20 Jun Asset Allocation: The Overlooked Ingredient
Asset Allocation is the amount of the sales price that will be assigned to each of the various assets being sold: equipment, furniture, supplies, patient charts and records, goodwill, covenant not to compete, etc.
Sellers often think that if they can come up with a sales price for their practice the rest of the practice sale process is easy. Most sellers don’t realize that the sales price is not nearly as important as the Asset Allocations. The truth of the matter is that the amount of the sales proceeds that you will retain after paying your income taxes on the sale is far more important than the sales price!
For example, if a practice is sold for $500,000 and the Asset Allocations are set so 40% of the sales price is allocated to intangible capital assets and the remaining 60% is allocated to the hard assets, the seller’s income tax liability, based on today’s tax rates, would be approximately $147,000. However, if that same $500,000 sales price was allocated 80% to the intangibles and 20% to the hard assets, the seller’s income tax liability would only be approximately $99,000. $48,000 lost to income taxes simply because the seller did not understand the importance of the Asset Allocations! This seller could have reduced the sales price but re-allocated the Asset Allocation percentages and netted more money on the practice sale!
Of course, a favorable Asset Allocation for the seller is not so favorable for the buyer (you know IRS is going to get one side or the other). Unfortunately, most “do-it-yourself” sellers and a vast number of practice brokers do not establish the Asset Allocations at the same time the sales price is established. So, the buyer is made aware of the sales price but the Asset Allocations just becomes one of the many things that will be negotiated later. With a huge amount of taxes riding on these allocations, it should not be surprising that the Asset Allocation percentage mix generally becomes a hotly negotiated part of the practice sale process. The fact is that transactions that fall apart generally do so during negotiation of the Asset Allocations, not the sales price!
When PARAGON handles the sale of a practice, the sales price and the Asset Allocations are both established on the front end and the two are permanently tied together. In other words, any change in the sales price would require a corresponding adjustment to the Asset Allocations so the after-tax results remain unchanged for both parties. Tying the two together thus eliminates the purpose for the negotiation of either the sales price or the Asset Allocations since the net after-tax results will remain the same for both parties. Proof is in the positive results. Using this approach, PARAGON consultants have completed thousands of transactions without any negotiation.
The sale of a dental practice is so much more than establishing a sales price and finding an interested buyer. We often hear, “Why pay a transition expert to sell my practice? I know my sales price and I have already located an interested buyer. Why pay someone a fee for the easy part now that I have already done the hard part?”
Why? Because establishing a sales price and finding an interested buyer is actually the easy part! The hard part is just beginning. You need a practice transition expert. A seller can sell for the desired price yet still forfeit double or more of what any transition expert’s sales fee would be by negotiating away a huge portion of the seller’s after-tax proceeds! With PARAGON at the helm, there is no negotiation of the sales price or the allocations. You net exactly what you should net on the sale.
Call PARAGON today for a complimentary consultation. You will be very glad you did. No obligation… just a very worthwhile education!