Funding Your Future

April 1, 1997
I once heard a high-profile dentist say in one of his lectures, "No dentist past age 50 should own a practice." At the time, I was about 40 and, like many of you, thought he was absolutely nuts.

Make sure you`re not among the 95 percent who `die by the chair`

Robert E. Hamric, DMD

I once heard a high-profile dentist say in one of his lectures, "No dentist past age 50 should own a practice." At the time, I was about 40 and, like many of you, thought he was absolutely nuts.

At age 40, I was looking toward my children growing up, sending them to college, and owning all the expensive toys and good things we dentists like to buy. At age 40, my practice was full of energy, booming, doing great. I was seeing nice profits, enjoying dentistry, working hard and, believe me, selling my practice was the last thing on my mind.

Why in the world would I ever want to sell my practice? Of course, I was like so many others, funding very little toward my retirement plan. By the time I paid for all my goodies-house, vacations, kids and taxes-there was very little left over. Sound familiar?

When is the best time to sell a business? When it is highly productive and profitable or when it is tapering off, slowing down and not so attractive? When is a dental practice most valuable? A doctor`s practice at age 50 may be worth 10 times what the same practice is worth when the doctor is age 60.

But, I love dentistry. I don`t want to quit. I need to work. I like to work. I like what I do.

Destined to Die by the Chair?

However, to sell the practice does not mean quit practicing dentistry, as we tend to think in the past. Why not sell the practice, work for the buyer as the associate, work as much or as little as I want and enjoy ultimate freedom?

The ADA reports that only 5 percent of dentists have enough in retirement accounts by age 65 to truly quit-retire from practice. This means 95 percent of dentists are trapped in private practice. No way out but to die at the chair.

Why is this? Because, when they were 40 years old, they were not able to put enough money away. I was in the 95 percent group who didn`t adequately fund a retirement plan. Are you? I have found that more than 50 percent of dentists have less than $100,000 in retirement funds.

Hold on! I have a great idea for you! Sell your practice, work for your buyer, and take the value of your practice to fund your retirement.

Here is how it works in a nutshell. Find a buyer for your practice and work an agreement that is win-win for you both. Structure the agreement with a down-payment buy-in, with the seller holding the note for the remainder of the balance, at 10 percent interest. This note can be for five to 15 years, depending on the value (cost) of the practice. Include in the agreement that the seller can remain in the practice (part-time) and continue to see patients, as an associate, paid on a percentage of the collections for the dentistry he or she produces.

In other words, sellers` income will be a percentage the amount they generate as an associate. Actually, this revenue pays the buyer enough to make a decent profit and pay his notes to the seller.

The seller can work three days maximum and generally generates income equal to what he or she was making prior to the sale. Then, take all the payments for the sale of your practice and place them in a retirement account (Defined Benefit Plan).

How do we determine the value of the practice? There are several factors, such as city, area, supply and demand, demographics, etc., to consider. To establish a good starting point, take your last three years` collections and figure the average. A good practice-transition specialist can advise you. (Call me and I`ll tell you who I recommend.) In my area, 80 percent of my last three years` average was considered a fair figure.

A Good, Fair Price

If your practice is incorporated (P.C.), as I was, here is the good news. I am not selling the corporation, only the assets of the corporation. I, personally, remain incorporated. I am the only employee of my corporation, working as an independent contractor for my buyer. If you are not incorporated, talk with a knowledgeable accountant; otherwise, you will be paying unnecessary tax.

The value of the practice should include: equipment, furniture, fixtures, office and clinical supplies, miscellaneous assets, goodwill, and a restrictive covenant. The assets-purchase agreement will be very detailed, leaving no stone unturned. A good transition specialist will cover areas you have never thought about-if there is a paragraph on a specific subject in your contract, there is a reason.

There should be a reasonable down payment. This is negotiable, depending on the financial status of the buyer. A down payment is a commitment and I would not consider a sale without one. The seller is holding the note, and the down payment reduces the note. Consult your accountant about the best tax plan here. The down payment should cover capital-gains tax for the seller and transition expenses, at least.

What about existing account receivables? Most transition specialists recommend that this money go to the seller. However, the buyer will need operating funds immediately.

One solution would be to lower the down payment, leaving some funds in the buyer`s account. I chose to get a larger down payment and allow the buyer to purchase the existing account receivables, adding that amount to the note. In other words, I loaned him the value of the receivables, so he would have a good start financially. I want this arrangement to work financially, and not be a struggle for either party.

The restrictive convenant will vary from state to state. In Alabama, they are not enforceable. One major concern is that the buyer will default and go elsewhere to practice. However, patients will be loyal to the seller; they have been coming to him for years. The seller could pack up and practice down the street. But this will hurt the seller, because then the buyer probably can`t make the payments.

All this can be avoided with good communication and profitability. The key is to choose the right buyer and make it work.

The contract will have the promissory note, amortized with principal and interest breakdown. I chose a 10-year payout at 10 percent interest. This can vary, depending on how long you want to remain in the practice and the total amount of the payments.

A $1 million buy-out may take longer than a $250,000 buy-out. I prefer to take payment on the note around the 15th of the month. This takes the pressure off the buyer`s financial load at the first of the month.

The security agreement uses all present and acquired goods as collateral. The buyer must cover the debt owed to the seller with adequate life insurance, in the event of premature death.

A Three-Day Work Week

The seller should plan on working no more than three days per week, allowing the buyer to have some space to develop his own peer group and market the practice. The buyer will be paying all the bills in the practice, while the production of the seller will more than provide a profit for the buyer.

With this plan, it is important to keep your corporation active, so you can fund your retirement. (Remember, you now are the only employee of your corporation.)

For the first five years, I think, practicing three days per week will be the maximum needed. After five years, re-evaluate your time, but leave yourself the option to practice as you elect to practice.

The contract should outline how the seller will be paid. A fair arrangement would be 30 percent of the money collected from the production created by the seller. The buyer pays all expenses incurred-lab, staff, supplies, everything.

Another alternative would be a 40 percent commission with the seller paying his or her own lab. How much can the seller make on a three-day work week?

- $2,000 a day x 11 days a month equals $22,000; multiply by .30 (percentage of production), which equals $6,600 in take-home pay each month.

- $3,000 a day x 11 days a month equals $33,000; multiply by .30, which equals $9,900 in take-home pay.

It is not unreasonable to expect to produce or collect $22,000 to $33,000 per month, with take-home pay between $6,600 and $9,900 per month on your collections.

What about hygiene? The doctor who does the exam should be paid for the exam. All other hygiene production should belong to the buyer, including soft-tissue management, because the buyer pays hygiene salaries. When the seller is in the office, he or she will check most patients, since they are accustomed to seeing him. He should introduce the new buyer to everyone and, over time, the buyer will begin alternating check-up exams.

I have found that I averaged 100 to 125 exams per month . . . an additional $2,500 to $3,000 per month. Therefore, the seller should make in the neighborhood of $10,000 to $13,000, working three days a week, with no stress.

A Steady Source of Income

What does this mean for your buyer?

A great deal-70 percent of what the seller collects belongs to the buyer. On $33,000 per month (from the seller alone), the buyer will keep $23,100 before expenses. If the lab bill is 10 percent, staff 5 percent, and supplies 5 percent, the buyer will net close to $20,000 from the seller. The money generated is going to provide enough to pay all the notes, and then some.

The seller now can turn over patients to the buyer and select the cases he really wants to do. The buyer will begin to attract patients from his social contacts and peer group.

Patients requesting to see the seller should be allowed to do so. Why would the buyer care? He benefits without having to work!

I feel the seller should take a decent vacation. My suggestion is to take a week per quarter . . . and put it in the contract.

The buyer would be wise to develop skills the seller refers out-endo, pedo, surgery, perio-keeping those services in-house, if possible. Also, a smart buyer will realize the staff is the reason this practice has done so well. He should never attempt to replace staff for fear of a lack of loyalty. Staff should be loyal to the practice and to both doctors.

Investing for the Future

Now, let`s talk about what to do with the money! In 1976, Harvey Sarner incorporated my practice. He did a magnificent job for me, as he has done for thousands of professionals. He helped me begin to get a handle on my money. In 1976, I was 38, had three children, and was living high.

I was funding retirement, but not always to the max. I was the trustee of my pension program and personally handled the investment routing of the funds, making about a 7 percent return. In those days, most of my retirement funds were in the stock market, and some were in mutual funds. To me, the stock market was like shooting craps ... up and down, hit and miss.

In 1988, I attended a lecture by Charles Givens. He gave me tremendous advice on money management. His plan is to invest in no-load mutual funds, and he has a great technique for knowing which funds are the best investments. He uses the prime-interest rate and T-bills as indicators.

This is explained in his book, Wealth Without Risk. I highly recommend this book. Givens feels that the prime interest rate and the 30-year treasury bonds directly drive the markets. This dictates where you place your money.

When prime interest is below 9.5 percent, money should be in stock growth funds. Currently, the prime rate is below 9.5 percent; therefore, most mutual funds we use are those type funds. When the prime moves to 9.5 percent, we will go to money market funds. When the prime drops, we go to bond funds, until we reach the 9.5 percent barrier again.

If you follow the 30-year treasury-bond record, the current rate is 6.79 percent. When this reaches 8.5 percent, we would switch out of stock funds to money market funds. Givens, in his monthly newsletter, tells you the best funds to be in. We follow that advice very closely.

Also, I have attended money-management seminars by Darryl Cain, Greg Stanley, Fred Willeford, Richard Collier and the DuMolins . . . all were excellent. I learned a lot from each of them.

How much will it take to retire? Have you taken the time to figure out how you can reach that goal? I have outlined a way to take the value of your practice, continue to practice dentistry as much as you want to, start a new quality of life, invest that money from the sale of your practice in a safe and practical manner, and, hopefully, change your life forever!

Will you do it?

The author is in part-time practice in Birmingham, Ala. He is a management consultant and a professional speaker, appearing on many dental programs. He can be reached at 3100 Wellington Parkway, Birmingham, Alabama 35243.

A Healthy Practice Sets Up a Nice Goose Egg

For the sake of simplicity, let`s say your practice is valued at $400,000. If you sold your practice for $400,000 at age 50, worked for your buyer, and followed the scenario outlined in this article, at age 65 you would have, at 10 percent interest, $1,670,899 in your retirement fund. The numbers look like this:

$400,000 Practice

Sold at Age Funds at Age 65 @ 10% Growth


45. . . . . . . . . . . . . . . $2,691,000

50. . . . . . . . . . . . . . . $1,670,899

55. . . . . . . . . . . . . . . . $1,037,457

60. . . . . . . . . . . . . . . . . $644,204

65. . . . . . . . . . . . . . . . .$200,000 (If you`re lucky!)

The numbers all depend on the magic of compound interest. Note that waiting from age 45 to 55 actually costs you $1.5 million; waiting until you are 65 is absolutely insane, unless you already have fully funded your retirement.

Want To Buy? Meet My Representatives-All Three of Them!

Again, the basic plan is to sell the practice, while it is really worth something and highly productive, with its greatest value. Then, the seller continues working for the buyer as much or as little as he or she wishes for a percentage of the collections generated by the seller. The seller puts all the payments for the practice into retirement funds.

The plan looks great on paper. But for this to work, it will take the right combination of players to create a win-win relationship. Here are the players:

- Transition specialists-As in any consulting area, there are many who claim expertise, but few who really are experts. This specialist must be able to help you and your buyer reach the proper agreement for both of you to prosper. Some transition people simply are brokers, who are in it for the money, and really mess up the long-range structure of the plan.

The transition specialist should represent both parties. This is not a "your lawyer against my lawyer, rewrite contracts in my favor, argue over minor points" sort of thing. If your buyer can`t understand that, then look for another buyer. I know of two transition experts I can recommend, without reservation, who have done thousands of transitions.

- Accountants-Both parties should lean heavily on the accountants for tax advice, along with the transition specialist. If your accountant is not up on the latest, then the transition specialist will know a great accountant. For instance, one accountant thought it impossible to fund all the payments for the practice into retirement. He will quickly learn, or his clients will change accountants.

- Lawyers-Do not get into a legal battle. Lawyers feel they must get all they can for their clients and can mess up a deal, as a result. Keep the lawyers out, unless one attorney can work for both parties.

- Seller-The seller must have the correct mind-set. The financial future of his or her family is what`s most important. What you are seeking is the right buyer . . . and the right buyer is seeking you!

- Buyer-The buyer must realize the tremendous income opportunity he or she has to purchase a profitable practice and take the practice to higher levels. Profitability from day one begins with this system. A person starting from scratch may spend $100,000 and not have a single patient.

A good transition adviser will do a great deal of homework before you will be able to sell the practice. It will take time to complete an analysis and time to locate the buyer. The transition adviser will do a complete practice proforma and tell you the selling potential of the practice. You may not have enough patients to do this type of transition, so get a management team to boost your practice. We are talking about a business here!

The transition adviser should do a retirement-funding projection. How much do you have now in retirement? How many years do you have left to practice? How much money will it take to retire? How can that mathematically be done? A market-value analysis will determine what your practice is worth, city, town, location, profile, equipment, furniture, supplies, decor, potential growth, management style, etc.

Of course, for this transition to be a success, there must be a buyer. How do you find a buyer? Your transition specialist will have a source of buyers. Frankly, a recent dental graduate would be stupid to start a practice from scratch. Why spend $100,000 to set up a practice without any patients? Buying an existing practice gives the buyer a profit from day one. Another source of buyers would be faculty members who want to go into practice, people exiting the military, or perhaps a younger dentist in your neighborhood who wants to merge.

Once you have found a prospect, check out everything possible (state-board results, financial condition, speak to the prospect`s friends and peers). You want to know about his or her personality, character, philosophy, and beliefs. I would run a personality profile with the D-I-S-C (Carlson Institute). If anything indicates this person is not compatible, keep on looking.

A Little Homework Makes All the Difference in Tracking Mutual Funds

Fidelity is the largest mutual fund company in the world. It has a mutual fund for every need. I have all my funds in Fidelity, and I can switch funds very easily with my touch-tone telephone. I subscribe to an independent newsletter on Fidelity Funds, Fidelity Insight [(617) 369-2500].

I follow every Fidelity fund, including volatility risk. There are growth funds, growth and income funds, asset-allocation funds, international funds, bond funds, money-market funds, and select funds. The monthly newsletter gives me information on the best funds in Fidelity each month.

My good friend, Dr. Mike Tabor in Tennessee, and I monitor our funds on a weekly basis. Each Saturday, in USA Today, under "Mutual Funds-Fidelity," we chart percentage change for the week. We are able to place our money in funds doing very nicely and stay out of ordinary funds. For example, in 1996, we captured the following funds:

Growth Funds:

a.) Dividend Growth.........30.1%

b.) Low Price Stock........26.9%

c.) S & P 500..............22.9%

International Funds:

a.) Nordic................41.7%

b) New Markets............41.4%

Select Funds:

a.) Energy Service.........49.1%

b.) Natural Gas............34.3%

Using Charles Givens` advice and technique, I placed all of my investments into no-load mutual funds. My rate of return for the past nine years has been:

`87- + 22.4%

`88- + 19.4%

`89- + 36.3%

`90- + 2.1%

`91- + 23.1%

`92- + 12.0%

`93- + 19.4%

`94- - 4.1%

`95- + 26.9%

Our nine-year average equals 17.5%

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