Most dentists planning to transition out of their practice consider two major options. Number one is selling their practice to another dentist or associate, and number two is selling to a DSO. What you don’t often hear about is option three—turning your practice into a source of passive income.
Let me be clear: Creating a business that runs when you’re not there requires planning and several years of hard work. But in the long run, not selling your practice, but instead maintaining your practice on the side will offer you the greatest amount of financial freedom.
In the next few paragraphs, I’ll share how I slowly transitioned my practice to a source of passive income—and how you can too.
Passive income versus selling
Not long ago, I made the decision to transition out of clinical dentistry to focus on the next phase of my career—teaching and speaking in the dental industry. I’d been in clinical practice for 20-plus years and I was ready to step away from clinical work. I also decided to move to Fort Lauderdale, Florida, leaving my practice behind. So selling seemed like the obvious choice, right?
Well, actually no. I decided not to sell my practice. Why? Because I realized that wasn’t the smart thing to do. When I looked at the figures, the practice was worth two million dollars. I live in Florida. In today’s market, with inflation and the rise of home prices, I could spend that on a house and it would be gone pretty quickly.
So I started to look for another option. What if I could turn my practice into a passive income source, just like real estate, allowing me to take profits out of the business quarterly, just like other high-level entrepreneurs? Could my practice be run by a dental office manager and integrator who performs like a COO? Could I continue to serve the community and patients hard, without my having to be there, and generate a passive stream of ongoing income? The answer was yes, and that became my reality.
How to get there
While turning my practice into a passive income source and leading others toward the same result, I learned that you must focus on a few key areas to be successful: developing the right people, creating processes followed by all, and having tools to create built-in accountability. One of the most important hires in this process was my office manager and integrator who could operate as COO and lead the team to carry out my vision when I wasn’t there.
I also hired multiple exceptional providers to take on my patient load and offer new services—such as clear aligners, sleep appliances, and laser dentistry. In short, I hired great people, invested in tools and training to help them excel, and gave them opportunities for huge earning potential.
Three reasons to keep running your practice on the side
Did we have to invest in our knowledge to complete this transition? Yes. Was it worth the work? Absolutely. For my transition, I started by cutting down my time working by one less day per week each year without earning less money. Today, my business runs smoothly all on its own. I don’t micromanage my team because they’re all rock stars and getting the best training in scheduling, insurance, leadership, case acceptance, and even marketing.
Best of all, after 20-plus years of clinical dentistry, in addition to passive income, I can also pursue a second passion in dentistry: teaching, speaking, and coaching other dentist entrepreneurs how to expedite building their multimillion dollar businesses so they, too, can generate more passive income.
Here are three reasons to keep your practice instead of selling:
Continue to make an impact. As dentists, we have the privilege of making a difference in people’s lives. We improve their health and well-being and even save lives. When you sell your practice to retire or pursue other passions, you lose that connection to your patients and positive impact on your team and community. Many retired dentists end up regretting selling because they miss that connection.
Build more wealth longer. After more than 20 years of practicing dentistry, I seriously considered selling. I easily could have made two million—a pretty decent nest egg for many people. However, I realized I could make more by keeping my practice and that two million wouldn’t last very long given the state of our economy and inflation.
In this model, I’m able to take profits out of the business to replace my salary and quarterly dividends and still keep my practice. Would you rather have two million from a lump-sum sale or ongoing profitability of $500,000 or more per year, with unlimited growth potential? Seems like a pretty obvious choice to me.
Multiply wealth through funding tax-free investments. Having a strong base level of passive income allows you to think big picture and invest in tax-free opportunities, further compounding your income and setting you up to build generational wealth. For example, you could invest in insurance policies with cash value components that can grow tax free forever (and from which you can borrow to invest in other opportunities). You could invest in multifamily real estate deals, which have an extremely high return on investment and provide additional passive income and massive tax benefits.
The opportunities are endless. In other words, your passive income can generate more wealth and even more passive income, funding an even bigger wealth-building strategy that will impact you, your children, your grandchildren, and generations to come.
If you’re willing to put in the work up front, you can develop a practice that not only serves your patients and community, but also creates an opportunity for significant wealth. By maintaining practice ownership during retirement in a way that generates passive income, you can continue to benefit from all the years of hard work you already put into building your business while pursuing your next adventure, achieving a different career goal, or maybe even just enjoying greater freedom to take all those vacations you skipped while building your practice.
Editor's note: This article appeared in the September 2022 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.