In the sale or transition of a practice, the buyer and the seller must resolve the issues surrounding the collection of outstanding accounts receivable. The three most popular solutions are:
- The buyer purchases the receivables.
- The buyer collects the seller`s receivables as an agent of the seller.
- The seller retains the receivables, collecting them outside of the transaction.
Each option has advantages and pitfalls that should be addressed. While the sale of accounts receivable is the most common arrangement in dental transactions, it is not necessarily the only or the most beneficial arrangement for the parties. That said, buyers often will find that purchasing accounts receivable offers the advantages of having control over the collection of the receivables and continued cash flow from the practice, thereby removing the need to acquire additional working capital.
The sale of the accounts receivable offers the seller a clean break from the practice and the ability to cash out. This approach leaves no open-ended accounting issues after closing (a great advantage for a dentist who "leaves" the community).
The valuation of the receivables varies greatly, depending on the future risk and resources necessary to collect the outstanding receivables. As a result, it is important to have a practice broker assist you in obtaining an accurate valuation.
Sometimes, a buyer and seller cannot agree on a valuation schedule for the accounts receivable. Sellers will feel like they are not getting a fair price, and purchasers fear they will not realize the full value of the receivables they are purchasing.
Under such circumstances, having the buyer collect the outstanding receivables for the seller can resolve the issue. In this scenario, the buyer takes a percentage of the amounts collected to cover accounting and administrative costs. The seller reciprocally agrees not to attempt collection of the accounts receivable for the period of time the buyer agrees to collect the receivables.
This option allows the seller to realize the full amount of the collectable receivables (minus the buyer`s cost of collection), as well as only minor accounting issues after closing. The buyer obtains control over the receivables, maintains continuity since patients continue to pay as usual and receive statements as usual, and assumes no risk of loss (which the buyer would take by purchasing the receivables).
If either of the above options do not suit your transaction, you may choose to have the seller collect the receivables. Under this type of program, buyers are responsible for the accounts receivable directly relating to the dentistry they produce. Sellers are responsible for the receivables relating to their production.
As a result, the buyer loses control of the seller`s receivables and the continuity of collections for the patients, but assumes no risk or duty to perform the seller`s collections.
The seller realizes the full value of the collected receivables (although collections often become difficult once the seller has left the practice). The seller also loses the ability to make a clean break from the practice, which can be a problem for both parties.
Despite the potential for problems, if the selling dentist plans on a transition and will be continuing with the office under a buy-in/buy-out or partnership agreement, this third option may be the best one.
Accounts receivable is a loose end that must be addressed in the purchase agreement and resolved in order to obtain a successful transition.
Guy Jaffe and Peter Ackerman, CPA, are from the firm The Dental Marketplace, a dental practice appraisal and brokerage firm with offices in Chicago and St. Louis. The Dental Marketplace has been servicing eastern Missouri, Illinois, southeastern Wisconsin and southeastern Iowa since 1986 and is a member of American Dental Sales. The authors can be reached at (773) 665-7945 or P.O. Box 148025, Chicago, IL 60614-8025.