OBSERVATIONS ‘06
Q&A OF BLUNDERS, CAUTIONS AND STRATEGEMS IMPACTING THE PRACTICE SALE THROUGHOUT 2006 (PART IV)
by Sam Reader
Compliments of S.G. Reader & Associates, Inc.
Q: Does it matter how I allocate the monies when I sell my practice?
A: Absolutely! Most practice sales are executed as an asset sale. Generally speaking, allocation will be broken down under Equipment and Furnishings, Trade Name, No-Compete, Goodwill, Leasehold Improvements, Accounts Receivable (if purchased).
The tax liability can be higher in some categories over others. For example: Equipment and Furnishings, No-Compete, Leasehold Improvements and Accounts Receivable (if purchased) will be taxed much higher than the allocations under Trade Name and Goodwill. Some sellers feel hesitant to allocate any monies under Trade Name because they feel there is little to no value in the name, particularly if the clinic is named after the seller. Understandably, a sophisticated buyer will use this as leverage to beat the seller down on price if too much value is allocated to trade name. To avoid this misstep, the seller will either change the name a couple of years prior to selling and/or drop the trade name allocation. However, trade name does add value, and changing the name is always the stronger way to go.
With the higher taxed categories falling under “taxable income”, such as account receivables as high as 45% and equipment at 43%, it is little wonder why accountants for the seller allocate heavily under Goodwill and Trade Name (not taxable income) at 23%.
The buyer’s accountant may feel resistant to some of these allocations and the lost taxable “write off” opportunities for his/her client, particularly with equipment. It does pose a problem when the seller is advertising the sale of his/her practice and representing the equipment at $50k, only to flip the value of the equipment to $20k for the purposes of tax allocation when the contract is drawn. Is this fair to the buyer? Absolutely not. This bait and switch maneuver has sent a few buyers packing and walking. Bottom line, the seller needs to think twice before he/she flippantly throws out an inflated number on the equipment to increase the price or value of the practice. It could cost the deal!
An alternative to the asset sale is a Stock Purchase or Stock Sale. Maybe one in twenty sales are Stock Sales. This is when the seller sells and transfers his/her corporation – 100% of the shares over to the buyer, Tax ID number included. This is all upside for the seller – not always so for the buyer.
The primary upside for the seller is his/her tax liability – 15% versus a possible high of 38% on an asset sale.
Downside for the buyer?
1) Buyer cannot (re)depreciate the
equipment and furnishings.
2) Assumed liabilites from the corporation.
Upside for the buyer?
1) An almost seamless transition, particularly if the clinic is heavy with PPO/HMO insurance payers. Can the buyer minimize liability when purchasing a corporation? Yes – simply by purchasing a tail insurance policy to protect the new doctor from the previous doctor’s actions within the corporation.
There is one other alternative that deals with a complex tax deferral specialized retirement account. This process can be costly to set up and does not usually pencil on sales under $500k.
Be Smart. Be Strong. Be Helpful. Enjoy!
