20 Jun Selling Your Practice to a Relative
Although it is still rather common for a family-owned practice to simply change hands without a sale occurring, you may be surprised to know that PARAGON is often asked to assist in the formal sale of a practice to a close relative. Taking into consideration today’s large practice values, it has actually become much more common for fathers or mothers to sell their practices to their children or to their children’s spouses rather than simply giving the practice away. If you really think about these family situations, it is quite logical that a practice be sold in the same type of “arms length transaction” that would occur with a non-family purchaser.
If you have a child in dental school and you are trying to decide on the right course of action, you must consider the issue logically rather than emotionally. First of all, ask yourself if you can truly afford to give your practice away. Do you need the sales proceeds to supplement your retirement? A dental practice will generally value at 60% to 80% of the most recent 12 months collections (some practices may value even higher). So, if your practice is currently collecting $500,000 a year, simply giving the practice away is potentially a $300,000 to $400,000 cost to you (and those depending on you for financial support)!
In addition, have you considered your other children? Even if you don’t need the money from the sale of your practice for your retirement, are you financially prepared to gift an equal amount to each child. For example, is it fair to your 3 other children that you simply give an asset worth $400,000 to the one child who elected to follow your career path into dentistry? Do you really think less of the other 3 children who did not select dentistry as a career path? Think about it! How can it be fair to “steal the inheritance” of your non-dentist children just so you can help your “dentist child” get started in practice. The only fair thing to do if you decide to give your $400,000 practice to one child is to give $400,000 to each of your other children as well. After all, theoretically if you had sold the practice, each of your children (including the dentist) would eventually receive their fair share of the practice value as inheritance.
The negative impact of your decision on your children should not be underestimated. Most parents would not think of giving one child a house or a car without considering the feelings of the other children. Why would a dental practice be considered differently? Your practice has a market value just like a house or a car does except that a dental practice likely has a significantly greater market value. To be fair, the proceeds from the sale of your practice should be included in your estate and eventually divided equally between all of your children. Giving the practice to one family member, no matter how good your intentions may seem at the time, can easily come back years later to cause a great deal of bickering and strife among your family members.
Brothers and sisters have gone years not speaking to each other once the effects of such actions were truly realized. Often family members were unaware of the inequality of an action (and the parent was unaware as well) until long after the action was done and after everyone had the chance to think about the negative effects on them personally. Then the real trouble starts! What seemed like the only logical decision to make ends up creating unbelievable family unrest and tremendous stress for you in a time of your life that you should be on “cruise control.” If for no other reason than to maintain peace in your family, the disposition of your practice should be handled in a non-emotional manner.
Another bit of advice PARAGON can offer is that you should never assume an outcome. No matter what you are planning to do with your practice, sell or gift, you and your close relative need to communicate NOW! PARAGON knows of 4 situations where a father practiced a minimum of 2 additional years (years in which he could have enjoyed a much higher quality of life) because it was assumed that his son would be taking over the “family practice.” In all 4 situations, the son in dental school knew that he would not be coming into the “family practice” long before the father knew: 2 entered specialty school; one decided to practice in another state; and, the fourth simply decided that he wanted his own practice identity. In all 4 situations, PARAGON sold the practices but several years later than the seller would have preferred to sell!
The decision concerning the best action when dealing with a close relative is very hard and more complicated than most. You will eventually make the right decision for your situation and, if that decision is to sell your practice, you should not be foolish. A practice sale is a business transaction regardless of the buyer. A practice sale is also much more involved than most dentists realize. Selling a practice to a close relative creates even larger issues. If ever there was need for an independent third party to buffer the emotions of the transaction… the transfer of practice ownership to a family member is at the top of the list!
One such obstacle is often a parent simply does not know the best way to approach a child with the idea of “buying” the practice. Actually, this is understandable since that conversation could easily be a cause for major embarrassment if the child is under the impression that the parent would never think of “selling” the practice, but rather would eventually phase out and simply turn the practice over. This situation becomes especially difficult if the parent truly needs the sales proceeds to retire and enjoy a reasonable quality of life in their retirement years.
Another obstacle is that it will be very hard for you and your child to hammer out the details of such a transaction without emotion entering into the mix. Do you really feel that the two of you can logically handle the delicate, emotional issues of a practice sale? Things like… Practice value and price? How much of the sales price are you willing to finance? At what rate and terms? Will you continue to work in the practice after it is sold? If so, for how long? How will decisions be made if there is a discrepancy as to how a patient treatment should be handled? After all, there may be 30 years between the time you were in school and your child was in school… things do change! What about the accounts receivable? What about the staff? Equipment? Office décor? Furniture and fixtures? Patient referrals to specialists? How about final contract issues? Restrictive covenant terms? Your provider agreement terms? Your provider compensation? Are you really prepared to negotiate all of these delicate issues with your son or daughter?
“Do-it-yourself” practice sales and practice sales with the assistance of attorneys and/or accountants who are inexperienced in these type transactions fall apart on the negotiating table at least 50% of the time. A practice sale transaction to a non-family member that explodes is one thing. A practice sale transaction to a close relative (and especially your child) that explodes due to a failure to agree on the pertinent issues is a completely different situation. Can your family really afford to take the risk?
Utilizing the services of an informed, experienced, unbiased and unrelated third party to initiate and finalize a transaction of this nature can prevent serious family problems from ever developing. PARAGON has the knowledge and experience to complete a transaction to both parties satisfaction. PARAGON’s unique and very successful dual representation approach to practice transactions eliminates the adversarial environment common to most business transactions and assures that both you and your close relative will arrive at a fair and equitable arrangement.
Call PARAGON today for a complimentary consultation. You will be very glad you did!