timing, ADS, selling a practice, practice value, allocation, Wendy Hirai.
The current low capital gains and ordinary income tax rates that we have enjoyed for the past few years were scheduled to “sunset” on Dec. 31, 2010. Fortunately, that deadline was extended until Dec. 31, 2012. How likely is it that Congress will extend it yet another time? What if they don’t? If they do not, what would a tax increase mean when it comes time to sell your practice? How early do you need to start the process?
Practice value
We are often asked, “What will my practice sell for?” The answer, while not immediately satisfying, is “That depends on many factors.” What owners are really asking is “How much money will be left in my pocket to fund my retirement or relocation after the sale of my practice?” Now that really does depend. Let’s explore that idea a bit more.
Supply and demand
Many dentists who are at or near retirement age continue to practice. This means that in many areas there are currently not enough practices available for dentists entering the market or wanting to relocate. This fact alone has helped maintain practice values at an all-time high. However, here is the flip side of supply and demand. As more sellers jump into the market, depending on the current economy, prices may begin to drop.
Profitable practices in population centers nearly always sell for more, and sell more quickly. This means that smaller practices, especially in rural areas, will become even harder to sell, and in extreme cases may not sell at all.
Credit policies have tightened. Buyers need to have more cash reserves, and the requirement by lenders for seller financing for at least a part of the sale is again becoming more prevalent. The good news is that in most cases, a seller can still be completely cashed out if that is his or her choice.
Equipment
New equipment will always catch the interest of a potential buyer over old, worn, and tired equipment. It will nearly always add to the value of the practice as a whole, and make it more enjoyable for the seller to practice in the meantime.
This includes dental equipment, as well as updated computers and office furniture and equipment. It also includes updated décor. But don’t go out and spend a small fortune if you’re only a year or two away from retiring. You’re not likely to get your full investment back, so maybe just new carpet and paint will be enough.
Cash is king
Running a tight ship will put money in your pocket today and contribute to a higher sales price tomorrow. Besides controlling overhead, you need to efficiently collect what you produce. Those accounts more than 90 days should be in the bank working for you rather than sitting out on the books. Be sure to watch patient credits that tend to accrue over time, too. A few dollars here and there multiplied by an entire patient base could leave you with an unpleasant surprise when it comes time to zero out those credits and leave a clean slate for your buyer.
Allocation
A properly allocated sale can save thousands of dollars in taxes. The reverse is also true. Be sure to work with a reputable CPA and practice broker who can help you keep more of those sales proceeds in your pocket, and can advise you on timing. And be sure to start early. Finding the right person to care for your patients takes time and a carefully thought out plan.
Wendy Hirai is a senior practice broker with ADS Northwest. She has a sales and marketing background with more than 10 years of experience in practice brokerage. Wendy lives in Boise, Idaho, and can be reached at (866) 348-3820, (888) 419-5590, ext. 866, [email protected], or visit www.mydentalbroker.com.
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