Two, Four, Six, Eight! Maximize and Appreciate!
As the adage goes, “failing to plan can mean planning to fail.” As health care entrepreneurs, we are responsible for the creation of our own retirement pensions through a career of hard work, smart planning, and effective strategies. Planning for the day when we elect to hang up the handpiece starts many years in advance.
Getting Ready for the Next Phase:
Practice owners have a unique advantage amongst healthcare professionals, with the sale of a dental practice offering a major asset to the financial portfolio that other allied health professionals don’t all get. And as with the sale of any asset, maximizing the net result of that sale is imperative. How a practice is sold and when a practice is sold are key considerations to ensure the top price is paid to you, and the minimum tax is paid to Ottawa.
Often, a practice sale represents part of the retirement portfolio but not all of it. Creating financial wellness through a long-game approach certainly helps level some of the peaks and valleys in the market and facilitates your advisory team in creating a plan that matches your lifestyle as you consider retirement. The transition of exiting practice ownership and later exiting practicing dentistry should also be part of the plan. This article is the first in a three-part series that will review some of the major considerations that should be discussed with your advisory team that support comprehensive retirement planning.
TWO! There are typically two ways a dental practice is sold
Ask yourself these questions if you’re considering selling your practice: Why do you want to sell? And how do you plan on selling?
WHY: Perhaps selling your practice is motivated by a straightforward goal of retirement and, simply put, “its time.” Perhaps it is because you are looking for more support in the management of your practice in which case there may be a consideration of selling to a DSO or investor that can provide this support while you continue to practice. Regardless, the motivation to sell your practice often influences the strategy that will be engaged by your dental practice brokerage.
HOW: This is your financial strategic plan. The two most common ways a dental practice is sold is as a share sale or an asset sale. With the benefits of the lifetime capital gains exemption (LCGE) providing up to $913,960 (2022 numbers) in shareholder tax free gains upon sale for a dentistry professional corporation (DPC), most practices sell as a share sale. To qualify for the LCGE, the DPC must have been in operation and owned the practice for a minimum of 24 months for each qualifying shareholder. But there are instances where a share sale may not be the best decision. Practice owners that have maxed out their LCGE may elect to sell their practice as assets and not shares. In the valuation world, an asset purchase represents an opportunity for a buyer as the purchase is depreciable. This is not the case in a share purchase. Therefore, the cost of capital allowance and the depreciation of the acquisition over time creates an advantage to the buyer that should be reflected in the appraised value of the practice. Not all appraisers consider this, which can be harmful to the selling dentist. In the case where a practice owner owns more than one practice, there may be certain strategic considerations that suggest an asset sale is beneficial for one practice and share sale for another. The point here is that how you sell your practice is a consideration that requires a planned strategy, ideally years in advance of execution.
FOUR! There are four ways to maximize your practice’s value
Maximizing your practice’s value at the time of sale has obvious advantages. A practice running optimally not only increases the value, but also the demand. Demand reflects buyer interest, and buyer interest drives up price paid. Not all practices sell at their optimal state of operation, which makes sense since dentists nearing the sale of their practice often have elected to slow down and have reduced financial pressures compared to purchasers. But optimizing operations in preparation of sale has tremendous advantages for the vendor. Here are the top four ways to maximize a practice’s value:
Maximize Cash Flow:
It’s not what we make but what we keep that matters. One of the authors of this article is a dental practice appraiser who is often asked, “What’s my appraised value as a proportion of my top line revenue?” It’s an unanswerable question. Top line revenue doesn’t matter. A practice that grosses $1.5M and nets $600K has a very different affordability and value compared to a practice that grosses $1.5M and nets $400K. Sometimes the best way to increase value is in fact to increase top line revenues, but often there are opportunities to create efficiencies in operations that result in net revenue increases. Having a practice consultant review your operations and determine where efficiencies can be created and where opportunities lie can pay for itself in less than 3 months of operation in some cases. And with today’s tight margins in dentistry, inflation, and the volatile investment market, investing in yourself is often the best investment you can make. After all, who cares more about your hard-earned money than you do?
Nail Down the Office Lease:
Leases don’t always add value to a practice, but they can diminish it in a hurry. Many dentists have practice leases with relocation clauses, demolition clauses, transferability limitations, and terms that can impede a practice sale altogether. This is devastating for a vendor to find out at the time of their appraisal if they intend on selling their practice in the near future. Far too often dentists assume the terms of their lease are not an issue because they have “never had an issue with the landlord.” But lease clauses that exhibit any form of risk to a lender can prevent financing and cost six or seven figures if acted on.
Invest in Efficient Technology:
The investment in clinical technology and automation has created efficiencies in modern dentistry that many patients now depend on and also serves to address the reduced availability of staff. Automated email or text reminders and confirmations for patients reduce staff time for this task and create ease and simplicity for practice operations. Hygiene recare programs can support your primary practice management software to stay on top of overdue patients and fill your schedule..
The Right Team:
In a goodwill-based business, having the right people in the right roles remains the most predictable way to increase a practice’s value. Regardless of how automated our world becomes, nothing can substitute the trust and care that is created by a sincere human interaction.
In the next article we will review six critical themes that create a framework to maximize wealth and minimize risk.
About the Author
Philip Evenden is a Director with the Wealth Management practice at Farber. His focus is on advanced financial planning for the successful – active or retired –entrepreneur. email@example.com
Dr. Sean Robertson is a licensed dentist and founding partner of The Dental Broker Team, a full-service appraisal, sale and transitions firm for dentists. Reach him at firstname.lastname@example.org.