Buying a Dental Practice: Asset Purchase or Stock Purchase?

Asset Purchase

If you are considering purchasing a dental practice, Nardone Limited‘s team of experienced dental practice attorneys can help guide you through the many decisions you face in making this purchase. We know that the process can seem overwhelming, and that some very important items may not receive the careful consideration they require. When purchasing an existing dental practice, one component that may not receive the proper focus is the structure of your purchase. Most commonly, the structure of a dental practice purchase falls into one of two categories (i) the asset purchase or (ii) the stock purchase. Both structures can be effective, and both have different strengths and weaknesses. There are a variety of factors that can influence the type of structure you choose to purchase your dental practice. Those factors can be matters like state law issues, tax advantages, or liability issues. In comparing the two structures, it makes sense to break the analysis into the benefits and detriments of each.

Asset Purchase

The main benefit of the asset purchase structure is that it allows the new owner to avoid becoming obligated for the liabilities of the prior owner. This structure can also offer significant tax advantages for the buyer, such as receiving a “stepped-up” basis for the assets purchased. The opportunity to start the operation of the purchased dental practice without concern for prior liabilities, combined with favorable tax treatment for the assets purchased, often leads buyers to choose the asset purchase. The asset purchase structure is particularly helpful if you are bringing a new practice into an existing group of dental practices, as no liabilities carryover into the practice group.

The asset purchase structure does require some thought during the due diligence process, because you need to choose the assets of the dental practice you will be purchasing, and which assets you will not purchase. For example, almost all of the assets considered part of a dental practice will transfer to the buyer in an asset sale. But, commonly the existing accounts receivable of the dental practice do not transfer to the buyer. You may also want to exclude a certain asset from the purchase that is not in good functioning order, or is too old to have much useful life left, to attempt to reduce the purchase price.

Stock Purchase

The stock purchase structure may seem more simplistic, because you just purchase the ownership of the dental practice entity, however, the due diligence required to know the exact status of the company you are acquiring is significant and time consuming. In a stock purchase, you will be buying the entirety of the interest in the business entity that owns the dental practice. This is done by purchasing the membership interest in a limited liability company, or all of the stock if the entity is a corporation. Everything owned by the business entity transfers with the ownership interest when it is purchased. This can simplify some of the processes involved in purchasing the dental practice, however, this masks the due diligence required prior to the purchase. In particular, the due diligence to determine what liabilities the new owner will be taking on in the stock purchase.

Unlike the asset purchase, however, the stock purchase structure obligates the new owner of the dental practice to be liable for all liabilities of that existing dental practice. This may not be favorable for the new purchaser of a dental practice as liabilities that pop up unexpectedly can quickly reduce your cash flow. The stock purchase also does not afford the buyer the same favorable tax treatment of the assets that the asset purchase does. Given the less favorable tax treatment, the parties often have to negotiate a tax neutral purchase price. The stock purchase also cannot be used if the current owner runs the dental practice as a sole proprietor.

Contact Nardone Limited

Nardone Limited‘s team of experienced dental practice attorneys can guide you through the purchase of your dental practice and help you get started by working with you to select the either an asset purchase or a stock purchase based upon what works best for you.  Nardone Limited, a Columbus, Ohio law firm, provides specialized dental practice representation across the state of Ohio and the United States. The dental attorneys at Nardone Limited specialize in representing dentists in such diverse areas as: (i) dental practice business succession planning; (ii) dental practice purchases and sales; (iii) dental board matters; (iv) real estate matters, including lease agreements and commercial real purchases; and (v) employment related matters of all kinds.