My spouse and I are considering having our attorney complete our estate planning. Should I add something about the sale of my practice in the event of my death?
Answer: Yes. Should a practice owner die, it’s important to designate who and how the practice will be valued, as well as to locate a purchaser. Often, a practice broker is designated in the will to locate a purchaser should there not be an associate in the practice obligated to buy it.
Without designating a method of how or who will handle the sale and purchase after a practice owner's death, the nondoctor spouse, siblings, or other family members are usually ill-suited to sell the practice because they often want to sell it and/or the real estate for a much higher price than its value. In many cases, neither the practice nor the real estate is sold, and the estate gets nothing.
Editor's note: This article appeared in the November/December 2024 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.
