Five Years to Retirement, A Planning Guide for Success

Five Years to Retirement, A Planning Guide for Success

Q&A with transition expert Catherine Etters of Legacy Practice Transition

As representatives of Legacy Practice Transitions (LPT), we’re often asked how far in advance you should start planning for a major milestone, like retirement.

The goal of this Q&A series — compiled from the most common questions we are asked on a regular basis — is to outline what this process involves, and to provide you with ideas and guidelines you can use to plan your own practice transition. In it, I will explain what a transition involves from a technical standpoint, and what the possible outcomes may be so you can make a plan that fits your timeline, whether that’s one year, five years, or longer.

Q: In general, what does the transition process involve and how would I get started?

 A: At LPT, the transition process consists of several phases, each one crucially important to ultimate success. These are:

  1. the determination of your needs and options.
  2. what you need to do in preparation for a sale.
  3. the actual transition process.
  4. what happens when you put your hand piece down for the last time?
  5. asking the question: What am I going to do with the rest of my life?

Q: What types of transitions are the most common?

A: Most often a practice transition means either buying or selling a practice, bringing in an associate, bringing in a partner, or retiring. At LPT, we also take into consideration that practice transitions equate with “quality of life”. Quality of life varies for every individual, of course, and most often includes working when you want, where you want, for how long you want, and if you want.

Q: How do you bridge “quality of life” and practice transitions?  

A: In every practice transition, regardless of type, there is a desired outcome.  That outcome normally relates to time, money, or both. Usually it’s time related, for quality of life and financial issues. We call this Objective Based Transition. The point of Objective Based Transition is to establish your individual needs and the various options that will get you from those needs to your desired outcome.

Q: What kind of needs?

A: These needs fall into three categories: economic, emotional and spousal. Let’s look briefly at all three.

Economic Needs: The main question is usually – “How much money do I need when I retire?” The answer is different for everyone, and should be discussed in great detail with a financial advisor before you retire! Keep in mind that the ADA did a study a few years ago and found that only 4% of dentists were able to retire and maintain the same quality of life in retirement that they had in their years of practice. Don’t let this be you!

Emotional Needs: Emotional needs have to do with control. If you are going to sell your practice and continue to work, are you able to give up or share control, or not?  What are you going to do with your free time?  Many times emotional issues are more difficult to evaluate and resolve than are financial needs.

Spousal Needs: Is your spouse in support of, or against, this transition? If your spouse is not on board with the transition plan, it is doomed to fail – full stop.

Q: If I decide to sell my practice, what are my options?

 A: LPT provides several dozen different types of unique and creative transitions, However, the three most common include:

Walk Away Sale. This is where the seller will leave the practice immediately and the purchaser takes over immediately.

Presale or Deferred Presale. This is a transition where the seller and buyer will work together for a period of time, anywhere from one to five, six or seven years. During that entire period of time one doctor owns the practice and the other is the employee or associate.

Incremental Practice Sale. This is a transition where there are two or more doctors who work together for a specified period of time, maybe 3-5 years, up to 10, 15 or even 20 years. This type of transition is suited to the multiple doctor approach as they transition in increments or stages.

There are definite pros and cons to each type of sale, and you should understand them all before deciding which one is right for you.

Q: So I’ve decided on what type of sale is best for my practice, now what?

A: Once you determine what your needs are, and potential options, the next step in preparation is a practice evaluation.

 You want to find out what the fair market value of your practice is. The general rule of thumb is that most offices will sell somewhere between 60-75% of a three-year weighted gross average. Sometimes higher or lower, but the majority of practices will be in this range.

Share your practice evaluation information with your financial advisor. Discuss how this amount of cash affects your long or short-term plans. Will you be able to retire sooner, or is it just that you will have more money when you do? Tax consequences of a sale also need to be researched.

Q: What if I find out I can’t afford to retire? What are my options?

A: Your options are either:

  • Work longer.
  • Bring in someone like Jan Keller for practice management to grow the practice 15-20% year. Jan has years of experience helping practices become more efficient and profitable by analyzing not only a practice’s numbers, but the systems and personnel that are in place to drive those numbers as well.
  • Do a practice merger.
  • Do a presale where you get equity out of the practice now, and you continue to practice so you have your clinical income to support your lifestyle and economic needs.

Q: Does it matter what type of business entity my practice is?

 A: Yes! If you’re a C Corp, for instance, that is probably the worst type of business entity for selling a practice. There are many reasons for this which you should discuss with your financial advisor prior to sale, including the fact that C Corps are subject to double taxation. Don’t skip or forget this important step.

Q: What else do I need to think about before I start my transition?

A: In general you need to consider leases, equipment and improvements.

Leases – With the lease we always want to make sure that you have the ability to assign that lease to a third party. In other words, if you want to sell your practice in two years, you don’t want to sign a five-year lease if you’re not able to assign that facility, or lease, to another doctor.  The wording of your lease is also important, so make sure you understand exactly what you are signing and exactly how it will affect your ability to sell your practice at any time and on your own terms. Seek professional help.

Equipment – Common questions about equipment include: should I add new? Will it help the sale of the practice? Will I get more money for it? Our answer is this – you will not get back as much money as you put in.

Our advice is to buy equipment if:

  • it makes your job easier
  • it makes working more efficient.
  • you want to do it.

Understand, however, that if you spend $60k on new equipment, it does not increase the value of the practice by $60k. It may, however, make it easier to sell, and it might sell in a timelier manner. Do what you feel is in your best interest, but don’t get too involved, or invested, in a whole lot of new equipment.

Improvements – Like equipment, minor or cosmetic improvements may help sell the practice in a timelier manner, for maybe a little more money. However do not expect to recoup large capital outlays dollar for dollar in your sale. (This is not an excuse not to get your sign repainted, or replace old and worn carpet. This type of improvement should be done regardless of whether you are planning to sell your practice or not.)

 Q: How long will it take to sell?

A: Typically, you want to plan about 12-18 months to sell a practice, and you should be realistic in your expectations. This is a process, not an event.

Q: What do I tell my staff, and when?

A: If you’re 80 years old, they’re unlikely to be surprised. But, if you’re 56-62ish, it’s better not to tell the staff you’re thinking about selling because the staff tends to feels insecure about their job. The same applies to patients. It’s best to not involve the staff or tell patients until such time that a contract has been signed with the prospective purchaser.

Q: How does a transitions company like LPT market my practice?

A: At LPT, our marketing plan for selling a practice is done through a series of methods involving:

  • internet advertising
  • telecommunications
  • mailings
  • references from other doctors / previous clients
  • networking with professional sources such as attorneys, certified financial planners, bankers, CPAs.

Q: Are there any important documents I should use with buyers?  

A: Yes, two.

  1. Nondisclosure before any information about your practice is shared with anyone.
  2. A HIPAA form between the two parties before the buyer reviews patient records or reports with patient names.

Q: What about banking considerations? What do I need to know?

 A: Both the buyer and seller need to understand that a bank or loan company is going to look at three different characteristics when they consider a loan for a buyer from a particular seller:

  1. the buyer’s credit worthiness.
  2. the cash flow of the actual practice.
  3. the ability of the buyer to generate income.

For example, if the seller is producing $1m and the buyer has never produced more the $300k they’re probably not going to make that loan. The buyer has to demonstrate the capacity to produce as much as the seller.

Q: Okay, it’s done, I’ve sold my practice. Now what?

 A: Congratulations, you’ve sold you practice, realized a great financial outcome and are ready to start the next chapter of your life. Or are you ready? Not having a plan in place describing exactly what you want your retirement to look like can wreak havoc on a successful and fulfilling retirement. (That’s partly why we looked at spousal needs earlier.)

Our advice:

  • Have this discussion with the important people in your life early and often.
  • Develop outside interests before you retire, whether they are recreational, educational or personal. (Or all three!)

About Catherine Etters

With decades of dental industry experience, Catherine Etters has a proven history of offering expert advice and strategies for building practice success. She is a Cum Laude graduate of Temple University, and the Founder and Owner of The Etters Group Practice Management Consulting company, established in 2001. For the past several years she has focused her expertise working as a Transition Analyst for Legacy Practice Transitions. In this role she provides all transition services, including evaluations, selling and buying a practice, mergers, partnerships, contract services and more. She is dedicated to ensuring her clients meet their goals and experience their own successful transition.

 

You can contact her at:

catherine@legacypracticetransitions.com

legacypracticetransitions.com

ettersgroup.com

610-520-9677

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