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Bruce Bryen is a certified public accountant with over 45 years of experience and is a part of Baratz & Associates CPAs. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 609-502-0691 or at Bryenb@baratzcpa.com, or through www.Bryen-BryenLLP.com.
In many of the cases in which this author has been consulted, there is an after-the-fact approach that must be taken because of an absence of advisory services prior to the engagement.
Dentists sometimes will attempt to save the penny when the dollar is at stake.
Dentists should remember how they treat their patients. If little or nothing has been done on a preventive basis and the patient has gone to a friend with little experience, you can be sure that the dentist who understands treatment procedures will let the patient know what has to be done and the cost.
Does the dentist then do this for himself or herself when a question arises that a friend cannot resolve for lack of experience? Is the approach the cheapest way out with a financial matter and advice or what the dentist would advise the patient on the best approach for the long term? The decision can be made after looking at a couple of examples.
Example 1: Acquiring an additional practice
In this example, an experienced dentist who owns a flourishing practice finds another practice available to buy. The seller is older and does not want to continue practicing. The dentist is looking at the transition in terms of the cost of the practice and how much he or she can negotiate the price without the use of financial advisory services. The thinking is that if the price is $500,000 and the buying dentist can transition it for $400,000 on his or her own, that would be a terrific deal.
This is a typical approach, and without a good dental CPA, the buying dentist may have been better off with a $500,000 acquisition price with a favorable income tax allocation.
For example, if the $400,000 is allocated to goodwill for the seller, the buyer has a 15-year write-off for tax purposes and the seller has the best tax treatment possible with a capital gain. With a $500,000 purchase price and a legitimate amount of $150,000 apportioned to equipment this year, with the balance to goodwill for the seller, the buyer would get an immediate $150,000 write-off and would amortize the remaining $350,000 over 15 years.
On a comparative basis, the $400,000 scenario results in a $26,666 per year write-off for 15 years-while the $500,000 results in a $150,000 plus $23,333 per year write-off for 15 years so that in the first year $173,333 is written off against earnings. This is a hypothetical example of how the cost without a good allocation may cost more for the buyer.
Of course, price is always a consideration. However, if the practice is honestly valued at $500,000 and the negotiations fail because of the buyer’ s insistence on a lower price, the allocation of the price may be something the buyer would miss without the advice of a good dental CPA.
Example 2: Forming a separate entity
Another example of a good dental CPA’s approach in assisting in the acquisition of a dental practice may be the need for the formation of a separate entity for the purchasing dentist. In attempting to keep costs down and integrate the transition into the flourishing practice, the buyer may not think of the concept of failure in the acquisition. The need for liability protection as well is important in segregating the new practice, even if it is very successful.
Lawsuits are like measles in their nature to spread. In the event that a lawsuit occurs within the new practice as integrated into the old in the same legal entity, the assets and income of both practices are at stake. From an asset protection standpoint, the dental CPA may suggest that a new entity be formed for the acquisition and operation of the transition. This protects the older practice from being joined into the new one and its litigation time and expense.
An additional example of a need for the advisory service is the use of a lender and the liability encompassed with all of the assets and not just the new acquisition.
The use of a good dental CPA and his or her advisory service will go a long way toward protecting the assets that the dentist has accumulated.