Exit Planning
Consider the following common scenarios:
Scenario #1: A doctor, having made assumptions regarding his/her post retirement financial needs, sells their practice. Within a few years after retirement they realize that they have grossly underestimated their post retirement financial requirements. They no longer own their practice, but must find a source of income to augment their insufficient retirement nest egg.
Scenario #2: A doctor decides that they are ready to retire in the near future. Retirement scenarios created by the doctor’s financial planner indicate that a gap exists between the doctor’s current net worth and the net worth required to meet their post retirement financial needs. The proceeds from the sale of the practice will be needed to bridge the financial gap. The doctor contacts a practice broker to order an appraisal for the practice. Unfortunately, the practice appraises at a value much lower than anticipated, and plans for retirement must be postponed.
Scenario #3: The doctor is on track to retire. Post retirement financial needs have been accurately defined. The practice has appraised at an amount that will bridge the financial gap and achieve the necessary net worth for retirement. Unfortunately, taxes on the sale proceeds were not adequately anticipated and a significant and unnecessary tax burden diminishes their nest egg to a point that jeopardizes the doctor’s retirement.
These scenarios are all unfortunate, and totally unnecessary. With proper preparation and guidance, each of the doctors could have avoided these devastating consequences. Just like in dentistry, accurate diagnosis followed by treatment planning and implementation of the prescribed treatment will create the most predictable results…..but this isn’t dentistry, and few of us are capable of diagnosing, planning, and implementing our financial future.
Fortunately, we are beginning to see the emergence of “Exit Planners” in the dental brokerage community. These are brokers who are trained to coordinate the multidisciplinary process of exit planning. Exit planning is a common and highly regarded practice in the business world that only recently has begun to take hold in dentistry.
“Exit planning” is different from financial planning alone because it significantly increases the predictability of achieving a predetermined financial goal by utilizing the services of a highly trained team of dental specific specialists. The financial planner will determine if a gap exists between the practitioner’s current financial status and where they must to be financially to retire. A practice broker trained in exit planning coordinates the team and will help decrease the financial gap by implementing dental specific practice management principles designed to increase practice revenue while reducing overhead. These measures will maximize the practice’s appraised value and sale price. Finally, a dental specific tax attorney creates the legal framework for maximum tax savings on the practice sale.
Since practice appraisals are created, to a large extent, from the practices most recent (three years) profit and loss statements, it would be very beneficial if these statements reflected the implemented proposals and resulting positive changes in practice revenue and overhead that exit planning provides. Therefore, it is extremely important to begin the exit planning phase as early in the transition process as possible. At a minimum, a five year time frame is recommended. This will allow adequate time for the creation of the exit plan, implementation of the suggestions, three years of improved profit and loss statements, and a twenty four month time frame for marketing and selling the practice.
With regard to dental specialists, a specialty dental practice broker trained in exit planning can be an invaluable resource. They understand what creates value in specialty dental practices, and they are able to implement measures designed to increase practice value based on specialty specific benchmarks and management principles that are unique to specialty practices.
Remember that at the end of the day, a well developed exit plan, with adequate time for implementation is the best tool for insuring that we are able to exit our practices with peace of mind.