Transitions Roundtable

This dentist wants to make sure that he properly prepares to make the move to a multi-dentist and multi-specialist practice. What steps should he take?

Question:

I’m a recently graduated general dentist, and I’m thinking about joining a practice with multiple general dentists and specialists.
How are ownership and buy-in typically structured for these practices?

Randon j. Jensen, cbi

The buy-in structure will vary depending on how the group business entity is structured. The most common entity for groups like this is a limited liability company (LLC). Each doctor is a member-owner, either individually or through his or her own respective LLC or professional corporation (PC).

The LLC provides some flexibility, especially in group and multiowner practices. Besides having the ability to pay dividends to members in a ratio incongruent with ownership percentage, an LLC allows a buyer to recognize a step up in basis in the assets of the company for the purposes of depreciation and amortization. This means buyers can recognize the tax benefit of writing off the entire price paid to purchase an interest in the practice. This is a vital element of the transaction.

In contrast, a buyer should avoid purchasing stock in a corporation since stock is a nondepreciable asset (i.e., cannot be written off). If the group practice you are considering is set up as a single corporation with multiple stockholders, I caution against buying stock in it. Instead, purchase tangible and intangible assets from the corporation and set up a new LLC.

If a sale of stock is the only option the group will consider, a purchase may be feasible; however, the purchase price should be adjusted to account for your tax disadvantage. Either that, or the sale should be structured with a significantly reduced price allocated to stock, and the difference between the stock price and the buy-in price should be paid to the sellers in the form of a management fee, which is deductible.

Successful group and joint ownership practice structures share these four characteristics: (1) compensation is paid to each doctor as a percentage of his or her respective collected production; (2) profits (net income after operating overhead and doctor compensation) are paid to each doctor-owner equally, or based on his or her percentage of ownership (not based on respective production ratios); (3) provisions address an absentee owner, or an owner who does not meet minimum work-schedule or production numbers; and (4) well-defined buy-out provisions address such things as death, disability, retirement, resignation, etc.

While we frequently see groups of GPs and of the same specialists, it is uncommon to see group practices of combined general dentists and specialists. As such, there is a lack of transition precedence when it comes to practice valuation and transition. Given that different specialists operate with different overhead percentages and are compensated differently, there are a host of considerations and potential conflicts to be considered.

As with any transaction, it is wise to have the price and terms of the buy-in transition structure, as well as the transition elements—from the associate stage, to the buy-in stage, to the exit stage–defined in advance. Have all associated legal documents in place and reviewed by legal counsel before starting. Likewise, complete proper due diligence, including a careful evaluation of the cash and patient flow of the practice. Always consult with an attorney and accountant on any topic relating to legal and tax matters.

Allen Schiff, CPA, CFE

This is an excellent question, which many graduates may be facing due to the explosive growth of group multispecialty practices. Within most group specialty practices, the buy-ins and buy-outs are designed by the shareholder and member agreements, wherein the individual practitioner is responsible for selling his or her shares and for finding the potential purchaser of the shares.

Once the purchaser has been identified, the economics of the deal are between the seller (departing shareholder) and the buyer (the new shareholder). If you are the purchaser buying into a corporation, whether it be a C corporation or an S corporation, you are purchasing shares of stock (common stock). This is no different than purchasing Facebook, Intel, or Exxon stock. The stock acquisition cannot be depreciated (expensed for tax purposes) until you sell the shares. As you can see, it will take you some time to recoup your investment due to the fact that you cannot depreciate the purchase of shares of common stock you buy at the time of the buy-in. You will receive the tax benefit of the purchase at the time of liquidation (sale).

On the other hand, if you are purchasing a partnership interest within a general partnership or limited liability company (LLC), you may be able to depreciate the purchase price of such members interest using Section 754 depreciation. The Section 754 depreciation is a tax election, so due care must be exercised here. Consult with a tax advisor to be sure this tax benefit is available to you.

The purchase price is paid directly to the seller. The buyer secures financing from a dental-specific lender. Some of the lenders may require the practice to put all of its assets (equipment, computers, etc.) as collateral for the loan. This is called a blanket lien against such assets. The borrower will more than likely have to personally guarantee the loan. Most buy-in loans are structured as 10-year-term loans, using fixed-rate financing (currently 4.75% to 5.50%) along with your personal guarantee as mentioned above.

If you are the purchaser, it is important for you to maintain the value of your equity interest within the group specialty practice. In the future the roles will be reversed. Where you were once the purchaser of the equity interest you will be the seller of such equity interest. As you are entering this potential transaction, you should keep in mind the exit of the transaction, anticipating your ability to recoup your investment when you choose to sell it. This due diligence should be completed now and not at the time of sale.

As a practitioner you need to decide if this potential employment is of interest to you, versus the more traditional group practice (all general dentists) or the sole proprietorship concept. Keep in mind how the current dental landscape is changing with the advent of corporate practices and multilocation group practices.

Randon J. Jensen, CBI, is with CTC Associates, a dental practice transition consulting company. Contact him at (801) 298-4242 or ctc-associates.com.

Allen Schiff, CPA, CFE, is the president of the Academy of Dental CPAs. This group of very knowlegeable dental CPA firms from across the nation specializes in practice management services to the dental profession. Schiff serves on the ADCPA executive committee. Reach him at (410) 321-7707 or aschiff@schiffcpa.com.

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