Transitioning practice ownership soon? Avoid 3 mistakes to enhance your financial future
Transitioning out of or into practice ownership is one of the most consequential life and career decisions a dentist can make. In the American Dental Association’s Survey on Retirement and Investment, general practitioners and specialists estimated that an average of 75% of their retirement income would come from savings accumulated over a career of practicing as a dentist plus the sale of the practice. Respondents estimated the remaining 25% of their retirement income would come from a combination of Social Security retirement benefits, inheritance, third-party pension benefits, and other sources (presumably income from part-time work).1
In short, it’s not outlandish to expect three-quarters of your future retirement income to rely on sage financial decisions made throughout your tenure as a practice owner. The single biggest financial decision you’ll encounter likely will occur at the time of transition. As a result, your family’s future lifestyle is linked to obtaining the best outcomes possible. If you are intentionally or unintentionally on the verge of being penny-wise and pound-foolish in your efforts to sell or buy a practice, recognize the danger in being overly careful about small amounts of money at the cost of being careless about larger, more important sums.
Over the 25 years I have spent working with dentists, on more than one occasion I have seen someone step over dollar bills to pick up nickels and dimes when embarking on a practice sale or purchase. To ensure the best possible odds of living their desired lifestyle in retirement, prospective buyers and sellers should avoid the following three common transition mistakes.
Transition mistake No. 1:
The transaction must have a winner and a loser
I have encountered both sellers and buyers who initially take hard positions over trivial matters to demonstrate to the other party that they are a formidable adversary. For business transactions to be successful for the long term, selling and buying stakeholders each must receive a fair deal. This is particularly important in dentistry, as the seller is leaving behind her or his name as a legacy for patients and the community while the buyer is purchasing an opportunity to sustain or enhance the seller’s legacy.
For example, a buyer may become willing to adjust terms of the transition contract because she understands the seller’s desire to save income taxes. A seller could agree to fill in for the new owner so he can take vacations with his young family, at least for the foreseeable future. These types of financial and nonfinancial accommodations encourage buyers and sellers to work toward a successful transition, helping to solidify the seller’s legacy and enhance the buyer’s chances for a successful future.
Transition mistake No. 2:
It’s better to DIY for free or acceptable to pay little for poor advice
Assembling the right kinds of qualified advisors to assist in transitioning a practice can save hundreds of thousands of dollars in the long run. Working with professionals with deep dental experience is vital. Both buyers and sellers will pay fees for this help, but with survey results showing 75% of future retirement income may rely on a financially successful practice, the cost can be quite worth it.
For the buyer, a dental-specific CPA can help avoid costly income tax mistakes and assist with setting up the bookkeeping system. The accountant also may offer support in implementing payroll and accounts payable systems.
For both sellers and buyers, a small business attorney can review the practice-sale documents to ensure compliance with all state, local, and federal laws. During this review, practice-sale documents shouldn’t be revised or rewritten without a compelling reason. Along with the accountant, an attorney will help select the appropriate type of entity (S corporation, C corporation, or sole proprietorship) to adopt in the transaction.
A properly credentialed fiduciary wealth advisor can assist the buyer in evaluating multiple lenders and determining how much cash the business will generate. The wealth advisor also can help the buyer negotiate a practice purchase loan and, after the purchase, maximize the practice’s value to achieve long-term goals, such as funding children’s education and retirement. Both the seller’s and the buyer’s wealth advisors should deliver all facets of financial planning, including the creation and support of a custom-designed retirement plan for the practice, which can help each party maximize savings while minimizing taxes.
Engaging a transition consultant may be necessary and beneficial (particularly for the seller), although not always. If either party in a transition is able to leverage their networks to identify a prospective buyer or seller, then the rest of the previously listed advisors should be capable of completing the transaction. Cultural mismatches among dentists and staff are frequently responsible for unsuccessful transitions, so a transition consultant’s input may be valuable during the matchmaking process.
Transition mistake No. 3:
Sellers sell too cheap and buyers pay too much
A seller’s objective may be motivated by financial, physical, or quality-of-life issues, all of which can lead to selling at below-market value. Without having a good transition consultant or a practice valuation by an objective professional, underlying issues can prompt the seller to accept an inferior offer. The amount of proceeds a seller retains net of taxes and fees is what matters more than the practice’s valuation; without expertise here, the seller could lose tens of thousands of dollars or even more in taxes. Another risk for sellers is not understanding the requirements, vis-à-vis level of production or duration, to obtain full cash liquidity from the buyer. The failure to hit thresholds or accepting privately held equity can dramatically reduce the cash expected, perhaps risking the selling dentist’s ability to maintain anticipated lifestyle spending levels.
The acquiring dentist is motivated to purchase an opportunity. It is vital to clearly understand the level of net cash flow a practice can generate before buying it. For example, a pediatric dentist recently purchased a practice that generates about $100,000 annually in orthodontic production. Our buyer, however, does not provide orthodontic services, so she lowered the net cash flow projections and subsequently reduced her offer for the practice. Without sound guidance, the buyer could have overpaid considerably.
While every individual and family has uniquely personal goals, no one strives to run out of money before running out of time. Proceeding through a transition without a comprehensive strategy supported by experienced professionals generates far greater financial risk than being out the fees you paid for wise advice. With your retirement dependent on sound financial decisions over the course of your career, now is not the time to be penny-wise and pound-foolish.
1. 2010 Survey on Retirement and Investment. The American Dental Association website. https://www.ada.org/~/media/ADA/Science%20and%20Research/Members/10_sri.pdf. Published August 2010. Accessed December 14, 2018.
Rob Ziliak, CFP, is chief experience officer at Buckingham Strategic Wealth, a comprehensive wealth management firm with a niche practice area that focuses on financial solutions for dentists and their families. Through a holistic, evidence-based approach to strategic planning, Buckingham helps dentists connect their finances with their values to realize their most important goals. Buckingham also offers ADA CERP–recognized continuing education courses for dentists. To learn more, please visit buckinghamadvisor.com or contact Buckingham at (888) 470-3064.