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Smooth succession planning for dentists

Sept. 7, 2019
It takes years of hard work and unwavering dedication to build a successful dental practice. But no matter how rewarding the practice is, no one wants to work forever, and eventually dentists will want to retire.

It takes years of hard work and unwavering dedication to build a successful dental practice. But no matter how rewarding the practice is, no one wants to work forever, and eventually dentists will want to retire. 

As you move closer to your ideal retirement date, one of your primary concerns is wondering what will happen to the business. Will you sell the business to the highest bidder, or will you help a junior dentist invest in the business and gradually take over? How will you handle the transfer of ownership? Will you make enough from the sale to retire in the fashion you wish?

Although the transition into retirement may feel overwhelming at first, putting a detailed succession plan into place will help smooth the process and ensure you receive what your dental practice is worth. There are multiple options when it comes to selling or transferring your practice. But the best decision for you will depend on your unique circumstances and personal preferences.

• Are you invested in seeing your practice survive after you leave?

• Are you simply interested in selling the business without the legacy?

• How much do you need to receive from the sale to be adequately prepared for retirement?

• How will you spend your time after you sell the practice? 

There are no right or wrong answers to these questions. Every dentist will have different goals and visions for themselves and their practices. But, having an idea of your options will help you prepare for a smooth and rewarding transition. 

Option 1: Selling to an unrelated party

Selling your business to an unrelated party may be the least emotionally complicated option, but it may not provide some of the other benefits many dentists desire. These include the satisfaction of passing your thriving practice on to someone you love (a next generation dentist within the family), or on to someone you respect (a junior dentist or long-time employee). 

Also, selling to an unrelated party may bring in lower bids than a selling dentist anticipated. Why? No matter how amazing the dentist who wants to buy your practice may be, it is unlikely that the new dentist will be able to retain all of the current patients. Some people loathe change and will leave simply because the practice changed hands. This is very common and largely unavoidable. But this may lead to a lower price being offered from an unrelated buyer than the offer you would receive from someone within the practice. 

Option 2: Selling to another dentist in the practice

Conversely, you may get a higher buyout price from someone within the practice who (a) is already emotionally invested in the practice’s success, and (b) maintains rapport with the current clients. 

This may also be the simplest succession plan option from a continuity and cash flow standpoint. Since it is fairly common for practice owners to stay in the practice temporarily after the sale is initially executed to help transition current patients, many dentists like the idea of doing so with a dentist they know and work well with rather than with someone new. If the entire buyout process spans a few years, this arrangement helps the purchasing dentist maintain cash flow and acts as an annuity for the selling dentist. This plan also eliminates the challenge of finding a qualified dentist who is professionally and financially able to take over.

Option 3: Employee stock option plan (ESOP)

Essentially, an ESOP is a trust that acts as a retirement plan for current and future employees, and it provides a tax-advantaged exit strategy for practice owners. With an ESOP in place, an employee or associate dentist can build up equity in the business and use that equity to help pay for the business years down the road. If the practice is structured as an S corporation or C corporation business entity, this type of succession plan allows the practice to maintain brand identity and continuity with patients while offering tax breaks for the retiring owner.

How an ESOP works

1) With the help of legal and financial counsel, the practice owner establishes the ESOP trust and appoints a trustee, perhaps a lawyer, accountant, or financial professional, who specializes in acting as trustee in these types of arrangements. 

2) The ESOP trust obtains a loan to purchase stock in the retiring owner’s practice. (The shares are in a loan suspense account inside the trust.) So, the ESOP trust will hold both the loan suspense account and the participant accounts.

3) Both the company and the individual employees will make retirement contributions in cash and dividends to the ESOP each year. Shares will be allocated to participants so that each individual will share the practice’s income and losses. The ESOP pays the existing loans with these proceeds.

ESOPs may be complex to initiate, but they’re popular because of the unique tax advantages they afford once they’re in motion. The tax advantages, though, vary based on the type of business entity under which the practice operates.

For S corporations: Any portion of the ownership held by the ESOP will be tax-free. For example, if the ESOP holds 50% of the shares of the practice, 50% of the practice’s annual income will be tax-free.

For C corporations: The retiring dentist is able to reinvest his or her share of the sale of the business interest in order to defer taxes. If this money is rolled into a retirement account right away, no tax will be paid at that time. For practices of significant growth, this could represent a tax savings of thousands, tens of thousands, or even hundreds of thousands of dollars.

Regardless of which option suits your needs, it’s best to start planning early.

By embarking on the planning process years before you need or want to execute the transfer, you eliminate urgency from potentially skewing your business decisions. With an exit strategy in mind, you’ll be able to enjoy your final working years with the confidence that you’re prepared for the next chapter.  

Disclaimer: This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your financial advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management Inc. provide tax or legal advice. Harbor West is a division of NorthEast Community Bank. Securities and advisory Services offered through Geneos Wealth Management Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.

GERARD GRUBER, CDFA, CFP, joined Harbor West (formerly Hayden Wealth Management) in 1997 as the chief investment officer. Gruber received a bachelor’s in business administration from Western Connecticut State University. He is registered as a general securities representative and agent, holding several licenses through the Financial Industry Regulatory Authority. Gruber is married with one child and lives in Trumbull, Connecticut. Contact him at [email protected] or (203) 454-3377.

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