AFTER THE SALE (PART 1)
Who says no one reads my blogs? This is a question from a senior doctor about a sale and possibility of reversing roles where the seller becomes the associate and the buyer becomes the owner.
Mike, Great article about associate pay. Could you write an article about retiring dentists who sell their practice and want to stay on as a part-time independent contractor for a couple of years. Compensation rule of thumb? 30-35% collections minus 30-35% of their lab bill? Also pay their own payroll taxes, malpractice insurance, retirement contributions, CE, etc.?????? Current overhead is 60%.
I responded that I would be glad to, but that he might not like what I say. I will divide this up into a couple of articles because it is a common question, wrought with a lot of challenges and misunderstanding when a seller stays on after the sale.
Basically, he has posed four questions concerning:
- Selling and staying on.
- Employee or Independent contractor status.
Selling and staying on presents several challenges and a few questions for both the buyer and seller. Often times the senior doctor is trying to slowly transition out of dentistry and feels like this employment arrangement with the buying doctor is that opportunity. Sometimes the selling doctor feels like a mentorship to help the young doctor would be a great opportunity for the two of them. Finally, almost every selling dentist wants to insure a good legacy for his staff, patients, and the buyer. All of these are noble. Yet, none of them ever turn out the way they were imagined in their infancy. Of course, there is one other possibility. The selling doctor needs to keep working to afford to reach retirement and is just burned out and tired of the ownership responsibilities. If we can step back and look at this from the seller’s position as well as the buyer’s, it becomes pretty clear as to what is the common sense action that should be taken.
In a walk-away practice sale, the price is allocated to 4 different categories: Supplies and Equipment, Goodwill, Non-Compete, and Accounts Receivable. Each has tax consequences for the seller and the buyer. The seller will want as much of the sale price allocated to Goodwill because it is taxed at capital gains rates, currently around 20%. The buyer wants most of it allocated as Supplies and Equipment because that dollar amount can be depreciated using Section 179 or depreciated in over the effective life of the equipment. So, when the seller sells the practice, most of what they are selling is Goodwill (usually around 80% plus or minus 5%). So, here is the question: If you sell to the young doctor at a fair price and the usual and customary allocation to Goodwill, but stay on, what did you actually sell? The answer: Nothing.
This is the first problem. While you sold your title of owner, nothing really changes. With the sale, the buyer is expecting to have purchased patients to work on and staff to work for them, in a setting that allows them to make changes and choose the direction of his/her new acquisition. Not so fast!
- If the senior selling doctor stays, which patients will want to see him/her instead of the buyer? Answer: Everyone.
- Who will the staff want to take their orders and direction from? Answer: The previous owner.
- Who will want the best staff to work for them one-on-one? Answer: The previous owner.
- If the previous owner is still there, who will resist changes in schedule, protocol, systems, pay, etc? Answer: Everyone.
Call me crazy, but can’t most of you see that any of these things could sow seeds of contention and discontent for the buyer? I can and always do see this as a fatal flaw in a “sell and stay” scenario. The average time before the buyer wants to kill the selling doctor is 6 weeks. Consider what the buyer considers: Every penny paid to the selling doctor (now the associate) after the sale, could have been theirs to produce. In a way, any monies brought in by the seller are always seen as lost income to the buyer. Even at this point, most of us can see that in a majority of cases this relationship between seller and buyer after the sale is very likely to deteriorate into chaos and loathing. Guess what, we have only gotten through question number one. Just wait till next week. It gets better.
Michael Abernathy, DDS
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