We ask two experts the same question to give you two different answers on a complex issue
QUESTION "I have been offered a partnership interest by my employer. He wants me to buy 50% of his PC's stock for $400,000. I've heard that only buying stock may not be in my best interest. Can you elaborate, please?"
By Earl M. Douglas, DDS, MBA, BVAL
If you're buying stock, it's critical to see what the corporation owns. Does it own equipment, real estate, accounts receivable? What are the liabilities? Some are known and some are not, but you will be buying them regardless. Be sure to understand discount for minority interest. Google that phrase; there are 1,460,000 results.
A 50% undivided interest has no control and is intangible. If there is an irresolvable issue, the only solution may be dissolution. I have seen several dissolutions that took more than a year of litigation at great financial and emotional cost.
Do the parties have different personal and career goals that cannot be addressed in a single policy? If irreconcilable differences develop, will either party be able to sell out? Stock purchases are not deductible or depreciable, effectively adding 40% to 45% to the price paid over an asset sale.
The list of issues and questions goes on and on, and in most cases, answers to these critical issues cannot be known with any certainty. I would rather remain as an associate or purchase a whole asset-allocated practice, but avoid the many potential difficulties of joint ownership despite its dubious rewards.
Earl M. Douglas, DDS, MBA, BVAL, is founding president and member of American Dental Sales (ADS). He is president of ADS South, which services the southeastern U.S. and has affiliates nationwide. Earl has been admitted as an expert witness, and has testified for dental practice valuations in five states. Reach him at 770-664-1982, 888-419-5590, ext. 770, or visit his website at www.adssouth.com.
By Tom Snyder, DMD, MBA
Your concerns about buying stock are correct. This is the most inefficient way for a purchaser to buy into a professional corporation.
The main issue is that the stock must be purchased in after-tax dollars. This will have a significant impact on your personal finances, because it is identical to how you pay your rent or mortgage in after-tax dollars. So you will have to generate significantly more income to purchase the stock vs. using an alternative approach that allows you to pay for the majority of your shareholder interest in pretax dollars.
However, if your employer is unwilling to change his stance about a complete stock purchase, try to negotiate a lower buy-in price to soften the blow of such a large after-tax payment! The only real benefit of purchasing stock, especially, is that you will get a "step up" in basis, meaning you can shelter a portion of your future capital gains when you sell your stock in the future.
However, if the doctor is an "S" corporation, you will get some immediate tax benefits. Although you still have to pay for your corporate interest in "after-tax" dollars, since an "S" corp is a "pass through" entity, meaning profits pass through to you personally, any depreciation or amortization charges (based on your ownership position) from the corporation will pass through to you, thereby lowering your taxable income.
Please confer with your accountant for advice on the implications on your personal cash flow with this pending stock purchase.
Tom Snyder, DMD, MBA, is the director of transition services for the Snyder Group, a division of Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or Tom.Snyder@henryschein.com .
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