Allocating Expenses When You Purchase A Practice

Hello Dr. Hayes,

I am enjoying your blog. 

I am currently negotiating to purchase a practice and will likely move it to a new building once the sale is completed. I am trying to determine my budget using your recommended expense categories. 

If I take out a loan for the amount of the practice, which category would include that payment? What about construction costs for building out the interior space? 

Finally, I am hoping to hire a consultant and possibly use the services of an office designer. Where would I book those expenses?

Thanks for your help.

Sincerely,
TS, OD

Dear Dr. S,

Thanks for the kind words! Here are my thoughts.

Construction costs for office build-out and designer fees will fall under Occupancy Costs.

I suggest putting consulting fees under General Office Overhead.

The answer to where you should allocate the cost of your practice loan is a bit more involved. (Disclaimer: These comments are for practice management purposes only. Please consult your CPA or Attorney for professional tax advice.)

Ideally, your purchase contract should specify how much you and the seller agreed on for the value  of the equipment, inventory and goodwill you were purchasing. 

In that case, the note payment you make each month would not be booked as just one expense, but at least three. You would then allocate your expenditures to these categories:

1. Inventory would fall under Cost Of Goods

2. Equipment falls under Equipment

3. I treat goodwill as a personal investment. It’s certainly not a legitimate expense of the current practice in my mind.

Unfortunately, many ODs do not realize they need to assign these values during their negotiations. What usually happens is two well-meaning ODs get together and after some discussion, agree on a price and payment terms. 

In most cases, they completely overlook the importance of placing a dollar value on the allocations for equipment, inventory and goodwill and find themselves back at the negotiating table when they get ready to file their tax return the following year. 

More about why that is so important in my blog this Thursday.      

Best Regards,
Jerry Hayes, OD

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Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2009 Jerry Hayes, OD. Not to be reproduced without written permission of the author. 

I wouldn't place any value on

Stephen Kepley - 05/05/2009 - 14:47 pm

I wouldn't place any value on goodwill if you are immediately moving a practice. Even if the selling doctor stays on and moves with the practice, relocating devalues any goodwill.