When you work hard to build a practice and provide good care to your patients, you should be rewarded for your life’s hard work. The path to reaping those well-deserved rewards is made up of a series of careful decisions, which can have a significant impact on your future practice value. This article will discuss a few of those important decisions.
Incorporate Your Practice
To have an optimal dental practice you can transition, it is more beneficial to form a legal business entity separate from your individual identity, such as a corporation. Without that separation, your dental practice is inexorably tied with your individual credit rating and personal assets, which could negatively impact your practice value. In addition, the practice cannot take advantage of income sheltering, tax credits, equipment depreciation, loss carryover, capital gains, and the other financial benefits of an incorporated entity with has a separate legal and tax existence from you personally. Most importantly, an incorporated dental practice can shield your personal assets from debts and liabilities incurred by your practice.
Many dentist owners do not realize the importance of the Lease Agreement. As with any other legal contracts, Lease agreements should be carefully reviewed and negotiated before entering into them. Many provisions have complex legal ramifications that simply cannot be understood by a layperson without any formal legal training.
For instance, the legal definition of what can be included as capital or common area expense can have a significant impact on how much rent you might be responsible for in addition to the monthly base rent. A recapture clause can entitle a landlord to take back the premises when you seek the landlord’s approval to assign the lease agreement to a future buyer. Renewal options that are personal to the tenant can prevent you from transferring the lease agreement with the remaining options to a future buyer of your practice, which can significantly decrease the attractiveness and value of your practice.
The ideal time to engage an attorney to review and negotiate a lease agreement on your behalf is before moving into the premises and spending a significant amount of capital in tenant build out and improvements. Once you have signed the agreement and become a tenant, it is still wise to have an attorney to review and negotiate the lease agreement as it becomes close to a renewal period, but much leverage will have been lost by that time.
Use an Attorney Experienced in Dental Practice Transition
The purchase and sale of dental practices is a common enough transaction that you will likely encounter it more than once in your career, from either end of the transaction. Despite it being a common transaction, there is no one-size fits all template to sell or buy a dental practice. Because of the complexities of the transaction, which include tax considerations, real estate lease assignments and negotiations, different state law on the enforceability of non-compete provisions, unique nature of each practice, the terms of the purchase agreement must be customized to not only protect your legal interest, but also accurately reflect the terms of the agreement reached between a buyer and seller. Using the right advisor to assist you would be critically important.
The right advisor will have the experience and background to properly advise and guide you through the process. He or she would need to understand unique issues such as patient retreatment, refunds and credits from possible improper billing, employee and associate arrangements, negotiate a proper and smooth lease assignment, financing requirements from the lender, dental board requirements, just to name a few. The right attorney should also know the important professionals in the dental industry who can assist and properly guide you after the sale and acquisition of a practice.
Include Your Practice in Your Planning
Whether it’s financial planning, tax planning, or estate planning, your practice should be a large part of your plan. When sitting down to look at your wealth strategy, there is always a balance you need to strike in building and protecting the practice’s value. Along the way you might have to consider how best to spend your cash and credit facilities – should you make a capital investment to help retain patients or later when the return on investment will contribute to your practice’s exit valuation? Should cash instead be put into a retirement fund? What steps can you take to protect the value of the practice over the long term – in good times and during economic downturns? Are there legal or financial vehicles that would leave your family in a better position when they take over or sell the practice? Even your buy-sell agreement should integrate well with all of your estate plans, including a will, trusts, strategic tax plans, and other estate planning mechanisms. Just as there are medical advances in treating patients, laws and financial strategies evolve constantly and your plans should evolve with them.
With some care and proper planning, the transition process does not have to be a daunting and complicated process.