Ten steps you should take while “treading water”
by William L. Otten
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These are uncertain times — the stock market is gyrating wildly, real estate values are down, and prices for medical care, food, gasoline, and other things are up. But worst of all is the feeling of uncertainty haunting many of us. It's very hard to see how we're going to come out of this mess anytime soon.
As a result of the scary economy, many dentists are postponing their retirement, hoping to sell when their retirement plan values have recouped some of the losses and the future doesn't seem so uncertain. For those who can wait, this may be the prudent thing to do. But while you are waiting, here are 10 steps to increase the value of your practice and improve its marketability when you do decide to sell:
1 Have your practice appraised now. There are several reasons why this is a good idea. First, it will give you an idea of the practice's present value. The results should be shared with your spouse so that he or she will have an idea of the practice value if something should happen to you. I have worked with enough widows to know how difficult it is for them to deal with the sale of the practice while recovering from the loss of their spouse. Many times they're given unrealistic advice about its value, which can impede or derail a timely sale. Second, the appraiser should point out expense categories that are out of line with the expenses of comparable practices. This information will help you make changes that may increase the value of your practice or improve its “curb appeal.” Third, the appraiser should give you some idea of the time it will take to sell the practice. This will help you decide when the time is right to put your practice on the market.
2 Keep your fee schedule current. Many dentists, especially those near retirement, charge fees that are below the 40th percentile for their zip code. This hurts the value of the practice for purposes of a sale and makes it more difficult to merge the practice into another one if its fees are considerably higher. If you receive a fee analysis as part of your appraisal, use it to gradually raise your fees to the 60th to 70th percentile. This will help you with the next step.
3 Keep your practice receipts steady. This may not be easy, but keeping practice receipts growing or steady greatly helps the sales process. By gradually increasing fees, practice receipts will grow without increasing the number of patients you see. A practice that has decreasing revenues over the last three years can be difficult to sell because potential buyers aren't sure that the decline can be reversed. A buyer will value a practice on its “performance” over the last three years, not on its “potential” for future growth.
4 Get your overhead under control. Part of the appraisal process involves an analysis of practice expenses. If any of those categories exceed the guidelines for your type of practice, you should begin decreasing them to the normal range for your area. For example, I would expect a general dental practice to be spending 6% to 8% of practice receipts on dental supplies. But many practices I appraise spend 10% to 12%. By reducing this cost to 8%, you will put more money in your pocket now and you will increase the value of the practice when it's time to sell.
5 Join or organize a “coverage” group. If you already belong to a group that will cover your practice if you become disabled or die, take a look at the provisions to see if they need updating. If you don't have a group, talk to your dentist friends about setting one up. Don't rely on a verbal agreement — get it in writing to avoid misunderstandings. By having your practice covered during a serious sickness or after a sudden death, there will be a much better chance of selling it for its fair market value.
6 Fix up the office. If you haven't redecorated in the last 10 years, look into sprucing up the office. If you haven't computerized, this is the time to do so. It's much easier to sell a practice that's computerized than one that's still using the peg-board system. Depending on your time frame for retiring, you may want to consider upgrading to digital X-ray.
7 Keep track of your referrals. If you refer out ortho, endo, and surgery cases, keep a running total for each category. Many times a buyer will do some of these procedures, and it helps the sales process to be able to tell a potential buyer how many of each type you have referred out.
8 Review your lease. Does your lease provide for termination during the term of the lease if you become disabled or die? If not, try to get such a clause included before you renew it.
9 Review your retirement plan. Are you getting the largest “before tax” contribution available? Has the cost of covering your employees gotten out of hand? There are many different options now available and you should determine which plan would be best for this extension of your career. Depending on your age and the size and age of your staff, you might consider a Defined Benefit Pension Plan. In the right place, such a plan allows you to put aside truly amazing amounts of money. It's not for everyone, so make sure it's right for you.
10 Review your investment strategy. Have your investments been hammered in recent months? Is your portfolio diversified? Do you have too much in stock and mutual funds and not enough in guaranteed investments? The performance of your portfolio in these difficult times should tell you a lot about your investment choices. When times are good, we have a tendency to introduce more risk into our investments.
When the stock market turns bearish, we get hit harder than we would have if our portfolio had been better balanced. When the stock market improves, you should be ready with a plan that protects you from large fluctuations in value.
By working a few more years, you can increase your retirement fund and make it last longer since you will be delaying tapping into it for retirement income. By carefully considering each of these steps, you can make those extra years of work more profitable and add to or preserve the value of your practice when it's the right time for you to retire.
Bill Otten is president of William L. Otten & Associates, Inc., a St. Louis, Mo., firm that provides dental practice valuation and dental practice sales services, accounting, tax and related services to dentists and physicians. He may be reached at (636) 391-4844 or through his Web site at www.ottendentalsales.com.