Owning a dental practice is a goal of most dentists, in fact it’s the American Dream to have ownership of something. So, how do you get there and what do you need to think about first? For dentists, the first decision is whether you should begin an acquisition of an existing practice or create a new start up business.
Acquire Existing Practice
There are several factors to consider when acquiring an existing dental practice. First, there is already an established reputation and customer base for the practice. Furthermore, the employees, policies and procedures are already in place. However, that’s not to say you won’t want to change some things. This could be good or bad for you: if the practice is struggling with something, you will have to evaluate how much work it is going to take from you to correct what isn’t working. Will you have to fire employees? Will you have to deal with backlash for changing policies and procedures that employees have been using for many years? On the flip side, all of the employees, policies and procedures could be spot on and not require any changes. You need to make sure you evaluate all of this.
Moving forward, does the seller want to sell just the practice, or the practice and the building? What do you want to purchase? Some buyers don’t want to deal with the hassle of owning a building and want to pay rent. Some sellers want to keep the building to ensure retirement income. Some deals are structured where the buyer pays rent for a certain amount of years and then has the option to purchase later. This could be your happy medium. Stay tuned for a future blog on lease versus own!
Other items to consider when acquiring a dental practice is whether accounts receivable will be included in the agreement. If yes, how much is the accounts receivable? You should evaluate the aging schedule and come to an agreement as to how many days outstanding accounts receivable you are willing to accept.
Probably the most important aspect of the acquisition is how the sales price will be allocated among assets. As the buyer, generally speaking, it is to your benefit from a tax perspective to have more purchase price allocated to furniture and equipment, as they have a shorter useful life for depreciation purposes, which allows you to recognize the expense quicker. Goodwill, which is an intangible asset such as customer list and reputation, has a 15 year life, which means whatever is allocated to goodwill will be spread out as a deduction over the 15 years.
If you choose to open your own startup practice, you are getting a fresh start. You will create your own reputation from Day 1, and establish the culture and environment you want for your employees and patients. You have more options as to where the practice will be located. From the beginning, you’ll have input about what equipment to use, as well as how the office should be configured and designed. You’ll have to decide whether to lease or purchase a building. You’ll need to have a marketing plan to quickly build up your customer base. You’ll need to identify and hire the appropriate team members. This can be a more arduous road but everything will be established as you desire, instead of how an existing practice is operating.
No matter which road you choose, we hope you continue to grow! As always, we advise having a strong team in place from Day 1 when you are acquiring or starting a practice. Whether you choose to acquire or start a practice you should have a plan and goals in place to help you succeed.
Written by Caroline Montgomery, CPA
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