by Amy Morgan and Hy Smith, Pride Institute
You've built a top-notch, advanced practice with excellent staff, technology, and clinical services, much like the practices we've reviewed in the previous articles of this series. You've reaped the financial and spiritual rewards of your profession, and you're proud of your accomplishments. What is your next challenge? Many of you may be thinking about retiring. How do you know when it's time to go? And how do you exit in a way that's personally and financially satisfying and also beneficial to your patients, your staff, and the new doctor? In this article, we'll discuss some of the dos and dont's of this final phase of your career: the exit stage.
The exit stage
The exit stage of a practice begins when you have five years or less to go before retirement. It's a time to prepare yourself and your practice for a smooth and successful transition.
A big issue to address in the exit phase is your state of mind about this great change in your life. Do you really want to retire? What will it feel like to walk away from your practice? If a great part of your fulfillment in life has come from your career, are you willing and able to live without practicing dentistry?
Pitfalls to avoid
Here are some common mistakes to avoid because they can have serious financial and other negative consequences:
1) The faux retirement. One dentist became so depressed over a protracted, costly lawsuit with a former employee that he lost his zeal for practicing. He misread what was only a temporary condition as a desire to retire. He brought in an associate with the expectation of an imminent buy-out. But then the stressful situation ended, and the dentist changed his mind — to the chagrin of the buyer! Many dentists who are burned-out, stressed, or overwhelmed opt for retirement. Interestingly, once the problem has been eliminated or resolved, the dentist may well experience renewed energy and enthusiasm for practicing.
2) Lingering. One dentist sold her practice and stayed on as an associate. "I'm only going to be here for a couple of months," she told the buyer. But after the allotted few months, she was still practicing, vowing, "Just a few months more." After a year, she declared, "I really think I should work four days a week, instead of two." The staff and patients faced a conflict of cultures between the new doctor and the old. Whose practice was it?
3) Change of heart. A dentist sold his practice and left. A year later, he was so bored with retirement that he decided to return to dentistry. He had to work as an associate in another practice without the financial advantages of a practice owner, and without the close relationships he had built over decades with his patients. Another dentist who flunked retirement started a new practice from scratch, earning one-fourth of his former income, working harder and incurring a new long-term debt! He had decided to retire without a clear idea of what he would be doing in his new life and whether he would enjoy it.
4) The unexpected disability. An older dentist who never planned for his exit was caught off guard when a sudden health issue forced him to retire, leaving him insufficient time to pick the best successor and get the best sale price.
5) The secret retirement. Another dentist did not feel completely comfortable with her exit choice, so she kept it hidden from her staff and patients. The doctor's lack of candor caused suspicion, uncertainty, and distrust as the staff feared the worst - that the practice would close and they would lose their jobs.
Many, if not all, of these difficulties can be avoided. Let's see how.
Factors to consider
Don't retire if you're uncertain about making this major transformation in your life. Your decision to retire should be based on one or more of the following conditions:
• Have you reached financial freedom? Make sure retiring is financially viable for you. Crunch the numbers, preferably with a professional's help, to ensure that you will have enough savings to live comfortably for the long-term. Avoid making overly optimistic assumptions about your investments, such as 15 percent annual return to support your retirement. And don't underestimate the amount of money you'll need in retirement, because that is the ideal time to take long-postponed vacations, visit family, and increase many other costly activities.
• Do you have the desire to pursue new interests? Achieving financial independence is necessary for successful retirement, but it isn't the only consideration. We work with many dentists who are financially able to retire but love dentistry too much to leave. That's fine! Boredom is a key reason why people flunk retirement, so ask yourself: How will I occupy my time when I retire?
• Can you acknowledge a physical or mental impairment that makes retirement prudent? For example, if you suffer from a bad back, and practicing dentistry aggravates this condition to the point that your doctor has advised you to retire, don't postpone your exit until you can no longer function. Plan for and make a successful transition, then move on to something else that you can and want to do.
• Are you making a sound decision? Don't retire because you're distressed over something that you can remedy. Retire for the right reasons - the desire to pull back from a demanding career, the financial security to do so, spending more time with family and friends, and the wish to pursue important hobbies or other activities. Only you can know what those "right reasons" are.
• Can you accept your decision? For a clean, effective exit, you need to acknowledge the success of your practice, welcome the start of a new stage of your life with its own different rewards, pick someone whom you truly want to see work with your staff and patients - and get out of the way! Ask yourself: Are you ready and willing to walk away from your practice, your patients, and the professional relationships that you have developed over decades? The most unsettling thing is to make a decision, then perpetually renegotiate it in your mind. Take all of the factors into account and decide firmly, without regrets.
• Do you like practicing dentistry? Dentistry is such a demanding profession that only your love for your work can make the great effort you must exert worthwhile. If you don't enjoy the work, then either correct the circumstances or plan your exit to more enjoyable pursuits.
Appraising the practice
Once you're certain that retirement is the right choice, obtain an accurate appraisal of your practice. Often we encounter dentists who are unrealistic about the value of their practices. It's difficult to put a price tag on 20 or more years of blood, sweat, and tears. Because emotion can cloud good judgment, many practices are over- or undervalued. Therefore, it's important to distinguish between the intrinsic and extrinsic value of your practice. The intrinsic value is the inherent worth of a practice that you lovingly built from scratch. It also could be that special view of the lake, or the gorgeous bay window you put in the reception area. The extrinsic value is the price the market will bear.
Approach the issue of valuation as logically as possible so that you can avoid creating unrealistic expectations and disappointments. If you price your practice too high, it won't sell; if you price it too low, the financial consequences could be grave.
To accurately value a dental practice, engage an expert who performs dental practice appraisals. The dental practice marketplace is very different from any other profession or business. A rule-of-thumb is that the present market sets values of dental practices at about 60 percent of gross annual revenues. But this rule may not apply to your practice. Despite the norm, some practices sell for 110 percent, and others go for much less than 60 percent. What do buyers value?
Making your practice attractive to a buyer
One alarming statistic is that practice values are declining in urban areas due to the shift from a seller's market to a buyer's market. Another issue is the fact that rather than purchasing an existing practice, most dentists can start a new practice in any growth area. However, the good news is that an excellent practice, with all systems working well, is still a very marketable one. Doctors look for:
o No reduced-fee dentistry. This is frequently the issue buyers want to address first when purchasing an existing practice. If the practice offers reduced fees, buyers won't even look at it.
o Modern equipment. Younger dentists want practices with near state-of-the-art equipment. Practices don't have to be on the cutting edge of technology, but they have to be up-to-date and contain at least the same technology as the prospective buyer had in school. Computers and software with reasonably current upgrades are also expected.
o Systems in order. An organized, well-run practice with established, efficient, functioning systems for scheduling, financial arrangements, collections, new-patient marketing, and treatment presentations will always be more desirable. An effective hygiene department with high production, an excellent recall system, and a good soft-tissue management program are also important.
o Stable staff. A staff that has been in place for at least one year (preferably longer) is attractive to buyers because it indicates stability and patient retention.
o Dentistry in the base. Dentists who have spent their lives performing comprehensive care are trying to sell practices where most of the patient base is in maintenance. If you have 3,000 active patients, but 80 percent of them are in maintenance, your practice is not going to command as high a price as an office with 1,800 patients who have plenty of dentistry still to be done. The mature dentist who wants to cultivate a practice that is attractive to a buyer should maintain a steady influx of new patients who need care.
o Desirable location. Where is the practice located? Is it in an urban, growing area? The area's demographics and trends will affect the sale price you can expect.
o Business trends of the practice. Constant slow growth will be more desirable than any decline.
o Attractive office. As with anything we buy, we are influenced by the appearance of the practice. Periodic remodelings will help maintain the value of your practice.
o Cash flow. We are seeing more and more buyers who expect significant net income from their practice purchase. This means that the practice must gross over $300,000, or it will likely fall short of the cash-flow requirements of the buyers or lenders. The larger practices, over $1,000,000, are also hard to sell because of the risk that the buyer will be unable to do that volume of dentistry.
o Diversity of procedures. Buyers are rarely interested in purchasing a practice that has a high percentage of procedures not ordinarily found in general dentistry, e.g., a high percentage of TMJ or orthodontics.
A word on specialty practices
Sales of specialty practices are suffering the most because more specialty dentists are retiring than are graduating. Specialty practices simply are closing down due to a lack of buyers. New specialists prefer to start practices from scratch instead and usually are very successful. One challenge of selling a specialty practice is its good will, which is very different from the good will in a general practice. In a specialty practice, the good will is the referral sources, rather than the patients.
This type of good will is more difficult to transfer because buyers are uncertain whether those referrals will continue with a new doctor. Losing even one referral source can cause a significant decrease in patients for the buyer. For these reasons, specialists need to start much earlier to find a buyer. An associate-to-owner transition, rather than an outright sale, will likely provide an easier exit.
Marketing a successful exit
Interestingly, with a proper transition, there is very little attrition. An average of two to three percent of patients will leave the practice. We also see an increase of new patients because of the changes that the new dentist establishes, such as increased marketing efforts.
It is very important that dentists who are selling their practices inform their patients about the transition. The best method is to send a warm, heartfelt letter that thanks patients for their trust and friendship, introduces the buyer, and assures patients that quality care will continue. After a few months, the new practice owner also should send a letter to the patients that introduces the new practice philosophy, vision, and values and encourages patients to continue to refer friends and family.
The end of your career should be just as exciting and full of promise as the beginning. Execute a retirement strategy that assures your patients and staff are in excellent hands. Leave with the greatest pride in your accomplishments and the fondest memories of the relationships you have nurtured through the years. Leave with the contentment of knowing that there's another road to explore. A successful exit means a successful new beginning.
For an expert valuation of your practice and a successful exit strategy tailor-made to your needs and goals, call Pride Institute at (800) 925-2600. Also attend Pride's popular seminar — now in its 15th year and completely revised to address current tax laws, legal standards, and market conditions: Transition Strategies: Associates, Partners & Appraisals (50 percent tuition savings for dental students).
