This is the second of a two-part series focused on preparing a dental practice for sale.
From beginning to end, good planning and thorough preparation will lead the way to a successful sale and smooth transition. We know from talking to other dentists preparing to sell, they want to protect the integrity of their practices, provide quality care for patients, and manage their businesses to obtain the most interest and highest value from buyers. This is possible by assessing systems in the practice, ideally years in advance.
A practice wouldn’t thrive without a solid patient base and excellent staff to deliver quality service. But so often, practice management software is greatly under-utilized to track practice efficiency. For example, buyers want to know the active patient count. According to Dale Tucci, of TMFD Financial, active patient count for an urban practice is generally the number of patients who received treatment within the last 12 months. For a rural practice, an 18 month timeframe is the more common. Dale Tucci’s team of consultants are expert at the most common dental software platforms, and can train staff to use the programs effectively.
Once active patient count is accurately reported, it can have a positive impact on practice value. In fact, there are many types of management reports and dashboards available from the software; but like any database, the reports are only as good as the information entered. Since buyers
wish to review at least three years of production history, training staff and managing the software effectively needs to take place well before a sale.
The largest expense for an established practice is staff costs. And for good reason—staff deliver quality care to patients. But another often overlooked element is the use of staff contracts. Well drafted contracts provide financial certainty to the buyer and can greatly enhance the practice value. For example, a contract can define the amount of termination pay if things don’t work out with a staff member after transition. In the absence of a contract, employees could be awarded as much as two years compensation depending upon job duties, tenure and age. To mitigate further risk for the buyer, the sale agreement often contains provisions for sharing termination pay for a short duration (such as 3 or 6 months) after the sale. These steps are helpful, but practice value erodes to some degree simply due to the lack of well drafted contracts. Staff contracts
should be introduced many years prior to sale with the guidance of an employment or commercial lawyer.
As mentioned previously, a practice valuation should take place a few years prior to sale. But as the transition draws near, you will need to decide whether to retain a broker or sell privately. Conceivably, brokers can secure the highest price since they advertise in the open market. Brokers also ensure that intentions remain private, helping to protect practice value from competing dentists in the area or early departure of patients and staff. On the other hand, many dentists prefer to sell privately on the basis they save the brokerage fees and keep more net proceeds. This might not be the case if the practice isn’t placed on the open market for the highest bidder. In addition, there are the hidden costs. It takes a lot of effort to manage the sale process by oneself, which steals time and production hours from the practice. Under unique circumstances, a private sale might be a good solution, but for most situations, a broker arrangement can be just as rewarding.
The sale of a practice can provide the foundation for a solid retirement nest egg, but the proceeds alone are rarely enough to meet one’s needs. Like other elements of preparing for sale, retirement planning requires ample time in advance to ensure you achieve your financial goals. Retirement can extend 30 years or more, which requires a substantial amount of savings.
When planning retirement for our clients, we determine how much income is needed to maintain the same lifestyle. In reality, spending patterns rarely change once a dentist hangs-up their lab coat for the last time. Property taxes, utilities, food, and transportation costs generally remain unchanged. In fact, with more time on one’s hands, discretionary spending for travel and recreation can increase. By far, spending patterns influence one’s retirement savings target far more than investment returns, taxes or inflation.
To give an example of how much retirement savings are required, we use a common benchmark called the 4% withdrawal rule. For example, $1 million in savings can generate $40,000 per year for 25 to 30 years. For a family spending $100,000 per year, then savings of $2.5 million is required to meet their needs. This rule-of-thumb is just a starting point for discussion; there are many factors that can influence the result. Again, caution is advised against relying primarily on the sale proceeds of a dental practice, which although substantial, may not be sufficient.
A financial planner can map-out the most tax-efficient sources of income to satisfy your spending patterns, now and in the future, to ensure your retirement years are financially secure.
Dentistry can be a very rewarding profession, not only for maintaining and improving the health care of patients, but financially as well. It takes prudent planning well in advance of a practice sale to capitalize on your years of effort.
CHRIS MOLLOY, B.A.Sc., CFP, is Senior VP, Advisory Services at TMFD Financial. Chris has over 20 years of experience at TMFD Financial as a Financial Advisor working in the Ontario area. Chris specializes in tax, estate and investment planning for dentists and dental specialists. For a complimentary initial consultation with our team, we can be reached at firstname.lastname@example.org or by toll-free at (844) 311-8633.