To Sell, Or Not to Sell the Accounts Receivable

So, you found a suitable buyer for your dental practice. Congratulations! The hard work of identifying a successor is over. Now comes the tricky part: negotiating the sale. The total purchase price will typically include two numbers: one for your practice, and another for your accounts receivable. When does it make sense to sell the A/R, and when is it better to retain it? Keep reading for some insight that may help inform your decision.

A/R is an asset that represents work you’ve already done. The first part of deciding whether or not to sell it depends on its value. You can get a higher price for your A/R if the balance is low relative to your practice and specialty, and if balances are deemed highly collectible. There is a lower risk to the buyer. If your A/R balance is on the high side, you may not be able to get as much in the purchase price allocation. The flip side of that scenario is that if you sell the A/R, you get to walk away from your practice, completely. You can see there is no right answer and what’s best depends on your situation and preferences – and the buyer’s!

There are essentially three options you can pursue:

Sell Outright

The first and perhaps least complicated, for you, is to sell the entire A/R balance outright. How much your A/R is worth will depend on negotiations with the buyer. Generally, it is reasonable to expect to receive up to 95 percent for current balances, provided the overall balance isn’t much higher than one times your monthly production. For older balances, you can expect to receive anywhere between 75 and 85 percent for 30-60 days and 60 and 75 percent for 60-90 days. Balances over 90 days old can be valued anywhere between zero and 25 percent, on average. It is up to the buyer to do his or her own due diligence, but do your best to represent all balances accurately and honestly.

If you decide to sell the A/R outright, you get a lump sum and don’t have to worry about collection or administration fees. The buyer gets an immediate income stream. This is also a good option if you think you’ll be in a higher tax bracket post-sale; see below for the tax implications.

Sell a Portion

The second and most complicated option is to sell a portion of the A/R. Reasons why this may be an ideal solution include spreading the risk between you and the buyer or if the total balance is high. A common scenario is letting the buyer collect fees for you for a specified period of time. You would agree on paying the buyer an administrative fee while they collect the balances, usually around five percent. At the end of the agreed upon length of time, the buyer assumes ownership of the remaining A/R balance.

With this option, you can elect to split collections so you don’t have to pay an administrative fee to the buyer. Use caution, as patients may be confused and less likely to pay if they receive two different bills.

Retain A/R

Third, you might decide you want to keep the A/R. This is a good option if you think you can get a higher return through collections than a negotiated payout with the buyer. It’s also a wise choice if you want a somewhat predictable source of cash flow after the sale.

The Role of Taxes

There are tax implications if you decide to retain all or a portion of A/R proceeds. Cash flow from A/R will be taxed at the ordinary tax rate, meaning that A/R proceeds will be treated as taxable income. If you’re in a higher tax bracket already due to the lump sum of your practice sale, also paying taxes on the A/R as it comes in might put you at a disadvantage. But if you’ve done the research and this won’t be a factor, then it’s another stream of income as you begin retirement.

Deciding how to handle A/R can be a sticking point in many dental transitions, but it doesn’t have to be. An experienced dental broker can guide you toward the best decision for your practice sale and post-closing income considerations. Contact the team at N/L Transitions for questions.