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Professional News Articles : : BUY/SELL by Peter Ackerman, CPA : Accounts receivable: Cleaning up after the sale

Accounts receivable: Cleaning up after the sale

February 1, 2010

In the sale or transition of every dental practice the buyer and the seller must resolve the issues surrounding the collection of outstanding accounts receivable. The three most popular solutions are:

  • the purchase of the receivables
  • the collection of the seller’s receivables by the buyer as an agent of the seller
  • the seller retains the receivables and collects the receivables outside of the transaction.

Each option has advantages and pitfalls that should be discussed with a knowledgeable practice broker and addressed in the purchase or transition agreements.

While the sale of accounts receivable is the most common arrangement in dental transactions, it is not necessarily the only or the most beneficial arrangement for the parties. That said, buyers will often find that purchasing accounts receivable offers the advantages of having control over the collection of the receivables and continued cash flow from the practice, thereby removing the need to acquire additional working capital.

The sale of the accounts receivable offers the seller a clean break from the practice with the ability to cash out. This approach leaves no open-ended accounting issues after closing, which can be a great advantage -- especially for a dentist who plans to leave the community. Valuation of the receivables can vary greatly depending on the future risk and resources necessary to collect the outstanding receivables. Therefore, it is important to have your practice broker assist you in obtaining an accurate valuation of the accounts receivable.

Sometimes a buyer and seller can not agree on a valuation schedule for the accounts receivable; the seller feels he or she does is not getting a fair price, and the purchaser fears he or she will not realize the full value of the receivables being purchased. Under such circumstances, having the buyer collect the outstanding receivables for the seller’s benefit can resolve this issue. In this scenario, the buyer collects all outstanding receivables for the seller, and in return takes a percentage of the amounts collected to cover the accounting and administrative cost of collections. The seller reciprocally agrees not to attempt or have any agent of the seller attempt collection of the accounts receivable for the period of time the buyer agrees to collect the receivables. This option allows the seller to realize the full amount of the collectable receivables (less the buyer’s cost of collection) with minor accounting issues remaining after closing. The buyer obtains control over the receivables, maintaining continuity as patients continue to pay as usual and receive statements as usual, but assumes no risk of loss (which the buyer would take under the first option).

If either of the above options does not suit your transaction, you and your practice broker may choose to have the seller collect their own receivables. Under this program, the buyer is responsible for the accounts receivable directly relating to the dentistry he or she produced and the seller is responsible for the receivables relating to his or her production. The buyer has no control of the seller’s receivables and the continuity of collections for the patients, but assumes no risk or duty to perform the seller’s collections. The seller realizes the full value of the collected receivables, although collections often become difficult once the seller has left the practice. The retired seller becomes second in line to the patient once removed from the practice. The seller also loses the ability to make a clean break from the practice, which can be a problem for both the buyer and the seller. Despite the potential for problems, if the selling dentist plans on a transition and will be continuing with the office under a buy/in, buy/out or partnership agreement, this third option may be best for both parties.

Accounts receivable is a loose end that must be addressed in the purchase agreement and resolved in order to obtain a successful transition. Many variations of these three options are possible, and your dental practice broker should be able to work out an arrangement satisfactory to both parties.

Peter J. Ackerman, CPA, is a certified public accountant, licensed real estate and business broker and national speaker on business issues affecting dentists. He may be reached at peter@adsmidwest.com or www.adsmidwest.com.

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