Purchase of a Medical Practice

The Hidden Cost of Buying a Medical Practice: Accounts Receivable Issues

I am working with a doctor who recently purchased a medical practice from another physician. The selling physician insisted that the purchasing physician buy the stock of the medical practice corporation, which he did (the seller physician obviously wanted to maximize capital gain rates on the sale).

This obviously hurts a buyer because the buyer's tax benefits are foregone (depreciation on acquired assets, amortization of a covenant not to compete, etc).

The real problem I noticed, and the one I bring up here, is that the selling physician was entitled, after the sale. to receive 100% of his accounts receivable existing at the time of sale. This is called old fashioned double dipping unless the valuation (i.es sales price is adjusted according to incorporate this part of the transaction (which of course it was not). Remember that when a person buys stock in a corporation, he or she is buying all of the assets and liabilities of that corporation in reality. This includes the accounts receivable in existence at the time of the sales transaction.

The moral of the story is this: This purchasing physician way overpaid for the medical practice by allowing the selling physician to keep his accounts receivable and not adjusting the sales price to reflect this.