Selling a dental practice: timeline, taxes and transition

This guide explains how selling a dental practice works. It comes from Copeland Consulting Services and uses public sources. It is general education. It is not legal, tax or financial advice. A sale involves contracts, taxes and patient records, and the rules depend on your facts and on state law. Involve an attorney and a CPA before you list, sign a letter of intent, or talk to a buyer about price.

It is part of the dental practice ownership guide. Read the guide to valuing a dental practice for how a value is set. Buyers can read the guide to buying a dental practice to see the other side of the table.

Why plan a sale early?

Planning early gives you time to choose a timeline, prepare records and build a team. The ADA’s sale tip sheet starts from the idea that there are “a lot of factors to consider once you’ve decided to sell your dental practice, regardless of the reason behind that decision.” Its video topics begin with planning an exit strategy, getting organized around a plan, and setting realistic expectations.

A sale is also one stage in a longer ownership path. The ADA Health Policy Institute finds that ownership has become a longer process for newer graduates: “In a nutshell, most roads still, eventually, lead to practice ownership.” That means future buyers may include associates in your own office. See the practice ownership trends post.

Start with the glossary entries on succession planning, exit strategy and practice transition. Then decide what matters most to you: price, speed, staff, patients, or a role after the sale.

How long does a sale take?

The ADA says, “The general rule of thumb is that the ideal timeframe from listing the practice for sale to closing is between four and six weeks.” Treat that as the ADA’s description of an ideal, not a promise. Real timelines depend on buyer financing, due diligence, contract negotiation and how well your records are organized. Read the post on how long a sale takes.

The ADA points to a trade-off. You must decide “whether you prefer to accept a lower price for a faster sale or if you’re able to allow more time in order to reach a broader market of potential buyers.” It also notes that a short timeframe “could reduce the number of patients who search for a new dentist and keep more of them as patients of record for the incoming dentist.”

Who belongs on a sale team?

A sale team usually includes a valuator, an attorney, an accountant, and a broker. The ADA says, “Assemble a team of competent professionals to advise you on different aspects of the sale.” Its list is below.

The ADA suggests asking a broker how they will promote the practice, how showings work (in person or virtual), and what fees will be charged. It also asks you to decide whether you or a professional will negotiate. It adds that “it may be easier for them to remain objective during negotiations” and delegating may let you “continue to focus on providing patient treatment and care.”

Ask every adviser how they are paid. A fee that depends on the sale price can create a different incentive than a flat fee. Compare at least two people for each role.

How do you prepare the practice?

Preparation means two things: improve what you can, and organize the records. The ADA suggests asking what improvements could make the practice more attractive to buyers, such as enhancing the physical footprint or improving recall as a way to boost revenue and value. Do not read this as a promise of a higher price. It is the ADA’s list of questions to consider.

The ADA tells sellers to take “a comprehensive and objective look at the practice’s operations and financials.” Use the KPI guide and the hygiene recall entry as starting points.

Gather records

The ADA says due diligence “can minimize delays in finalizing the transaction” when you are thorough and honest. A buyer’s team will ask for the items below. Have them ready.

Gaps in records are easier to fix before a buyer finds them. See the due diligence checklist post.

Plan who to notify and when

The ADA suggests listing people and businesses to notify of a sale and deciding when each should hear. Its list includes staff, vendors and suppliers, your professional liability carrier, representatives of dental benefit plans you contract with, dentists who refer to you or whom you refer to, utility companies, and your landlord. Ask your attorney about timing and confidentiality.

How do you structure the sale?

The purchase agreement allocates risk and sets what happens after closing. Your attorney drafts or reviews it. The ADA says each party has, or is suggested to have, an attorney review the contract of sale, and it lists topics to read closely.

1. Patient records and access to them.
2. Whether any restrictive covenants apply.
3. How goodwill transitions.
4. Tax consequences.
5. Collection of accounts receivable.
6. Current office lease terms.
7. Which equipment is owned or leased, and who the owner or lessor is.
8. Whether current employees stay, and for how long.
9. Continued patient care and active cases that need retreatment.

For retreatment, the ADA suggests having a threshold for retreatment, setting up a “basket” for continued patient care, or agreeing that the buyer cannot hold the seller liable for every case received. It also notes that disagreements about whether a case needs retreatment can go to an arbiter for a final decision.

The ADA’s video topics include restrictive covenants, non-disclosure agreements and letters of intent. A letter of intent outlines main terms before the full contract. Ask your attorney which parts are binding. A partial exit is another structure some owners consider, where the seller keeps an interest or a role. Your attorney and CPA can explain the choices.

How are taxes handled?

Taxes depend on how the deal is structured, and a CPA must advise you. This guide explains only the IRS reporting rule it opened.

The IRS says, “Both the seller and purchaser of a group of assets that makes up a trade or business must use Form 8594 to report such a sale” if goodwill or going concern value attaches to the assets and the purchaser’s basis is set only by the price paid. The instructions say an allocation of the purchase price is needed “to determine the purchaser’s basis in each acquired asset and the seller’s gain or loss on the transfer of each asset.”

That means the way the price is split among asset types affects both sides, and each side files. See asset sale and goodwill in the glossary.

The ADA’s tip sheet lists tax topics in its video series: what you are selling and how it is taxed, what you can expect to net after taxes and expenses, and buyer and seller tax consequences. This guide cannot summarize those videos because it did not open them. Ask your CPA these questions:

• How would each deal structure affect my tax bill?
• How should the price be allocated among assets?
• What will I net after taxes and the costs of the sale?
• How does the timing of closing affect my taxes?

What happens to patients, staff and records?

A good transition protects patients, staff and the buyer’s ability to serve them. The contract should address each. The ADA connects timing to patient retention: a shorter timeframe may keep more patients as patients of record for the incoming dentist.

Items to plan with your attorney:

• Patient records. Who holds them after closing, who may access them, and how long. Ask about Missouri and federal rules. See the HIPAA post.
• Active cases. How unfinished treatment is handled, including retreatment, as covered above.
• Staff. Whether the buyer keeps them, on what terms, and for how long.
• Introductions. Whether you will stay for a period to introduce the new dentist, and under what agreement. Ask about pay, role, hours and any employment terms. See the associate contracts guide.
• Insurance plans. How payer contracts transfer, if they can. Ask the plans.

Malpractice coverage after the sale

Your own professional liability policy may need attention. The ADA’s contract guide explains that with a claims-made policy, “if a claim is filed after the dentist’s policy has expired (or properly terminated), no coverage would be provided unless the dentist purchases an extension of the policy known as ‘tail’ coverage.” It adds that termination can occur for many reasons, including a dentist leaving practice. Call your carrier early. The ADA sale tip sheet also advises contacting your professional liability company for recommendations.

What if you are thinking about a DSO instead?

A sale to a dental support organization is one of several routes. See the DSO versus private practice guide and the glossary entry for DSO. The same advisers apply, and the contract questions are similar and often broader. Ask your attorney how the buyer’s terms for employment, clinical decisions and later transfers work.

Questions to bring to your advisers

Attorney

• Have you handled dental practice sales, and how often?
• Which contract terms should a seller protect first?
• How will the contract treat records, retreatment, restrictive covenants and the lease?
• What do you need from me before listing?

CPA

• How would different structures affect my taxes?
• How should the price be allocated?
• What will I likely net after taxes and costs?

Broker

• How do you promote practices and screen buyers?
• What fees do you charge and when are they due?
• How do you handle confidentiality with staff and patients?
• Who negotiates for me?

Valuator

• Which methods will you use, and why?
• What range do you expect and what drives it?

Next step

For a map of all ownership paths, read the dental practice ownership guide. To ask about practice ownership and transitions, contact Dr. Jon Copeland, DDS, a general dentist in Wildwood, Missouri: contact Dr. Copeland about consulting.