Preparing to Sell Your Veterinary Practice—Key Tax Considerations in an Asset Sale
Written by:
Matthew Santoro, CPA, MST
Tax Manager, Granite Peak Associates
granitepeakcpa.com/team/matthew-santoro-cpa
Selling your veterinary practice is a monumental step, and understanding the tax implications of the transaction can save you from costly surprises. If you’re considering an asset sale, here are key points to guide your planning process.
1. Who Is the Buyer?
The buyer’s profile impacts how the deal is structured and taxed. For example:
Corporate Groups or Private Equity: These buyers may offer cash, rolled equity (ownership in their entity), or an earn-out based on future performance.
Individual Buyers: They often rely on traditional lending facilities or seller financing, which may limit the upfront cash available for the sale.
Understanding the buyer’s structure and goals helps you anticipate their negotiation points and evaluate their offer.
2. Cash at Closing
The cash portion of the sale received at closing is typically subject to capital gains tax. However, the tax rate depends on the type of asset being sold. For instance, equipment and inventory are taxed at higher ordinary income rates, while goodwill and other intangible assets qualify for lower capital gains tax rates. Carefully negotiating how the purchase price is allocated among these categories can significantly impact your tax liability.
3. Rolled Equity
Rolled equity means you’ll retain a percentage of ownership in the buyer’s entity. While this strategy aligns your financial interests with the buyer’s success, it’s important to know:
How your equity will be valued in the future.
Whether the rolled equity postpones tax liability (often under IRS rules for tax-deferred exchanges).
The risk involved if the buyer’s entity doesn’t perform as expected.
4. Earn-Out Agreements
Earn-outs tie a portion of your payout to the practice’s future performance post-sale. While this can increase the total sale value, it introduces uncertainty. From a tax perspective, earn-out payments are often taxed as capital gains. Ensure you have a clear understanding of the performance metrics and timeline.
5. Joint Ventures (JVs)
Some buyers may propose a joint venture, where you retain partial ownership and remain involved in operations. JVs can provide ongoing income and tax-deferred growth, but they also mean you’re not fully “cashing out.” Consider how this option fits with your long-term financial goals and tax strategy.
6. State Taxes
Proceeds from an asset sale are subject to both federal and state taxes. Each state has its own set of intricate tax laws that must be navigated during a sale. Here are some key points to consider:
State-Specific Taxes: Many states have additional tax considerations outside of income tax. For example, Massachusetts has two state-specific tax policies that sellers need to know:
Sting Tax: Corporations with gross revenue between $6 million and $9 million are subject to a 2.00% tax on net income. Gross revenue over $9 million is subject to a 3.00% tax on net income. The money received during an asset sale is included in gross revenue.
Millionaire’s Tax: The individual tax rate in Massachusetts is 5%. Individuals with taxable income over $1 million must pay an additional 4% surtax. This means every dollar of taxable income over $1 million is taxed at 9% instead of 5%.
Pass-Through Entity Tax: The Tax Cuts and Jobs Act limited individual taxpayers to including only $10,000 of state and local taxes paid towards their itemized deductions. As a workaround, most states have enacted a pass-through entity tax that allows shareholders to pay their income taxes through their pass-through entity and receive a tax credit on their personal state tax return.
Sales Tax: The sale of tangible personal property (e.g., equipment and inventory) may trigger sales tax debts that must be paid to the state where the business operates.
Bulk Sale Laws: Some states have laws that prevent the buyer from assuming the seller's debt unless expressly included in the purchase agreement. Under Bulk Sale laws, the indebtedness between the seller and their creditors must be resolved before the state approves the transaction.
Real Property Transfer Tax: Many states tax the transfer of real property (e.g., land and buildings) included in an asset sale. The tax rates vary per state, but the transfer of real property is also subject to capital gains taxes at the state level.
7. Plan Ahead
Knowing the timeframe for when you want to sell is the best way to maximize your sale proceeds and minimize your tax dollars. Consider the following when thinking about your exit strategy:
Business Valuation: Progressive year-over-year financial performance is the key to increasing your business's overall valuation. Most professionals require 3 years of financial history to assemble an accurate business valuation, which is based on EBITDA.
Assets and Debts: Another way to show strong financial performance is to properly manage your assets and debts before selling. Avoid purchasing new equipment a year before selling the practice if you can. Emergencies happen, but buying new equipment before the sale could subject you to unfavorable tax treatments. Having debt on the books at the time of purchase is not bad, but one of the best ways to present your business as “sellable” is to show steady cash flow and a history of timely debt repayment.
Contracts and Agreements: Revisit all the contracts and agreements you have in place to ensure that no issues could complicate the asset sale. The crucial agreements to review are employee contracts, real estate/equipment leases, and supplier agreements. Avoid signing contracts with suppliers that the buyer cannot get out of easily. Additionally, if you do not own the real estate, ensure the lease is transferable to the buyer.
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