Hidden costs when acquiring a dental practice

Through: Bruce Bryen

A dental graduate who has worked as an associate and learned from a mentor or owner may now be looking for that first dental practice acquisition. There are many things to think about before buying a dental office as it is probably the biggest buying and borrowing step ever taken by the employee.

What are some of the focus areas? Which advisors are needed to make this transition as smooth as possible?

Let’s start with who is needed for guidance so as not to make material mistakes that could cost thousands of dollars. An employee who has probably never spent much money on consultancy services is now going to invest heavily in the transition process.

Who should advise on the takeover?

If the lawyer is not the first adviser to be called in, who is? It’s the dental CPA† Few lawyers understand the dental world. Dental CPAs have seen many transition contracts, they know taxes from a dental perspective, and they are enthusiastic and ready for this type of work.

Benefits of Working with a Dental CPA

The dental CPA can assist the attorney and point out several points to remind the attorney what should be in the purchase contract. The dental CPA can explain the hidden costs of acquiring a dental office, which will be discussed in more detail later. If the lawyer listens, there is a good coordination between the lawyer and the dental CPA.

The cost to someone who understands and can carry out what needs to be done is not cheap. They are cheaper in the long run than a non-dental CPA who may know a lot about business but little about a dental office.

Finding the Right Dental CPA

Finding the right dental CPA is not as difficult as you may think. The dental practice broker can be of great help in referring the right dental CPA to the prospective dental office purchaser as they will likely have a lot of experience with other transitions in handling both sides of the transaction i.e. the purchasing dentist and the selling dentist and each of their dental CPAs.

The hidden costs of acquiring a dental practice

The dental practice buyer may not realize it, but there are hidden costs associated with acquiring a dental practice.

Asset Allocation

Usually, the practice seller insists on capital gains treatment when discussing the purchase price allocation of his or her dental office.

Without using sophisticated means of deferring or eliminating a material amount of taxes owed, the cheapest tax rate for a seller is the capital gains rate. It can be up to 50% cheaper for the seller to report goodwill and other capital-type assets in the transition as the rates for him or her can be as low as 20% compared to 50% if that same income as normal are reported.

An example is reporting goodwill consisting of patient lists, addresses, phone numbers, location and other items compared to receiving a consulting agreement or gross pay. The debate among the dental CPAs will give each of the reasons to use the preferred method that solves the problem and makes the transaction possible. Each of the dental CPAs will learn about the other party’s offer of reasons as to why his or her method of asset allocation is reasonable and will help get the job done.

taxes

There is usually not much talk about the taxes that the buyer has to pay at the transition. These are the hidden costs that need to be discussed so that the dental office buyer is ready when the taxes show up. An example is the amortization of the loan used to acquire the practice. It is important to note that every time a payment is made against the loan balance, the person making the payment has only two ways to do it.

One way is by reporting the income needed to pay off the loan, which creates income for the payer of the loan and there is a tax on that income. The other way is to refinance the loan and pay it off with another loan. That payment would not come from income and would not be taxed.

These are critical points for the buyer to understand as he or she will be required to report the income and unless other steps are taken a tax will be levied on that loan payment.

Understanding the Hidden Costs of Acquiring a Dental Practice

Probably one of the best examples to help understand the buyer’s tax in an acquisition is to use something that is familiar to almost everyone. When paying the home mortgage, most look at the payment each month and know that nearly 100% of the payment is allocated to interest charges.

This allows the buyer to “write off” the interest on his or her tax return under certain restrictions. When the mortgage begins to pay off, the portion allocated to the loan balance is not something that can be “written off” as it is a loan payment.

Where does the money used to pay the loan come from? It must come from income generated by the payer of the loan. Because the write-off is such a small amount, most people don’t realize they’re making that portion of the payment by reporting enough income to have the money to make the payment. When the payment is made, the loan balance decreases, but there is also a tax on the loan payment.

As time goes by, the loan payment portion of the mortgage payment becomes higher and the tax also becomes a larger amount. This is where the dental CPA comes to the rescue of the dental office buyer.

photo by Karolina Grabowskac

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