I have been negotiating with a local dentist for a couple of months and recently, we came to what I feel to be very fair terms for an associateship opportunity with a delayed sale. Associate for 2 years, paid 40% of production. I pay my own lab fees. CE $$ as well. After 2 years, it would have been a 100% buy-out. That was the original plan.
Tonight, he brought up a unique structure of a transition. He said his CPA and attorney formulated the plan trying to improve the tax advantages for all involved. I need your advice on what tax advantages are present for both the buyer and the seller.
Asking price $840K
He is most interested in me having a “vested interest” in the practice. An interest so strong that he will not be caught in two years with me leaving and he having to begin the whole process all over again. I completely understand this. He’d like me to buy 25% of the stock of the business when I begin (210K) creating this vested interest. However, the associateship lasting 2 years would still apply. He then went on to say that he believes, based on his CPA and attorney’s advice, that me, the buyer, would be able to borrow money from the corporation at year 2, paying for the final 80% of the practice. By doing this, am I able to pay the debt service pre-tax? And I assume I’d still be able to deduct my interest.
I told him I am obviously interested in owning 25% of the stock, but with that means that I’d be paying back the debt to that borrowed $$$. Because I’d own 25%, wouldn’t that warrant that I receive 25% of the hygiene production? From the way he understood it, I would still only make my associateship compensation with no hygiene production. I am not educated in taxes and many of these matters, but to me, I don’t understand how this can work. I understand that he wants a commitment and I’m willing to give that commitment to him, but I cannot borrow $210K without a means to pay it back.
This doc is a very generous and honest man and I know he is not trying to put me in a bad spot. I need your thoughts. Thanks in advance.
What they APPEAR to be suggesting is a buy-inbuy-out that is done with a combined stock purchaseearnings shiftdefermentdifferential method. The fact is this is a VERY common method and while I generally agree that an asset purchase may be preferable in most cases, buying stock isn’t the devil that some make it out to be in reality.
That said, IF they continue to have you buy the other 75% in year two then you should stick to your guns and make it an asset purchase and DO NOT buy stock now. There’s NO WAY to buy the other 75% as a stock purchase and do so with pre-tax dollars, can’t happen and I think I’m missing part of the proposal simply based on that part of your post.
It almost sounds like they want you to pay 25% of the purchase price now for stock (or maybe a deposit against 100% of the stock to be held in escrow) and potentially pay him out over 5 years beginning in 2 years as some form of severance, deferred comp or mgmnt type compensation that the corporation can deduct.
Again, THAT’s what it sounds like.
If they want you to have a vested interest, an approach would be that you DEPOSIT $25k now and in two years do the deal. If you walk within the two years, you lose the $25k or a portion of it depending on when you walk. If they terminate you within 2 years they give it back PLUS some add’l severance payment equivalent to approx. $2k per month you stay there (so if they terminate you in month 23 for no good reason, they give you back the $25k AND they pay you another $22k over a year). Of course there would be conditions placed on termination.
Now, is that a good deal for you? Who knows, I don’t know you OR the situation.
The bottom line is that it’s time for you to make a nominal investment (in the grand scheme of things) NOW (if you truly see this as your future) and hire a professional who handles transitions to represent you.
If you’re buying 50% why consider an asset purchase? You purchase a 50% interest in the assets of the C-corp & maybe a 50% interest in the owner docs personal goodwill (that needs to be addressed by his advisers). There is an added level of complexity to this approach, however, for the buyer(s), who in theory will ultimately own the practice, they aren’t stuck with an old c-corp they don’t want or need and you use an entity that allows for more flexibility in future salespurchases of interests in the business.