Message Boards
Today's Active Topics Today's Active Cases Browse Forum Categories My Recent Activity My Messages Private Groups My Marked Threads My Subscriptions
Today's Active Images Today's Active Polls Most Active Topics Global Townie Map Advanced Message Board Search Message Board Terms of Use

Don’t Clock Out Yet by Tim Lott

Start Discussion More by this author (6)
Categories: Practice Management, HR and Accounting;
Don’t Clock Out Yet Why sellers shouldn’t walk away too soon

by Tim Lott

Should a seller consider a consulting agreement when they sell their practice?
The answer is maybe.


What a consulting agreement is
First and foremost, the transition has to lend itself to the idea of a consulting agreement, which means the seller is making themselves available to the buyer during the transition period, whether that’s three months or 24 months. This may mean coaching the buyer on certain patient treatment plans, handling HR issues with staff, teaching them about business matters and processes, or just being available for questions from the buyer whenever they arise. In my experience, this occurs with many practice transitions; therefore, a consulting arrangement could fit perfectly. You would also want a written consulting agreement between the parties that clearly outlines the terms and specifics of the arrangement.

Before I jump into it, let me summarize why this topic is relevant for those who may not understand how this could be important.

When the seller and buyer of a dental or orthodontic practice arrive at and agree to a specific purchase price, at some point that purchase price needs to be allocated among the various assets that are getting sold and purchased. Therefore, both the seller and buyer must come to an agreement on the allocation of that purchase price. For this article, I’ll primarily discuss the typical asset acquisition structure of the sale and purchase since they are most common; however, the idea of a consulting agreement can also be used with a stock or equity interest structure.


Why buyers suggest it
For example, if a seller and buyer have agreed to a price of $500,000 for the various assets of the practice, they might also agree that the allocation of that price will be $25,000 for dental supplies and small tools and instruments on hand, $175,000 for the tangible assets like furniture, equipment and computers, and $300,000 for goodwill. This is what happens in most asset acquisition structures of a dental practice sale.

However, sometimes a buyer might suggest a different allocation whereby they lower the goodwill and either increase the allocations to supplies or furniture and equipment, or insert a consulting agreement to absorb some of the price allocation. Why would a buyer want this type of allocation, you ask? There could be several reasons, but here’s a real example of why a buyer in Maryland might suggest it. I’m based in Maryland, where if $175,000 is allocated to tangible assets, the state charges a 6% bulk sales tax on that amount, and it is payable at closing by the buyer. That’s an additional and immediate cash outlay of $10,500 by the buyer at closing from their working capital funds. If they reduced that allocation down to $100,000, the bulk sales tax due would only be $6,000, an immediate savings of $4,500. That could be fairly significant for a buyer just starting out with practice ownership.


How consulting income can benefit sellers
Unfortunately, many sellers and their advisors will balk at the thought of allocating $75,000 to a consulting agreement, and their argument is that it would be treated as ordinary income and taxed at ordinary income tax rates instead of a lower long-term capital gains tax rate. They would not be wrong with that argument. The ordinary tax rate might be 40% with a tax cost of $30,000, whereas the capital gains tax rate could be 25% with a tax cost of $18,750. That’s a savings of $11,250 to the seller. However, many advisors fail to completely think this through and consider how the consulting income of $75,000 might generate a greater tax savings than $11,250.
I’ll lay out a very basic scenario where a seller could realize greater savings with an allocation of $75,000 to a consulting agreement versus a higher allocation of $75,000 to goodwill.

If the allocation is considered consulting income, the seller continues to have business income that they can report on their business tax return, generally an S corporation. This means they may also have ongoing business expenses to apply against the $75,000 income. What kind of expenses might this include? Well, they may continue to have business expenses like business travel, business use of their vehicle, continuing education, dues and subscriptions, licensing, business meals, office supplies, furniture and computer equipment, etc. If so, all of these could be legitimate business deductions that would reduce the $75,000 of income. Let’s assume those expenses total $15,000. Let’s also assume the seller has $20,000 of health insurance premiums due for the year that can be deducted as an S corporation owner.

At this point, you have expenses that total $35,000 that shelter some of the $75,000, leaving taxable income of $40,000. Now, the tax at the ordinary tax rate of 40% on $40,000 would be $16,000. That’s less than the $18,750 tax on $75,000 at the long-term capital gains tax rate of 25%.


Ways to maximize the tax advantages
But wait, there could be more. What if the seller retained a 401(k) retirement plan or implemented a similar type of retirement plan to replace the one they had? They could pay themselves wages of $30,000 and defer $25,000 of it so that only $5,000 of wages were income-taxable. They may also have an additional profit-sharing contribution of $5,000. The S corporation income is now down to $5,000 ($40,000 from above minus $30,000 of wages minus $5,000 of profit-sharing contribution), so they’re only paying ordinary taxes on $10,000 ($5,000 of S corporation income and $5,000 of taxable wages). The tax on $30,000 of retirement plan contributions is deferred into the future. At the ordinary tax rate of 40%, the tax on $10,000 of taxable income is only $4,000 compared with the $18,750 of tax on $75,000 at the 25% long-term capital gains tax rate. That’s a difference of $14,750.

Yes, there is the payroll tax cost on the wages of $4,600, and sometime in the future the deferred income of $30,000 could be taxed at 25%, or $7,500 (compared with the current ordinary rate of 40%, or $12,000), plus the $4,000 of income tax from the previous paragraph. That totals $16,000, which is less than $18,750.

After you combine all the tax savings, the tax costs (payroll) and savings on the deferred income, you come out ahead by almost $3,000 in this very conservative scenario. A savvy taxpayer and advisor with higher consulting income might want to spread the consulting income over at least two years, where the resulting savings could be even greater.

Even in a situation where there is a hybrid sale structure that is part stock, part personal goodwill and part consulting payment, the savvy taxpayer and advisor can arrange a scenario with the same type of tax savings and possibly shelter even more of that consulting payment into a retirement plan. If the seller wanted to use an existing (or create a new) cash balance or defined benefit plan, they could defer even more income into the future to be taxed at a lower income tax rate in retirement.

If the transition involves the seller taking back a seller note, that may also lend itself to a consulting agreement as part of the practice transition.


The bottom line
In summary, I wish many more sellers and their advisors would be open-minded to a consulting agreement as part of the sale of their practice. I certainly know which of my clients would benefit from such an arrangement. Hopefully this article will plant the seed for some sellers who, in turn, will ask their advisors about the concept and have a serious conversation about the pros and cons, costs and savings of a consulting arrangement as part of a practice sale or transition.
Author Bio
Tim Lott Tim Lott provides consulting services to health care professionals and practices. He offers expertise in startups, mergers, transitions, tax and retirement planning, financing assistance, and budgeting. Lott has a specific concentration on consulting to dental professionals on associate, partner, and shareholder arrangements, practice management, revenue enhancement, practice purchase, sales, buy-ins and buyouts, and the related tax issues. He is also a longtime Townie and member of Dentaltown magazine’s editorial advisory board.
More In Practice Management, HR and Accounting
Creating a Remarkable Dental Practice: Communication and the Patient Experience.
Creating a Remarkable Dental Practice: Communication and the...
Fred Joyal
CE Credits: 1.75
Office Visit: Dr. Christos Papadopoulos
Office Visit: Dr. Christos Papadopoulos
by Kyle Patton
April 2024
Real Estate: Real Issues for Starting (and Selling) a Dental Practice
Real Estate: Real Issues for Starting (and Selling) a Dental...
Charles Feitel
CE Credits: 1.5
Tips Before Starting Residency
Tips Before Starting Residency
March 2024
Orthotown Magazine
November 2025
Orthotown Magazine November 2025 Read Current Issue Read Archived Issues
Sponsors
Townie® Poll
What percentage of your treatments involve traditional ortho (brackets, wires, etc.)?
  
Related Articles
4 Steps to Evaluate Metrics
4 Steps to Evaluate Metrics
by Dr. David Wank
October 2025
Game Changers: Remote Monitoring and Referral Marketing
Game Changers: Remote Monitoring and Referral Marketing
by Dr. Roger P. Levin
September 2025
Taking the Pulse of Your Practice
Taking the Pulse of Your Practice
by Brittany Frazier
July/August 2023
Site Menu
Message Boards Magazine Continuing Education Podcasts Blogs Classifieds News Events Townie® Poll Ebooks Townie Choice Awards
Company Info
Contact Us Advertise With Us Howard Farran DDS, MBA Policies and Agreements
Site Help
The Orthotown Team, Farran Media Support
Phone: +1-480-445-9710
Email: support@orthotown.com
©2025 Orthotown, a division of Farran Media • All Rights Reserved
9633 S. 48th Street Suite 200 • Phoenix, AZ 85044 • Phone:+1-480-598-0001 • Fax:+1-480-598-3450