Asset valuation is another important area to consider. A buyer will record a practice's assets and liabilities at their fair market value, which could alter their carrying value and/or amount of annual depreciation, Riley explains. The selling physician practice will recognize a taxable gain or loss based on the difference between the allocated sale price and the tax basis of the assets and liabilities. C corporations usually end up with an increased tax burden, Riley says.
How much can the tax hit be? It can be pretty big. Federal long-term capital gains rates are between 15% and 23.8%, and federal ordinary income tax rates go as high as 39.6%. If the practice being sold is an S corporation but formerly was a C corporation within the 10-year built-in gain tax recognition period, additional taxes could be owed, Riley notes.
With a stock sale, the practice's assets and liabilities stay with the business. Sellers often favor this option because they want to simply sell the whole kit and caboodle and be done with it, Riley explains. It is typical, however, for purchase agreements to include indemnification clauses that make the seller responsible for some liability during the transition period, he adds.
Capital gains also can become an issue with a stock sale because the seller may have a gain or loss based on the difference between the price paid and the current basis in the stock, Riley explains. This loss or gain usually is treated as a capital gain, making it subject to lower federal capital gains rates-currently 15%-23.8% for most sellers.
Smaller physician practices, such as practices with only two or three physicians who are all retiring at once, may not have much leverage when it comes to structuring the sale, Riley notes. If a physician in such a practice wants to retire within a certain time frame, the buyer may have all the power to dictate terms. Being flexible and willing to postpone retirement can give the seller more power, he says.