Veterinary Sales & Appraisal Articles

When my team speaks with practice owners, one of the chief questions we hear is, “How do I minimize my after-sale tax burden in the sale of my veterinary practice?”

I explored this question with my accountant, W. James Barrs, Jr., CPA, pulling from my own experience helping hundreds of owners exit their practices, as well as his experience as a tax advisor. There are many factors to be considered for any exit strategy and tax plan. This article contains a few points to be discussed with your advisors. Real estate is a separate entity with nuances outside the scope of this article.

The sale of your practice will likely be structured as an asset sale, wherein the buyer purchases the individual “assets” of the practice—i.e. inventory, equipment, accounts receivable, non-compete covenants, and goodwill. Typically, a provision in the sale contract will separate each and allocate a portion of the sale price amongst each of these assets. The gain or loss on each asset will be taxed at either capital gains rates (which are lower and what you desire) or ordinary income tax rates (which will generally be much higher).

Inventory, equipment and accounts receivable: Typically, the gains on these will be taxed as ordinary income. For federal purposes, the current tax rate could be as much as 37%. Your inventory gain or loss will be the difference between the contracted inventory allocation and the balance at the point of sale. The gain or loss on equipment will be the difference between your depreciated tax basis and the allocated contract sale price.

Ideally for the seller, the inventory and equipment would be allocated to show a loss, or at most a modest gain. Good advice is to wind down the inventory once in the selling mode and not to purchase new equipment unless necessary for operational replacement or maintaining revenues. While these items might make your practice more salable, they will not necessarily increase your practice value. Accounts receivable might or might not be included, depending on the practice receivable policy. 

A non-compete covenant will be taxed as ordinary income. However, the covenant is typically a nominal percentage of the allocation, making the actual tax amount somewhat irrelevant. Under certain circumstances, this income may be subject to self-employment taxes. 

Goodwill is the difference between the sale price and the total amount allocated to the other assets. Goodwill represents the intangible value of the practice and is taxed at the more favorable capital gains rates. The great majority (over 90%) of the asset allocation typically goes to goodwill.

Note that the buyer and seller generally have competing interests when it comes to the asset allocation. Therefore, it’s important to seek the guidance of an experienced practice sales expert who can help you establish processes for ideal allocations and navigate the negotiations.

How can I potentially reduce or defer the tax bill? Some of the following strategies may help reduce, spread or defer your tax bill.

• Installment sale (owner financing): If the buyer pays you over multiple years, you may be able to spread the taxable gain over those years instead of paying it all at once. Accordingly, you will likely enter a lower tax bracket post sale because of your lower earned income. This is a very safe loan considering that commercial veterinary lenders and the Small Business Association have determined over the years that these default rates are less than 0.5%. So, if you don’t immediately need the cash, and an investment such as a Treasury bill is the intended landing spot for whatever cash you do receive, you may want to consider this approach.

• Timing the closing date: Closing at the end of the tax year versus the beginning of the next can shift a large tax bill into a different tax year with reduced earned income. This could allow a portion of the gain to be taxed at your lower rates.

• Retirement plan contributions: Maximizing contributions to a SEP, solo 401(k), or profit-sharing plan in the year of sale can offset some of the ordinary income portion of the deal.

• Charitable giving strategies: If charitable giving is already part of your plans, a donor-advised fund (DAF) or charitable trust funded in the year of sale can offset taxable income.

• If the real estate is involved in the sale, a 1031 Exchange may help. This tax-deferment strategy is beyond the scope of this article and should be exercised with the guidance of a proper financial professional.

The sale of a veterinary practice is a complex process with many factors to consider well beyond taxes. To ensure you are maximizing your personal financial return during ownership and at the time of sale, engage throughout your career with multiple advisors who know “the waters” (CPA, broker and practice appraiser, and financial planner to name a few). Gaining multiple perspectives around any major decision will ensure you are driven by what matters most to you.

Doyle Watson, DVM, president of Simmons & Associates, is a veterinary practice appraiser and broker. Learn more at www.simmonsinc.com.

This article was written in collaboration with W. James Barrs, Jr., CPA, of Barrs, Coiner, & Lumpkin, LLC, of Brunswick, Ga.

This article was originally posted on www.simmonsinc.com. Any reproduction on any other site is prohibited and a violation of copyright laws.