Clean up accounts receivable & credit balances
It is relatively common to see practices with high > 90 days accounts receivable balances due to the fact that the practice owner has not written off uncollectable accounts in years.
While this may be an easy explanation, buyers and lenders may relate a high accounts receivable balance to an issue with the office's collection rates/policy. Therefore, it is a smart move to clean up accounts receivable prior to beginning the transition process to alleviate any undue concern from potential buyers. It is also important to mention that the seller is typically required to refund any credit balances or write a check to the buyer for the amount of the credit balances at closing, so these balances should also be cleaned up prior to a practice sale.
Reduce discretionary write-offs on practice tax returns
As we previously discussed, cash flow is one of the primary components of practice value. Since buyers and their advisors will utilize your practice financials to evaluate the cash flow of your office, you will want to make it as easy as possible for them to dial in on the true overhead expenses of your practice. While buyers understand that you may be writing off personal or discretionary expenses such as travel, country club memberships, and meals and entertainment through your business, it is wise to minimize these write-offs in the years leading up to a practice transition. If you choose not to do so, be prepared to provide potential buyers and lenders with documentation regarding any personal or discretionary expenses that are being run through the practice.
Look for Part 6 in the Series on Keys to Maximizing Your Practice Value in next month's Tip of the Month.