There are a lot of details to be settled when buying or selling a dental practice. One of the more difficult items is the disposition of amounts owed by patients for dental work done by the Seller.
These are known as Accounts Receivable (A/R) and their value has not been included in the value of the dental practice.
These accounts represent work that has been done by the Seller but payment has not been received by time of closing.
And, while many Sellers have slowed down in the week or two before closing, the total amount outstanding can be significant.
A/R Sold to the Buyer
One solution is to sell the A/R to the Buyer. This is probably the “cleanest” way to do it. However, it is not always easy to come to an agreement on the value of these A/R. Some may be 30 days old and some may be over 90 days without payment.
Clearly, not all of the A/R will be collected. So, the total amount of the A/R needs to be discounted.
There are various formulas that can be used to estimate the value of the A/R and an experienced broker will be able to provide considerable help in this area. By purchasing the A/R, the Buyer will have to borrow additional money, but he or she will need less working capital from the immediate cash flow as the A/R is paid off.
The seller will have taxable income to the extent of the amount paid for the A/R but that is no different from the tax treatment if the A/R had been collected by the Seller.
If the Buyer does not collect as much as was paid for the A/R, he or she will be able to write off the shortfall.
A/R Billed & Collected by Buyer
If the A/R is not sold to the Buyer, it is common for the Buyer to agree to bill and collect the A/R for a period of time – usually 3 to 6 months. Each month the amounts paid on the A/R are remitted to the Seller less a percentage for the cost of billing and posting payments.
At the end of the agreed time for billing, any unpaid accounts are turned over to the Seller to be written off or turned over to a collection agency.
This method involves some extra bookkeeping and staff time in the Buyer’s office. But, it does provide a connection between the Buyer and the patients and, by helping the Seller, it should preserve the goodwill between the parties.
A/R Billed & Collected by Seller
If the A/R is not going to be collected by the Buyer, it sometimes is billed and collected by the Seller. This would seem to be easy, especially if the Selling dentist’s spouse had been involved in the billing process or a former employee is available to do the billing in his or her spare time.
However, this method will require coordination with the Buyer’s staff because some patients will send in payments to the office, and the office records will need to reflect those payments so that new dental work performed by the Buyer gets credited properly. We find that this method is complicated and confusing and should be avoided if, at all possible.
Most A/R will be collected in the first 3 or 4 months after closing so the time and paperwork involved will diminish pretty quickly. If the A/R aren’t purchased using an agreed upon formula, collection by the Buyer is probably the next best thing to do.
Do you have other questions about Accounts Receivable or any other aspect of buying or selling a dental practice in the St. Louis region? Contact us for a free consultation.