Now that we’ve covered the meat and potatoes of my 2018 Townie meeting presentation lets go over some negotiating tips that will be useful in any purchase transaction you may find yourself dealing with.
Let’s talk about the purchase price. While the price may not be the most important aspect of some transactions, that doesn’t mean you should overlook it. Also, unfortunately, price may be the MOST important issue with some sellers, therefore, be prepared to get creative to try and have the seller get what they want…..THEIR price!
What if you think their asking price is too high, though with the reach of what you’re willing to pay? Instead of offering a lower price, offer their price and suggest that it needs to include A/R. If their price is close enough to your upper end of reasonable you may not even care what the collectible A/R is. On the other hand, if their price is well beyond your upper end of reasonable then you may have to do some work on A/R analysis and assessment to see if including A/R will work at their price.
If their asking price is within reach of your upper-end price, consider offering their price and using that as a bargaining chip for something else you want to go your way later on, like price allocation, sellers comp working for you or other excluded assets you’d prefer to have. For example, if you’ve offered a price allocation and the seller comes back with something too drastic for you, suggest that since you offered their asking price without haggling over it, even though your advisors suggested it was too high, they should allow you to keep the price allocation and not haggle over it.
Another option, though most sellers and their advisors prefer to avoid like the plague, is to over their price with a portion of it contingent on future revenues or production for the practice and/or the sellers if they work back for you. Again, most sellers avoid the contingencies, however, certain situations SCREAM for a contingent based offer.
What if you’re buying the real estate along with the practice? This may provide you with another area to give them their asking price on the practice as long as you get your price on the real estate or vice versa. Keep in mind that if real estate is involved it behooves the buyer to consider the price allocation of both assets as a higher price on the practice along with a lower price on the real estate will generally provide a better tax result for the buyer while likely not impacting the seller at all OR even help out the seller with their tax strategies.
A couple other strategies with allowing the seller to get their asking price is to have a piece of the price allocated to a consulting payment and/or if the seller retains the real estate and wants to charge you rent, maybe you get a reduced rent which is fixed for five years or until you purchase the real estate.
Lastly, since we’ve mentioned price allocation let me kill a couple of myths:
- There is NO standard price allocation based on percentages of the various assets…that’s not to say that goodwill may encompass 70%-80% of most price allocations, that doesn’t mean it will in every situation and you have to know HOW to allocate the purchase price
- There IS an ordering method to how the purchase price gets allocated though…this is the general order of the various assets you’re buying in terms of allocating a “value” to them…
- First you allocate to cash
- Second, A/R
- Third, supplies, small instruments on hand
- Fourth, furniture and equipment (leasehold improvements would be included here, however, a buyer RARELY wants an allocation to leasehold improvements)
- Fifth, covenants
- Sixth, goodwill….yes, goodwill will be the last item you should allocate to….it winds up being the “difference” between the purchase price and the total of all the other allocations
- That said, if you do want to allocate something to a consulting agreement, you do so BEFORE you assign the goodwill value….goodwill is ALWAYS last.
In our next blog, I’ll cover some more practice purchase tips like A/R, to buy or not to buy, how to value, how to collect, etc.
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 on Dentaltown.com. You can reach Tim at firstname.lastname@example.org or any of the other dental partners/principals at (800) 772-1065 or email@example.com.