When deciding to buy or sell a dental practice, it’s important to consider how your sales contract is structured. Typically, you’ll choose between an asset sale or a stock sale. Let’s take a look at how they differ so you can make the best decision for your dental practice transition.
What Is An Asset Sale?
An asset sale is when a business sells off individual assets rather than the entire business (or legal entity). Assets can include dental equipment, the building, lease agreements, inventory, and accounts receivable. Additionally, the buyer can acquire intangible assets like the goodwill of the practice, customer lists, and patient records.
Asset Sale Pros for Buyers
Let’s take a look at several advantages for buyers in an asset purchase transaction:
- Get tax deductions for depreciation and/or amortization by taking advantage of “stepped-up” tax values
- Goodwill can be amortized slowly over 15 years for tax purposes
- Determine what liabilities, if any, to take on
- Get protection from liabilities and lawsuits incurred by the seller prior to the sale
- Dictate exactly which assets will be acquired through the purchase (in case some assets, like equipment, are faulty and may need repair)
- Due diligence typically requires less time and money
- Choose which employees to keep without affecting unemployment rates
Asset Sale Cons for Buyers
Buyers need to factor in the potential challenges that may come up in an asset sale as well. For example:
- Sellers may increase the purchase price to account for high taxes they’ll incur
- Some contacts may be non-assignable
- Potentially spend time renegotiating contracts with suppliers and vendors
- Spend time retitling assets
- Finding and/or securing contracts with key employees
Asset Sale Pros for Sellers
An asset sale benefits dental business owners who are cash poor but want to retain ownership over the business. Here are a couple of other points in favor of an asset sale for sellers:
- Not required to reveal to the buyer the business’ capital structure or information about its shares or shareholders
- Minority shareholders typically cannot hold up an asset sale transaction (need a majority vote, not a unanimous one)
Asset Sale Cons for Sellers
On the other hand, in an asset sale, dental business sellers face issues including the following:
- Tax costs are higher
- C-Corporation sellers face double taxation
- Spend time liquidating remaining assets
- Settle unassumed liabilities and leases
What is A Stock Sale?
Only dental practices set up as corporate entities, like a C- or S-Corporation, have the option to undergo a stock sale. The idea is simple, ownership is transferred from the seller to the buyer through a stock purchase. This also means that the new owner takes on all assets and liabilities unless explicitly stated otherwise.
Stock Sale Pros for Buyers
Buyers’ advantages in a stock sale include:
- No valuations or retitling process is necessary
- The corporation (not the individual) owns the non-assignable licenses and permits allowing them to transfer over
- May avoid transfer taxes
- Smoother and simpler transition
Stock Sale Cons for Buyers
Unlike asset sales, dental practice buyers do not enjoy big tax benefits in a stock sale. This is because the legal ownership of the net assets does not change in a stock deal. Here’s a list of cons for buyers:
- Can’t re-depreciate certain assets
- Goodwill is not tax-deductible
- All assets and liabilities are transferred at fair market value (unless stated in a separate agreement)
- Subject to more capital gains taxes
Stock Sale Pros for Sellers
Dental practice sellers generally prefer a stock sale due to tax benefits and the ease of transition. Here are the pros for sellers:
- Get large tax savings, especially on depreciated assets
- Less responsibility for future liabilities and lawsuits
- Shareholders get the cash
- Smoother and simpler transition
Stock Sale Cons for Sellers
All shareholders must be willing to sell in a stock sale. Therefore, a potential dental business sale could be held up if one or more shareholders are not willing to sell.
How Do You Decide?
Buyers generally favor the tax and liability advantages of an asset sale whereas sellers prefer the tax savings of a stock sale. There is some inherent friction there, but it doesn’t mean that you must stick to these generalized assumptions.
Depending on your specific goals, you can make either contract structure work for you as long as the proper agreements are in place and due diligence is performed. If you need assistance in creating a smooth transaction with your dental practice, reach out to us—we’d be happy to help. Schedule an appointment today.