In many practice purchase transactions, the sellers will keep their patient accounts receivables (A/R) and the buyer will accept the responsibility to collect them for a period of time at a nominal fee (to help cover their costs) and remit those collections to the seller. While this sounds simple enough, if the asset purchase agreement was written properly you will find that there is a fairly common set of rules that dictate HOW the A/R is collected and who OWNS them.
In the past six months I have had two buyers (buyers that I represented and who now own the practice) reach out to me due to collection issues, specifically as collections come in, inquiring who do they belong to…seller or buyer?
In both instances, the person with the primary responsibility to collect and identify the owner of the collections also worked for the seller prior to the ownership change. Also, in both cases, this person was NOT following the rules as they were spelled out in the agreement, and in both cases, this person was favoring the seller’s old A/R in terms of how to apply these collections even when the collections belonged to the buyer. Both of my buyers did NOT think they were doing this intentionally, the fact is neither buyer took the time (or they just did not think about it) to educate this person on the proper procedures.
Here are a couple of examples of how collections were posted incorrectly:
- After closing as the buyer was seeing patients and collecting co-pays the day of service if a patient had money owed to the seller, they were posting this payment against the seller’s A/R when it should have been credited towards that day’s treatment and the buyer’s A/R.
- EOBs from insurers were coming in with payment and even though some of the EOBs clearly showed that the payments were made for treatment done by the buyer AFTER closing if the seller had an A/R balance for a patient where the payment was being made, it was going to the seller instead of the buyer.
- In one situation, the agreement stated that any seller A/R older than 180 days would be deemed to be worthless (they could have been written off either the day of closing or the day after and they were not) and as some of the patients came back for treatment and paid for that treatment, the money was applied to the seller’s A/R that should have been zero.
- One agreement stated that if the patient MAILED in payments and both buyer and seller had A/R with that patient, those payments would be credited to the buyer UNLESS the patient specifically noted that the payment was for the seller’s work.
- One agreement stated that any remaining seller A/R after 180 days would become the property of the buyer. Yet, since some of the patients were allowed to make small monthly payments, some of those payments after 180 days got turned over to the seller.
- One serious issue was in one case, the buyer had allowed the collection person to directly deposit EOB payments made out to the seller into the seller’s bank account. This led to two problems, first, the nominal collection fee was not withheld, and second, some of the EOBs included treatment done by the buyer AFTER closing and those payments belonged to the buyer.
The lessons here are simple. First, make sure YOU (the buyer) know the A/R collection rules for your particular transaction. Second, it is up to you, the buyer, to make sure the person collecting and posting these payments KNOW these rules as well. Third, during the first month of owning the practice. meet with the staff member handling the collections to make sure they are following the rules. Fourth, handle any collection errors immediately. Just like old A/R, the older it gets the less likely it is you will collect it. The longer you wait to notify the seller the greater the risk that the seller disagrees with your assertions and makes it difficult to get reimbursed for the money that is legally yours.
About Tim Lott
Tim Lott, CPA, CVA, has decades of experience working with dentists at all stages of their careers. He is a regular speaker at study clubs, societies, and dental schools. Tim is a frequent participant and a moderator of Dentaltown.com. You can reach Tim at email@example.com or any of the other dental partners/principals at (800)772-1065 or firstname.lastname@example.org