The two most common are stock sales and asset sales. If you’re doing your homework on an upcoming dental practice sale or purchase, you need to understand the difference between a stock sale and an asset sale.
What’s the difference between a stock versus asset dental practice purchase or sale?
Simply put, asset sales transfer the assets of the dental practice in a series of transactions. Stock sales transfer the partnership interest from the seller to the buyer.
Each structure of purchasing a dental practice is very unique and each has positives and negatives. Both buyer and seller must be aware of the implications of the structure of the sale.
In a dental practice asset sale the buyer purchases some or all of the assets of the dental practice. Assets includes equipment, inventory and often accounts receivable. Asset purchases can include intangibles with a quantifiable value– “goodwill” (practice reputation), non-compete agreements and client records. After the asset sale, the seller and buyer can choose to create a new legal entity and continue the practice together. In an asset sale of a dental practice buyers are often protected from current and future liabilities of the dental practice, such as lawsuits and health and safety violations. The practice sellers typically retain the cash and short- and long-term debt obligations of the practice.
What about taxes in a dental practice asset sale? An individual buying a dental practice in an asset structure sale will be able to take depreciation deductions on assets to lower their taxable income. Equipment depreciates relatively quickly as new technology emerges. Asset buyers take bigger tax deductions in the few years after purchase, freeing up the cash flow of the practice. Sellers are taxed on the asset sale in the year it occurs. Installment sales can lower the tax burden on them. Under the installment sales method, the seller includes in income each year only part of the gain received, or is considered to have received. Sellers pay the ordinary tax rate on the sale of tangible assets, instead of the lower capital gains rate. Goodwill and intangibles, on the other hand, get long-term capital gains tax treatment, a significantly lower rate. Because of faster depreciation, the buyer prefers more of the purchase price to be allocated to tangible assets, and because of the lower taxes for intangibles, the seller has an incentive to allocate more of the purchase price to intangibles.
A stock sale is a bit simpler than an asset sale. The seller transfers their interest in the practice to the buyer. There are no separate conveyances for the different items (equipment, leases, and “goodwill”). The practice buyer simply takes the place of the seller in the ownership of the dental practice. And that includes not only the transfer of ownership but all the responsibilities, risks, rewards and benefits of the ownership of the dental practice, unless specifically excluded in the purchase agreement. The practice seller pays a capital gains tax rate on the proceeds of the sale. This can mean a significant tax savings compared to an asset sale, especially if the assets sold were depreciated in value. The practice buyer, on the other hand does not have the benefit of depreciation tax deductions in a stock sale because the business assets do not leave the practice and the new owner simply replaces the seller. The practice assets continue to depreciate on the same schedule.
Because of the possible tax savings for buyers by choosing an asset sale, they may prefer it over a stock sale, especially if the dental practice has significant depreciating inventory.
The practice buyer in a stock sale assumes all of the business’s current and future liabilities, known and unknown. This can be risky, however a skilled dental lawyer can create a sales agreement that can shield a buyer from some liability.
Which One is Right for Our Dental Practice?
The buyer and seller should look for a structure that offers the lowest tax rate and ensures legal protections against liability. Of course, buyers and sellers will have different preferences based on what we just discussed. In almost every case, both buyers and sellers should obtain separate legal counsel even if they are currently colleagues in the practice to make sure that the sale is a true “win-win” situation. Buying or selling a dental practice, it’s important to evaluate both short- and long-term interests.
Dental lawyers, dental CPAs and appropriate financial advisers like MedTrust Capital’s financing experts can assist buyers and sellers on the best choices for your practice’s financial success. You can contact MedTrust Capital for an absolutely free, no-hassle consultation on buying or selling your practice. Not only can we help with the financing piece of your practice, but our vast network of referral partners will also assist you during your transition.