Drilling Down Into Buying or Selling a Dental Practice in Michigan

Drilling Down Into Buying or Selling a Dental Practice in Michigan

Article by Dan McGlinn

Over the past year or so, I have assisted at least five dentists in buying or selling their individual dental practices.  So, I thought it might be useful to describe some of the more important issues that need to be addressed when buying or selling a dental practice in Michigan – many of which would also be relevant to the buying or selling of other healthcare or professional practices.

1.  Asset Transactions.  Almost all dental transactions involve the sale and purchase of assets as opposed to the sale and purchase of stock/membership interests in the dental practice. The assets sold and purchased are equipment, inventory and good will, and sometimes accounts receivable and real estate.  In Michigan, because the sale of medical records is a crime, only the custody of the patient records is also transferred, and no portion of purchase price should be allocated to the medical records.

If the accounts receivable are sold and purchased as part of the transaction, the total face value of the accounts receivable will be discounted based upon the aging of the accounts receivable.  As an alternative to selling them at the closing, the seller may retain the accounts receivable and enter into a billing and collection arrangement with the buyer. In this way the buyer handles all post-closing billing and collection efforts and receives a percentage of the collections as compensation for these efforts.

2.  Real Estate.  It is very common for the selling dentist to also own the real estate/dental office condo, either in his or her individual name or in a limited liability company (“LLC”).  So, the sale and purchase of a dental practice may include the buyer either purchasing or leasing the dental office from the seller.  Obviously, if the seller merely leases his or her medical office from a separate landlord, the buyer will need to work with the landlord regarding either an assignment of the lease or a new lease arrangement.  Because a lease represents a significant financial arrangement, the lease should be reviewed by a real estate attorney.

3.  Purchase Price.  The purchase price is obviously one of the most important aspects of the transaction to be negotiated.  The general rule of thumb is that dental practices (excluding the real estate) will sell for between 50 percent and 70 percent of annual gross revenues.  The ability of the seller to command a purchase price higher in the range will be influenced by the strength of the practice (i.e. size, steady or growing patient base, profitability, location, specialties, etc.).  Fortunately for most buyers, there are plenty of interested commercial lenders ready to finance the purchase.

4.  Allocation of the Purchase Price.  The allocation of the purchase price is likewise an important item to be addressed in the asset purchase agreement.  Generally, most of the purchase price will be allocated to goodwill.  Parties will sometimes allocate some portion of the purchase price to a noncompete agreement.  From the buyer’s perspective, it does not matter which portion gets allocated between goodwill versus a noncompete because both are intangibles for which the purchase price must be amortized over 15 years.  However, it does matter from the seller's perspective since amounts allocated to a noncompete probably reduce the amount allocated to goodwill, which more than likely would receive capital gains treatment.  Indeed, there is an IRS Revenue Ruling which some sellers rely on to claim that no amount needs to be allocated to the noncompete.  You should consult with your CPA on this issue.

In addition, some older professional corporations ("PC”) never elected S corporation treatment and are taxed as C corporations.  When such a PC sells its assets, the shareholders of the PC risk double taxation when getting the money out of the PC.  In this situation, one of the methods to reduce the ultimate tax liability is to sell the goodwill owned by the individual dentist outside of the PC.  However, given IRS pronouncements on this issue, this should only be done if the shareholder never had a noncompete with the PC and only after consultation with a CPA.

5.  Employee Benefits.  The seller will need to work with the practice’s employee benefit plan advisers before the closing regarding terminating those plans.  The seller will also need to decide whether to pay employees for unused paid time off (PTO).  The general rule is that an employer does not have to pay for unused PTO unless he or she has agreed to do so.  The buyer will need to determine what types of benefits, if any, will be offered to the employees.  Obviously, to retain skilled and dedicated employees, the buyer needs to consider offering employee benefits equivalent to those offered by the seller.

The professional liability insurance coverage of the seller should likewise be reviewed to determine whether tail insurance needs to be purchased. Unlike other health care professions, most professional liability coverage for established dental practices is occurrence coverage, so the seller does not need to buy tail insurance upon a sale.  However, if the seller goes to work for the buyer, the seller should review whether tail insurance will be needed when employment terminates, and who pays for it.

6.  Post-Closing Employment Agreements with the Selling Dentist.  A buyer of dental practices typically desires the selling dentist to stay on for a period of time after the closing to help transition the patient base.  Normally, this does not extend beyond six months to a year.  However, recent sales of dental practice to large dental corporations have resulted in longer employment arrangements for the selling dentist, so who is buying the practice may impact the length of the desired employment agreement.

If the selling dentist is at or near retirement and the purchaser is a large dental corporation, the seller will need to consider the possibility that he/she may feel different about working after he/she is no longer in charge.  To address this, a selling dentist should make sure to obtain the right to terminate employment no later than one year after the closing ­– even if the original intention was to work two, three or more years.

7.  Post-Closing. Once a dental practice is sold, the selling dentist will likewise need to tend to some post-closing obligations.  First, the Board of Dentistry in Michigan must be notified of the sale in writing.  In addition, the Michigan Department of Community Health must be notified of the transfer of medical records.  The seller will also need to file closing forms with the Michigan Employment Security Agency and the Michigan Department of Treasury.  And ultimately, if the seller had a professional corporation or professional limited liability company, the seller will want to dissolve that entity and file final tax returns.

 

 

 

 

Posted on January 19, 2015
Tagged as Business Law, Real Estate