July 17, 2023

Succession Planning for the Family Dental Practice

By Jon Almeida, CPA, CFE, ABV, Partner, Tax & Business Services

Succession Planning for the Family Dental Practice Dental Services

Many closely held dental practices are operated as family businesses. Often, non-dentist family members work in the business, handling administrative or other duties. In some practices, other family members may have chosen to follow in the footsteps of the practice owner by becoming dentists themselves. In these cases, the practitioner may have solved one of the most difficult problems in transitioning from business owner into retirement, finding a successor!

But how does the dentist/owner transition this asset, which they have worked so hard to build, to the next generation? The two most viable options may be selling the business outright to the successor family member or gifting shares of the business interest.

The sale of the business may or may not be appealing to the business owner, depending on personal motivations and whether they need the cash flow a sale may provide. Certainly, the tax implications of a 15-20% Federal capital gains tax plus any State taxes are not very appealing.

Equitable Giving Considerations

Family dental practice owners may wrestle with the question, “How am I going to be ‘fair’ to my children who do not participate in the practice?” Beyond any tax implications of giving, it may be important for the owner to understand the business value they are giving up to determine equitable giving amongst heirs. In this circumstance, the owner will want to engage a professional qualified to perform a business valuation to help determine the value of the practice. The business valuation will help them decide on what assets to gift or sell and in what amounts, all in the interest of being equitable to their heirs.

Tax Implications of Wealth Transfers

In a gifting scenario, the gift of shares of a practice achieves multiple tax objectives.

The gift gets the business asset out of the Dentist’s estate, shielding future appreciation of the practice from Federal and State estate taxes.

The gift may help address uncertainty regarding future estate tax law changes. Current federal law provides for an exemption of $12.92 million. In 2026, the exemption increases of the Tax Cuts and Jobs Act are scheduled to expire and, without any action by Congress, will revert to the 2017 level of $5.0 million, adjusted for inflation. Federal estate tax rates range from 18% to a max of 40% on assets in excess of the exemption. Also, the annual exclusion for gifts is currently $17,000. This presents an opportunity for a practice owner to consider gifting shares in smaller increments over multiple years without impacting their lifetime exemption from estate and gift taxes.

A gift of a partial interest also has unique potential benefits. A gift of a minority interest could result in a lower valuation on a per share basis, thereby using up less of the gift tax exemption. If a gift is not a controlling interest, it could be subject to a discount for lack of control applied in the valuation of the shares. A discount for lack of control is based on the concept that a non-controlling interest in a business would have less value to an investor than an interest with elements of control, such as voting rights and the ability to make management and financial decisions on behalf of the entity. Discounts vary widely depending on the elements or control associated with the gifted shares. A valuation professional can help in determining the appropriate discounts.

Owners must also understand that once the gifting process is fully complete and they no longer own or control the entity, they must be willing to accept certain changes. These changes include no longer being the ultimate decision maker in the financial and management aspects of the business and no longer having access to distributions of business profits.

Valuation Concerns

When valuing a dental practice, it is important to consider the cash flows available to the owner in determining practice value. In an income approach to valuation, value is determined based on consideration of the ability of a business to generate an income stream for the owner into the future and the application of a risk factor to the income stream in arriving at a value. As part of this assessment, a valuator must separate the practice’s income stream into cash flows that represent reasonable compensation for services provided by the owner from the cash flows that represent profits of the business itself. Reasonable compensation paid to the owner does not add value to the business but indicates cash flows that the owner would need to pay another dentist should the practice owner need to be replaced.

Another key factor in assessing the income stream to the owner is evaluating the contributions of the successor to the existing practice. Some factors to consider:

  • What share of the patient load is the successor currently handling?
  • How many hours is the successor currently putting in weekly?
  • What percentage of the new cases are attributable to the successor’s efforts?
  • Is the successor’s salary reasonable for the services provided?

Answers to these questions help a valuator assess cash flows attributable to the successor. A valuator will also need to determine the risk that these cash flows may not continue should the successor practitioner leave the practice and need to be replaced.


Owners of family-run dental practices should consider the prospect of transitioning the practice to the next generation. Planning for such a transition can be complex, and a review of options may need to start long before the owner is ready to retire. A good first step in developing a plan is consulting with qualified valuation and tax professionals to ensure the owner’s objectives are achieved.