Practice transitions get negotiated hard on price and then structured casually, which is backwards. How a deal is built frequently moves more money between the parties than the price does, and unlike price, structure is often decided by whoever raises it first.
Buyer and seller want opposite things
This is the central tension and it is worth naming early rather than discovering it at the letter of intent stage.
The buyer wants purchase price allocated toward assets that can be deducted or depreciated quickly — equipment, supplies, non-compete agreements — because that produces near-term deductions.
The seller wants allocation toward assets producing capital gain rather than ordinary income, principally goodwill, because the rate difference is substantial.
Both parties file forms reporting the allocation, and those forms are expected to agree. It is not a question each side answers privately. It is a negotiated term, and it belongs in the negotiation rather than being handed to the accountants afterwards.
Asset purchase or stock purchase
Asset purchase
The buyer acquires specific assets and gets a stepped-up basis in them, which generates depreciation and amortisation going forward. Goodwill is typically amortised over fifteen years. The buyer also generally avoids inheriting unknown liabilities.
Buyers overwhelmingly prefer this.
Stock purchase
The buyer acquires the entity itself. Simpler in some respects — contracts, licences and provider numbers may carry over without renegotiation, which in a medical practice is not a small consideration. But the buyer inherits the entity’s history, including liabilities that have not surfaced yet, and gets no basis step-up in the underlying assets.
Sellers generally prefer this.
Where the practice depends heavily on payer contracts and credentialing that would be painful to re-establish, the practical case for a stock deal can outweigh the tax case against it. That is a judgement that needs both advisers in the room.
Compensation versus purchase price
Many practice buy-ins are structured so the incoming physician or dentist takes reduced compensation for a period, with the shortfall effectively funding the buy-in.
Whether those amounts are treated as compensation or as purchase price changes the outcome materially for both sides. Compensation is deductible to the practice and ordinary income to the recipient. Purchase price is neither.
Arrangements that are vague on this point tend to be interpreted later in whichever way is least favourable, usually by someone who was not in the original conversation.
Personal goodwill
In a practice built around one clinician, some of the goodwill may attach to the individual rather than the entity — patient relationships, referral sources, personal reputation.
Where personal goodwill genuinely exists and is properly documented, it can be sold separately by the individual, which can significantly change the tax result for a selling owner. It is a fact-dependent position that requires real substance, not a label applied after the fact. It is worth raising early with advisers who have handled it before.
The California layer
California practices operate under the corporate practice of medicine doctrine and generally must be organised as professional corporations owned by licensed practitioners. That constrains ownership structures that would be routine in other industries, and it shapes what a buy-in can actually look like.
Get your health care attorney involved on that side. The tax structuring has to work within whatever the licensing rules permit, not the other way round.
Model it before the letter of intent
The most expensive mistake in practice transitions is agreeing to a price and a broad shape, then discovering during documentation that the structure produces a result one party will not accept. At that point you are renegotiating from a position where both sides feel the deal is already done.
Running the after-tax numbers on two or three structures before the letter of intent takes a fraction of the time and tells you what the deal is actually worth to each side.
Talk it through with a Fresno CPA
We model practice transition structures for buyers and sellers and work alongside your health care attorney and lender. See our medical and dental practice accounting page.
Schedule a meeting or call 559-372-9213.
This post is general information, not advice for your specific situation. Tax figures are current for the year stated and many are indexed annually. Talk to a CPA before acting on any of it.
