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Chip Fichtner
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Chip Fichtner

New Taxes on Practice Monetization in 2022 and Portfolio Risk

by | Jun 2, 2020 | Insights

Taxes are going up. Your Tax Rate Could Exceed 50% in 2022.

LPS urges all dentists to fully understand the potential impact on the net value of your practice in 2021 vs. 2022 and beyond. Now may be a time to consider selling a PART of your practice to an Invisible Dental Support Organization. Remain as an owner and continue to lead your practice with your brand, team and strategy for years or decades. Benefit from the resources of a larger partner and have significant potential gains on the value of your retained ownership. This may be the last time to pay only a 20% tax rate on the proceeds.

Monetize in 2021 OR Wait Until 2025 to Get The Same NET Proceeds, After Tax…But Only If You Grow Your Bottom Line 10% Per Year in 2021, 2022, 2023, 2024 and 2025.

Many doctors tell us they are too young to need an IDSO partner, or are growing so fast that now is not the time to monetize. But the reality if taxes go up is less money, net, in the next five years. This is one of the biggest decisions of your life. Can you grow your bottom line (EBITDA) by 10% per year, compounded each year, in 2021, 2022, 2023, 2024 and 2025? That is what you must do if you postpone a monetization event in 2021. Otherwise, you will be working for the government for five years. Note: My math for this example assumes you live in a state without taxes; with state taxes, the break-even dates extend to 2026 or 2027.

President Biden has stated repeatedly that he wants to “tax the rich and make them pay their fair share” by eliminating the Long-Term Capital Gains tax preference on investments. This could take your Federal tax bill on the sale of all or part of your practice to 43.4% in 2022. Of course, most states also add their own taxes on top of this which are only deductible against the federal taxes up to $10,000. See your state tax rates here: IRS.

Your Portfolio Results in 2020

Smart dentists know portfolio diversification. However, their financial advisors often forget that your practice is your largest investment. Below compares practice values in 2020, vs. others:

The New Realities of IDSO Transaction Values; UP 400% in 39 Months?

Working with great dentists for 10+ years enables us to see our forecasts come true. We are pleased to see a young, smaller DSO which started buying LPS advised practices 30 months ago, just sold for over $1.4 billion dollars, an increase in value of over 400% in 39 months! Several LPS advised doctors who recently joined this group had the opportunity to liquidate their retained ownership at 300+% of the initial equity value. 2021 Will Be Interesting!

A number of IDSOs buying IDSOs transactions are also in process. And LPS just helped create another new IDSO to acquire our great clients. We identified the investor and recruited the senior management; stay tuned!

So Why Do I Send this Now?

If you have a great practice, you should understand its value today vs. its value with a 40% – 50% tax hit in 2022, 2023 and beyond. You may want to plan on selling part of your practice in 2021. To make a 2021 closing, you must start before July 1.

Chip Fichtner
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