When you find yourself asking, “How do I sell my dental practice?”, buckle up for an extensive process and numerous questions. You’ll have to consider your employees’ job security, your career path, and the price at which you’re comfortable selling your practice. Surprisingly, the sale price isn’t the only thing you need to consider when trying to evaluate how much money you will make off a sale.
Asset allocation plays a vital role in the profitability of a practice sale. The percentage sale price that is assigned to your assets can be the difference of tens of thousands of dollars after taxes. Read on to learn more about asset allocation to make sure you’re getting the most out of your sale.
What is Asset Allocation?
Asset allocation is the portion of the total sales price that is assigned to each of the various non-building assets being sold. This includes, but is not limited to, patient data, furniture, supplies, equipment, and the non-compete covenant. The percentage of your sale price associated with the assets could change the amount of income a seller is liable for with IRS.
For example, if a practice sells for $1,000,000, and 40% of that price is tied to necessary capital assets, the remaining 60% would be hard assets for which you’ll be taxed. Conversely, if you managed to allocate 80% of your sale price to intangible capital assets, you would only be liable for 20% of the hard assets.
In both situations, the practice sells for the same amount of money. However, in the second example, the seller would end up with close to $100,000 more income than the former situation.
How to Allocate
When deciding how to distribute the price, place the highest price possible on each item. At the same time, make sure you aren’t breaking any laws, and you’re being fair to any potential buyers.
The IRS states the proper way to allocate the purchase price among different assets is to apply fair market value to the identifiable assets (patient data, supplies, equipment, etc.), and then assign any remainder to Goodwill.
A common misconception is that there is a standard value locked into to the different categories, but this isn’t true. The IRS states that the assets are to be evaluated by a fair market value, which is defined as a price the buyer and seller can agree upon. If the two agree on a price, then the price is set.
Most sales fall apart during the negotiation-of-assets phase. It is understandable to try to get as much as you can out of a sale, but remember, the IRS is always going to get a cut. If they don’t get it from you, they will get it from the other side. Stay flexible and fair in negotiations.
Get the most out or your practice transition by understanding allocations and applying them appropriately. If you want to avoid lengthy negotiations, or need help allocating your sale price, US Dental Transitions is here to help. We have aided thousands of doctors moving into the next stage of their career and would love to be a part of your transition. Contact us today for more information.