Question: I want to hire an associate and use a buy-out formula to transition the practice. Where should I start?
There are so many moving parts when it comes to selling a dental practice. One thing to consider is hiring an associate and using a buy-out formula. This has multiple advantages for both the selling dentist and the associate.
The transition buy-out formula is dependent upon how long the practice owner plans to work prior to the sale. If the practice owner wants to work fewer than seven years, he or she should consider hiring an associate, sell the entire practice in one to three years, and continue to work with the new owner for three or four years if the patient base is sufficient, and by mutual agreement thereafter. Should the new owner terminate the former owner’s employment without cause, the restrictive covenants could become null and void.
The purchase price is determined after the associate works one year in the practice on a full-time basis and is increased by the cost of replacement equipment and mutually agreed upon equipment and technology. It is then depreciated over a 10-year straight-line basis.
The advantage of a complete sale is that there is one owner and the complexities of co-ownership can be avoided. In addition, the parties receive favorable asset treatment, which means the new owner can deduct all assets purchased and the selling owner will receive primarily capital gains. It’s a win-win for both.
If the doctors enter into co-ownership, there are three choices for the buyout formula in light of a fixed buy-in price: formula, appraisal, and fixed price. I usually recommend a formula because it accounts for growth or decline.
Appraisals are costly, take time, and values vary significantly among appraisers. If used, the appraisal methodology should be specified, and the buy-out agreement should provide that the last appraisal will control if a new appraisal is not obtained. Fixed price is used when the departing owner plans to leave within a relatively short time.
The formula, appraisal methodology, or agreed value should consider whether the business and tax structure of the co-ownership benefits the departing or remaining owner in that it needs to be tax-balanced so that one owner does not receive a tax benefit to the detriment of the other.
It is not only important to consider how the associate enters the practice, it is also vital to consider how the buy-out works in light of how long the existing owner plans to work.
William P. Prescott, Esq, EMBA represents dentists and dental specialists in the areas of developing business and tax structures for co‑ownership, associate buy‑ins, owner buy‑outs, compensation planning, practice sales and acquisitions, valuations, group practice and solo group arrangements, dispute resolution, fringe and employee benefits, and business and tax planning.