Selling a dental practice is a huge life event for a practice owner and will have a significant impact on your financial stability and quality of life after the sale. In previous articles, we discussed the reasons for hiring a dental practice broker and their role in the transition process. While it is important to understand the role of a broker and the importance of utilizing their services, it is also imperative that you hire the RIGHT dental practice broker to represent you in the sale and facilitate a smooth transition. When selecting a dental practice broker, consider asking the following questions before signing a listing agreement:
Top 5 Reasons to Hire a Practice Broker
Selling a dental practice is a complicated process that involves numerous steps including determining the market value of your practice, finding the right buyer, negotiating the purchase price, purchase agreement and lease assignment, and facilitating the transition of ownership (just to name a few). Employing the services of a trusted professional can make a tremendous difference in the success of your transition. Here are the top 5 reasons to hire a practice broker when selling a dental practice:
- To formulate a transition strategy to meet your individual needs
- To confidentially market your practice to find a buyer who is the right fit
- To maximize the value you receive for your practice
- To represent your best interest during the transition process
- to provide a structured closing process to ensure a smooth and timely transition of ownership
Practice Transitions and Taxes
Taxes are a fact of life, and an extremely important consideration when considering a dental practice transition or sale. Let’s explore some potential tax mitigation strategies to consider.
STOCK SALE
If you are incorporated, sale of the stock in your corporation to the dental practice buyer can potentially yield you the greatest tax savings, because the sale of stock is almost exclusively taxed at the lower fixed capital gains rate as compared to the higher, tiered ordinary income rates.
PRICE ALLOCATION
The IRS requires the total price of a dental practice for sale to be allocated to the various types of assets being sold and that the allocation be made according to the fair market value of the assets. As a general rule, the tangible assets are taxed as ordinary income above basis, and the intangible assets are taxed as capital gains.
CARRY BACK A NOTE
Sellers frequently ask us, “Won’t I save on taxes if I self-finance part or all of the sales price (i.e., carry back a promissory note from the buyer)?” The answer is, “No, but maybe . . .”
SALE TIMING
The tax associated with recapture over basis on the sale of tangible assets will be determined by your ordinary income tax bracket in the year of the sale. If you are planning to retire after the sale of your practice and, consequently, will have a drop in your ordinary income level, it may behoove you to strategically time the sale of your practice until after the start of the next tax year.
“C” CORPORATION CONSIDERATION
If you are currently incorporated and being taxed as a regular “C” Corporation, the sale of goodwill by your corporation will likely be subject to double taxation once as capital gains inside your corporation and then again as ordinary income when paid as a distribution to the shareholder(s).