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There are numerous issues to be dealt with in transitioning a dental practice. One issue that does not get much attention is how to deal with the accounts receivable. In most cases of a complete sale, the buyer does not purchase the receivables. Hence, when practices are valued, they typically do not include the receivables. If they are included in the purchase, a method must be developed to value them. If they are not included, a method must be agreed upon regarding how they will be collected.
Let’s start with the most typical case, when the receivables are not purchased. Who will collect them? Most of the time the staff, who are familiar with the patients and their accounts, will continue to collect them. There are two steps to the collection process: processing the payments as they come into the office, and billing patients or insurance companies for outstanding accounts. Both of these processes take a little time and may continue for several months after settlement.
Should the seller be charged a fee by the buyer for this service? If so, what should it be? In some practice sales, the buyer is more than willing to have the staff bill and process the seller’s receivables for a period of time at no cost to the seller. This might be in situations where the number and amount of receivables is not too large. In other situations, the buyer wants the seller to pay a fee for this service. Most commonly, the fee suggested is a percent of each payment (e.g., 5%). Although this may seem to be a fair arrangement, it really is not. For instance, suppose there is a payment of $500. At 5%, that would be a payment of $25 for processing one check. That does not seem reasonable.
A better approach is to pay a set fee for each check processed and each bill sent out. This could be a fee of $2 to process a payment and perhaps $2 to $3 per bill sent (to cover time, stationery, and postage). It would be fairly simple to track this and the amount paid would be more equitable.
Other options for the seller
Another option is for the seller to collect the receivables on his or her own. Perhaps a staff person could be paid by the seller after hours to do this, or the seller could do it on his own. If this method is used, the buyer’s staff should be kept apprised of the payments so that when patients ask about what they owe, they do not get the impression of two separate practices. Both parties will want the transition to be as seamless as possible.
There is also the issue of patients owing money (not payments from insurance companies) to both seller and buyer. There are two ways to handle this. Either the oldest account is paid first, or payments are split equally until the seller’s account is paid off. The first method is generally what the seller would like, but can be unfair to the buyer. This issue needs to be resolved before settlement.
If the buyer does purchase the receivables, the price and terms need to be agreed upon. The best way to handle this is to get aged receivables and apply percentages based on the age. For instance, a buyer may pay 90% to 95% of any amount that is current, 80% to 85% for amounts 31 to 60 days, and so forth. There is no set rule for the percentage rate. It will depend on a number of factors, including the payment track record. The agreed upon value can be paid at settlement or possibly over three to six months to allow time for collection.
In a buy-in, there are a number of options for dealing with receivables. The new partner can purchase a proportionate share and have that included in the price. Another option is to consider them a loan to the practice by the original owner, which can be paid to him or her over time as cash flow permits.
In a sale, it is much easier from a bookkeeping standpoint for the buyer to purchase the receivables. The problem is agreeing on their worth. In most cases, that disparity in perception of value results in their not being purchased. However, it is usually a good idea to at least discuss the possibility of the buyer purchasing the receivables.
Philip A. Cooper, DMD, MBA, is a dental practice broker with 25 years of experience. His firm, American Practice Consultants, which is a member of ADS, serves dentists in New Jersey and Eastern Pennsylvania. He can be reached at (800) 400-8550 or firstname.lastname@example.org.
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