At the beginning of a dental transition, many buyers and sellers find themselves focused on the big ticket items like location, price, timing.
However, the transition process is filled with many details, steps and factors to consider. Some are a given, others come as a surprise to many, yet each piece can play an important role in how the overall transition plays out. The big and little details work in tandem and illustrate the full picture, impacting both the buyer and seller, now and in the future.
Here are a few considerations that may not be top of mind at first but will need to be discussed or negotiated before the deal closes.
Sale Structure: Asset vs. Stock Sale
The sale structure of the practice purchase sets the buyer/seller up to understand what they’re buying or selling. Asset sales are the most common in a dental transition, but stock sales can occur and are appropriate in certain circumstances.
An asset sale is where the buyer purchases the tangible and intangible assets of the practice but not the legal entity. Meanwhile, a stock sale is where the buyer purchases the stock or interest of the seller’s entity and therefore takes on everything owned by the entity (both assets and liabilities).
The type of structure impacts the buyer and seller differently from both a tax and legal liability capacity, and sometimes there are competing interests on which sale structure is “better” for the buyer and seller based off these implications. One structure may sound like the best option in the moment—be it for simplicity or efficiency—but that doesn’t mean it will have the same impact in the future.
Get more from our podcast: Asset Sale vs. Stock Sale
The Practice Lease
Most people are familiar with residential leases for an apartment or house, but transferring a practice lease can be more complex and filled with different stipulations.
The rent of a space is often one of the largest contributors to overhead and can make a big impact on the patient base. Additionally, the lease agreement typically sets the expectations for not just one year but multiple years, so negotiating the proper terms up front while keeping the long-term goals in mind is crucial.
Some of the factors that require consideration include the type of lease (triple net or gross lease), the lease term, renewal options, rent escalations, HVAC repair and replacement and future purchase options for the building.
Negotiating the practice lease is often a task that comes up near the end of the transition, but with significant financial implications and all of the moving pieces involved, this aspect of the transition requires consideration well in advance.
Get more from our podcast: Negotiating the Real Estate or Lease
Goodwill
Typically, between 70-80% of the total practice value is allocated to intangible assets, and the primary portion of that is goodwill. This non-physical asset encompasses factors like the provider’s reputation, marketing materials, location, patient record quality, practice processes and working relationship with the patients and staff.
Not only is goodwill a large contributing factor to the overall practice value, but because it’s intangible, the handoff between the buyer and seller isn’t as simple as handing over the keys.
Goodwill does not exist independently of the practice, nor can it be sold or purchased separately of the practice. It requires time and effort to build goodwill, so an established practice with a loyal following of patients and efficient business operations has more value to a buyer than a brand-new physical practice.
When it comes to the practice’s goodwill, buyers and sellers will need to understand what sellers may be expected to do to transition goodwill, what buyers can reasonably negotiate and ways a buyer and seller can tarnish goodwill.
Get more from our podcast: Goodwill’s Role in Your Transition
Accounts Receivable
The practice’s accounts receivable (AR) has more significance to a buyer or seller than one would think. That’s because the AR can be bought or sold in a dental transition.
In the simplest terms, AR are monies owed for production that has already been performed. This could be money owed by the patient or money billed and owed by insurance.
When the AR is sold in the transition, the seller receives a lump sum at closing and is no longer responsible for trying to collect outstanding payments from patients. Any payments coming to the practice post-close (regardless of when the production was performed) now belong to the buyer.
In most cases, purchasing the AR is advantageous as it provides an immediate cash flow stream on day one after the transition is finalized. For the opposite party, selling the AR means the seller receives immediate payment for their work versus relying on the buyer to collect the payments.
While there isn’t a right or wrong decision when considering whether to buy or sell the AR, this piece can be advantageous to the overall transition.
Get more from our podcast: All About Accounts Receivable
Putting the Pieces Together
Especially when a dental transition may only happen once or twice in your career, it can feel overwhelming to ensure you have everything in place throughout the process. A dental transition advisor like NDP can provide thorough guidance and help put the pieces together. Contact our team today to discuss your situation.
