Bruce Bryen, CPA. Managing Partner The Snyder Group, LLC Printer Friendly Version

Dental Practice Acquisition: The Real Cost

Getting ready to buy the practice:
The buyer and seller of a dental practice typically have negotiated the price for its sale after getting input from their advisors and after incurring many hours of studying demographics, financial records, the state of art and the condition of the equipment, the practice’s fee schedules and other important areas of concern. Usually money has been spent for a practice valuation, fees have been paid to accountants and attorneys and payments have been made to consultants to determine projections and the ability to pay off the practice acquisition debt needed to purchase the practice.

How to structure the purchase price:
A good CPA with experience in the dental world may suggest a pre-tax approach for the acquisition of the practice. What does that mean? The sale price is a number that the buyer and the seller of the dental practice have agreed upon. The pre-tax approach to the payment and the allocation of payment can create enormous savings for the buyer and the seller. A payment that is made after reporting the income needed to pay the tax first and then have the money available to amortize the cost of the purchase becomes almost a doubling of the real cost of the acquisition because of the income tax effect. A good financial advisor with dental experience will suggest structuring the transition for the purchase of the dental practice in a way to minimize the tax effect for the buyer and the seller.

What concepts are used to create a pre-tax transition?
The basic concept used to create a pre-tax transition is determining how to write off a significant portion of the acquisition price. This is done by creating an expense, such as deferred or non-deferred compensation. If the dentist that is selling the practice can wait for some of the payment, an attractive, safe and good long-term method to use for a pre-tax approach is to design a sophisticated, qualified retirement plan for the dental practice, creating a liability for funding the plan and reducing the value of the dental practice so that few attributes of the acquisition are allocated to non-deductible items. This creates an expense to the practice and can reduce the tax effect for the buyer and seller by hundreds of thousands of dollars. If the seller cannot wait for the sale proceeds, other methods of creating an expense are available on a shorter term basis. The value of the practice has to be reduced by creating a liability so that any payment that is allocated to a non-deductible item or a deductible item that takes many years to amortize is substantially reduced.

What difference does it make how the practice is sold?
Money is the answer that describes the difference between a pre-tax method and an after-tax approach to a practice acquisition. A hypothetical example in terms of real dollars is the following: For the buyer of a dental practice using a transition price of $400,000 in a state that has an income tax (such as New Jersey), the effective tax rate including federal income tax, Social Security taxes, Medicare taxes and state income tax is probably close to 50%. Simply put, in this example of an after-tax purchase, someone would have to earn $800,000 and pay $400,000 in taxes to have the $400,000 available after the payment of the taxes to pay for the dental practice. The cost, including taxes, is probably double the purchase price. With a pre-tax approach, there would be little to no income tax to the buyer, if the acquisition is structured properly; the total price for the acquisition would be closer to the $400,000, rather than the $800,000 previously described. Imagine the number of buyers available at the net cost of $400,000 rather than $800,000!

Where do I go from here?
Contact an advisor with knowledge of structuring a dental practice acquisition who also knows the real cost of that purchase. Find someone who has done this before and who can explain the details to your satisfaction. The savings are enormous. The effective return becomes much higher to the buyer and the seller of the dental practice.

For further information about the real cost of a dental practice acquisition, the author of this article is willing to discuss the format, methods and the costs required to proceed to the settlement table with a lower out-of-pocket payment for the dental practice acquisition.

Bruce Bryen, CPA has successfully assisted dentists with their personal and financial matters for more than thirty years. As a partner in The Snyder Group, he delivers creative and prudent financial strategies to help dentists build and protect wealth at every stage of their careers. His extensive expertise includes financing, debt restructuring, retirement planning and tax advising to help dentists keep more of what they earn. Bruce is also experienced in providing litigation support services and has testified on numerous occasions as an expert witness.

If you would like additional help or are interested in having Bruce Bryen speak to your dental society or study club, he can be reached at bruce@thedentistsnetwork.net  or at 1-800-988-5674.

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