Common Practice Transition Structures
Published May 19, 2022
All practice transitions are not alike. It is important to work with an attorney who is experienced in dental and dental specialty transactions to ensure a smooth, comprehensive, and legally valid practice transition. Collier & Associates is an industry leader in all things pertaining to dental practice transitions.
Outright sales can be in the form of an asset sale, the sale of stock of a corporation, or the sale of units in an LLC. In an asset sale, the Seller is selling, and the Purchaser is purchasing the tangible and intangible (i.e., goodwill) assets of the practice, and the Purchaser does not assume liability for any past obligations or liabilities of the practice. Conversely, in a stock or unit sale, the Purchaser is purchasing the stock or units of an existing entity and agrees to assume responsibility for past, present, and future obligations and liabilities of the practice. Due to potential successor liability issues involved with a stock or unit sale, as well as a favorable tax treatment to both Seller and Purchaser, we often recommend that unrelated parties structure their outright sale as an asset sale.
Below is a non-exclusive list of items your outright sale documents should address. Collier & Associates can assist you with drafting and negotiating these documents, as well as any relevant ancillary documents:
- The Parties
- Assets included/excluded from the sale (including accounts receivable)
- Purchase price
- Allocation of the purchase price for tax purposes
- How the Purchaser will finance the purchase
- Closing date
- Responsibility for practice liabilities pre/post-closing
- Representations and warranties of the Parties
- The extent to which Seller will provide post-sale transitional assistance (i.e., goodwill)
- Whether Seller will provide clinical services after the sale and the terms (i.e., salary, schedule, termination, benefits, etc.)
- Restrictive covenants (an inseparable part of goodwill with no separate value)
- Re-work/Redo after sale
- Letter to patients
- Real estate (if applicable)
- Any miscellaneous terms the parties agree to
- Much more
Buy-in/Buy-Out from a Partnership
Partnerships are like a marriage—although nothing is certain, you should be confident that the relationship will be successful, and you should be willing to do what it takes to make it so, before you commit. Partnership buy-ins (and buy-outs) traditionally deal with the sale and purchase of stock (for a corporation) or units (for an LLC). The documents needed for a partnership include:
- Stock (or Unit) and Goodwill Purchase Agreements: These documents will address many of the issues discussed in the outright sale section above.
- Shareholder Buy/Sell Agreement or LLC Operating Agreement which describe the relationship between partners including practice management responsibilities, compensation, what happens when a partner exits whether voluntarily, or due to death/disability, and more.
- Shareholder/Member Employment Agreements.
- Other documents.
Asset Allocation for Tax Purposes:
How the assets are allocated for tax purposes can have a substantial impact on the parties’ bottom line and often controls how a deal is structured.
Assets allocated as “capital” assets will receive capital gains tax treatment. In 2022, for married taxpayers filing jointly those rates are 15% on amounts up to $517,200 and 20% on anything above $517,200. Assets allocated as “ordinary income” will receive ordinary income tax treatment based on the taxpayer’s income bracket. Ordinary income taxes can be as high as 37% for federal taxes plus any applicable state tax.
If an asset is misclassified as one which receives ordinary income tax treatment, you could be leaving tens of thousands of dollars on the table. On the other hand, if an asset is misclassified as one which receives capital gains treatment, you may have to deal with the IRS. Our attorneys are experts in tax treatment and will work with the parties to determine a fair (and legal) allocation of the assets.
The following chart shows common assets in practice transitions, and how they are treated for tax purposes:
|Goodwill||Capital Gains||15-year amortization|
|Tangible Assets||Ordinary Income|| 12-year amortization for equipment|
15-year amortization for leasehold improvements
|Restrictive Covenant||Ordinary Income||15-year amortization|
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