By Greg Auerbach, MBA

With November 4th less than two months away this never ending Presidential election cycle’s conclusion finally seems in sight. The impending change in administration, though, may be an important consideration for the transition out of, or into your practice. Whether it is the possibility of tax law changes or uncertainly surrounding the current state of the economy or of, both buyers and sellers have many things to review

Beginning first with taxes, it is important to note that, for a buyer, the entire purchase price totally is depreciable. While there are variations in the amount of time over which each allocation category can be amortized, some accelerated, some not, the bottom line is that 100% of the price can be depreciated over time. That said, for the seller, the categorization implications come with the possibility of drastic tax ramifications. Because of this, in looking at the apportioning the purchase price, most of the time, a large amount of the purchase proceeds is allocated towards seller goodwill. In 2008, the tax on goodwill is set by the IRS at the capital gains rate, currently 15%. Quickly comparing that to the rate set for other commonly used allocation categories, there is oftentimes up to a 20% variation as other allocation line items can be taxed at level up to the filer’s personal income rate.

Coming into a new administration, we all expect that change happens. In our discussion, we are especially keeping watch over a possible change in that capital gains rate. Plans that have been discussed by the two major party candidates include anything from zero, to even a ten or twenty percent increase in the capital gains rate (depending on what report you read and when you read it) – meaning up to $20,000 additional paid to the IRS on every $100,000 allocated towards goodwill. Considering that in the average practice, $20,000 is approximately the take-home monthly net income to the owner and, generally speaking, multiples of $100,000 are allocated towards goodwill, the variation and cost comparison can be considerable.

So, as a soon to be retiring doctor, what can you do? Obviously there are always two options; transition now or transition later. In this decision, though, you may need to discuss with your advisors a strategic plan of action. It very well may be worthwhile to consider selling before tax policy may be changed, even if you would like to scale back but keep your fingers wet for another year or two. In doing this, you could then find part-time employment inside the practice, if feasible for the purchaser to employ you, or, outside of your restrictive covenant, if not. Then again, your practice may be so profitable that this type or timing of transition would not be in your best interest. Your current take-home pay with a greater tax liability later may outweigh the ongoing part-time pay in addition to the comparative tax savings.

So, now, where does this leave a buyer? I will be addressing similar administration changes, demographic shifts and market perceptions, more in depth, next month.