How Annex Wealth Management approaches a dental practice buy-in

Step 1: Price your family's month before the practice

Pull a full year of checking-account and credit-card activity, your spouse's take-home pay, and every fixed payment. Include student loans, the mortgage, childcare, insurance, and any payment that continues when collections are poor. Add the numbers and write down one floor: the spending that must be paid in a bad month.

Annex Wealth Management writes that floor down before it opens the seller's valuation. A note payment under about a quarter of projected owner draw usually leaves room for weak months. Above about a third, the plan is thin. If fixed spending already takes more than about 60% of current take-home pay, even a small year-one dip forces a choice between saving and bills.

Compare gross associate pay with gross owner draws only if you use the same tax treatment on both sides. The note is paid from after-tax money, so an after-tax comparison is usually more useful. The slip is treating $18,000 of owner draw as if it were the same household cash as $18,000 of associate salary.

• Last 12 months of spending
• Spouse's take-home each month
• Student loan payments each month
• Three years of practice P&L
• Seller's weakest collections year
• Draft buy-sell agreement

Step 2: Read the shares and note terms

People say 50% means half the profit. The actual purchase is 50% of the S corporation's shares. Distributions must follow share ownership because an S corporation has one class of stock, but each owner's W-2 salary is set separately. Half the shares can therefore produce less than half the take-home if the seller keeps a larger salary.

People also say the buy-in note is tax-deductible. Stock principal is not deductible, and you pay it from after-tax pay. Ask a CPA how interest is treated in your case. Do not build the household budget on a tax result that has not been checked.

Ask the seller, lender, and practice CPA who owns receivables at closing, how salaries are set, and whether the valuation uses collections or profit after a market-rate dentist salary. Ask what the buy-sell pays if you leave in year three, and request three years of the practice's Form 1120-S returns.

Two answers should stop the signing process: “we'll finalize the buy-sell after closing,” or a seller who cannot produce the 1120-S returns. Either answer means the cash flow under review may not exist. The three-year cash-flow test also does not establish a fair price; valuation and tax review are separate jobs.

• Valuation after dentist salary
• Receivables at closing
• Annual owner salary rules
• Year-three departure price
• Three years of Form 1120-S

Step 3: Run the first three years

Farid and Siobhan were 41 and 39 when Farid, then an associate, received the offer. Their hypothetical household included a four-chair S corporation practice, Siobhan running the front office, and one child who would start college in three years. Farid earned $15,000 each month as an associate. The seller offered 50% for $300,000.

The seller financed the price over seven years at 6% for illustration, producing a payment of about $4,400 each month. Projected owner draws before tax were $18,000 in year one, $20,000 in year two, and $21,000 in year three. The arithmetic is direct: $18,000 minus $4,400 equals $13,600; $20,000 minus $4,400 equals $15,600; $21,000 minus $4,400 equals $16,600.

Against $15,000 of associate pay, the monthly gaps were negative $1,400, positive $600, and positive $1,600. By year, that is negative $16,800, positive $7,200, and positive $19,200. Add them together: negative $16,800 plus $7,200 plus $19,200 equals $9,600 ahead after three years, before tax.

A ten-year bank loan drops the payment to about $3,300 each month, so year-one cash rises to about $14,700, only $300 short of associate pay. The death column tells a different story. After 24 payments the bank is still owed about $253,000, often with Farid's personal guarantee behind it, against about $227,000 on the seller note. Both balances are rounded and before tax.

• Associate pay each month
• Projected owner draws
• Seller-note payment
• Year-one cash gap
• Cash reserve target

Step 4: Protect Siobhan if the note outlives Farid

After 24 payments, about $227,000 of the seller note remained, and that debt belonged to Farid's estate. Siobhan was not a dentist and usually could not keep the shares long term under state ownership rules, so the buy-sell needed to require the remaining owner to buy them back. A term life policy should cover at least the note balance. Check a disability buyout clause the same way. Leaving the buy-sell for later and skipping the policy costs nothing in year one, but Farid's death in year two could have left Siobhan facing about $227,000 while holding shares she could not run.

Step 5: Would a 34-year-old and a 52-year-old sign this offer?

Two associates can receive the same 50% offer and need different answers. A 34-year-old with a spouse earning about $90,000 and fixed spending of $9,000 each month can absorb a $1,400 year-one dip; a seven-year note ends at age 41.

A 52-year-old spending $16,000 each month and hoping to slow down at age 60 would finish paying at 59, leaving roughly one debt-free ownership year. A smaller stake or a longer associate contract fits that person better.

A single associate has no second income to cover year one, so more cash should be held before signing. A large existing balance can cover the dip, but draining it leaves less for student loans, college, or practice surprises. Early retirement shortens the debt-free ownership period, and those years are where the buy-in has time to pay back.

Sign only after holding 12 months of the year-one shortfall in cash. In Farid's case, $1,400 multiplied by 12 equals $16,800. The buy-sell agreement and term policy should also cover the full note balance. Annex Wealth Management reruns the test using the seller's weakest collections year because a strong year is not a forecast, and money invested can lose value.

Step 6: Bring the offer letter to Annex Wealth Management

The right time to talk with Annex Wealth Management is after the draft agreement arrives and before you sign the note. Bring the offer letter, draft buy-sell, practice P&L, and 12 months of your own statements. Annex Wealth Management lays the note onto your monthly spending plan first, then looks at the valuation; fees are set out in a written agreement before work starts.