By Jonathan Martin, CPA
Many doctors fail to plan when it comes to transitioning their practice from one doctor to a multidoctor practice. Even when they do plan, doctors tend to make decisions based solely on emotion, and may overlook the financial due diligence that is equally, if not more, important in evaluating transition plans.
But as everyone knows, there are far more important things in life than money. This article will not call that old adage into question, but rather argue that happiness and financial instability are not mutually exclusive. If appropriate planning is done to determine the best transition plan and time frame, you can achieve all of your goals, including work/life balance and financial independence. But first you should answer these questions:
1. Can I afford an associate? Whether your plan involves selling an interest in your practice or just hiring an associate, your new doctor will be an associate in the practice at some point. Typically, doctors do not ask themselves this question before hiring an associate, but instead generate a list of reasons why they need another doctor. These include the ability to take vacation without closing the practice, the desire to decrease their work schedule, wanting assistance in growing the practice, and more. These are all good reasons. However, there is a quantifiable financial impact to the owner that, if overlooked, could be detrimental to the practice and owners. If you envision your practice income as a pie, as sole owner the whole pie is yours. If you bring another doctor into the fold, you are now faced with sharing that pie. If the pie grows, the question is whether your share of the larger pie is more or less than the smaller pie that was yours and yours alone. If the pie does not grow, you now have a smaller piece of the same size pie. Hungry yet? Many doctors find out the answers to these questions after the associate is already working in the practice. Had they done their due diligence in advance, determining the right time to hire an associate and its impact on their financial situation, their decision might have been different.
2. If I can’t afford an associate now, when can I, if ever? This is not an easy question for doctors to answer on their own because it is based on many factors. The first step in evaluating the appropriate time is determining the owner’s financial needs. This is based primarily on current financial needs (cost of living) and long-term needs (retirement goals). There is a direct relationship between the owner’s financial needs and the level of growth (if any) required in the practice in order to support another doctor. Once you have determined what the owner needs, you can then determine how much growth is needed so that both doctors can thrive, estimate how long it will take, and assess the steps to take in order to reach that goal. The amount of necessary growth will depend on the doctor’s reasons for hiring the associate. For example, if the reason is to reduce one’s schedule, the need for growth in the practice is usually reduced, as the owner will essentially leave production on the table for the new associate to pick up. However, if the reason for hiring another doctor is to grow the practice, the need for growth is greater.
Too often dentists make decisions regarding their practices without knowing the ramifications. While things can work out, too often the outcome is burned bridges, tarnished relationships, and money lost. While it does take some time to answer these questions, it makes very little sense to put your No. 1 income-generating asset at risk. The cost of answering these questions pales in comparison to the cost of making the wrong decision.
Jonathan R. Martin, CPA, joined the McGill & Hill Group, a member of ADS, in 2005, and has assisted over 300 dentists nationwide with their transition needs. He may be reached at [email protected], 888-419-5590, x704.
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