Transition Consultants Blog
TRANSITION CONSULTANTS
SHOULD I SELL NOW OR WAIT!!
As a Transition Specialist the past 30 years I frequently have addressed the question of when a dentist should sell his or her dental practice: in advance of retirement or at retirement? A large part of the answer results from comparing the financial impact of each.
As an Economics Major in college we studied the principle of Opportunity Cost which is important to understand in this context. It’s not a difficult concept, stating that “ Opportunity Cost” refers to “a benefit that a person could have received, but gave up, to take another course of action”. Specifically in this situation, what does a dentist give up financially when choosing to sell at retirement rather than prior to retirement?
Determining Opportunity Costs requires a comparison. Assume a Dental Practice has a current value of $500,000. For simplicity we are not factoring in taxes or the time value of money.
A dental practice for a dentist around the age 55-60 will probably not increase in value, and in fact more likely will decline. Once a dentist reaches that age range his/her personal goals can change. The kids are gone, there’s no longer the need to prioritize a house and cars, college, etc. In fact “downsizing” is a popular concept.
The doctor also begins to value personal time more. Travel, golf, cruising, hobbies, etc. begin to take up time. The doctor may decide that now is the time to enjoy some vacation time. He/she may even reduce the number of days in the practice. This can not only reduce time at the practice but can reduce the focus of maximizing cash flow.
The doctor may also begin to refer out certain procedures such as endo, oral surgery, etc.
At some point new patients may begin to decline as patients prefer choosing a doctor that’s not going to retire soon and require them to find a new doctor. They frequently look for a dentist their own age.
None of these are “absolute” and the timing certainly varies, but we personally have seen sudden and precipitous drops in collections for older doctors. The doctor never expects it and it seems to “come out of the blue” but it is normal and expected. Fortunately we can plan ahead and avoid the consequences.
Since a primary determinate in the practice value is collections, the same principle applies to the value: a period of growth, stability and then decline. So the doctor should sell before the decline sets in.
As important as the inevitable decline is the aforementioned opportunity cost, losing the investment value of the sales proceeds of the practice.
One respected financial planning firm currently targets a return of up to 8% over the next 5 years. Using 8% for a 10 year period suggests an approximate value of $1,110,000. In other words the cash received at closing would essentially double in value during the ten year period.
So a dentist can double his retirement fund by selling his or her practice 10 years before retirement. That is a significant impact on the quality of the doctor’s retirement.
Note that during this time the seller is working as an associate in her own practice. This income can be equal to the income the seller would earn by maintaining ownership.
In addition there is the very real danger of illness or death of the doctor which can devalue a practice to almost zero.
To apply this broad analysis to an individual dentist requires an understanding of the personal needs of the seller, their goals and aspirations, the specific issues of the practice, the current market conditions in practice
sales, and the financial implications of the various options.
Please call. We have the experience, intellectual capacity, and personal
concern for your well-being to evaluate and guide you through these important issues.
Transition Consultants
James M. Robertson, MBA
713.822.5705
BuyDentalPractice.com
Stanford University, B.A. with Honors
Rice University, MBA Finance and Entrepreneurship
Is a dentist better off selling the practice sooner or waiting for a period of time? Many doctors think they should hold on to the practice until the last minute. Or at least they feel no sense of urgency to turn their investment in their illiquid practice into one that earns a much higher return.
I reviewed a local, highly respected mutual fund performance review and found that the past 3 years their fund with the lowest return had an annual return of 6.38%, and their fund with the highest return had a return of 28.99%. The 5 year annual return was 25.72% and 10 year was 24.34%
Using the annual returns, the $300,000.00 invested with them after 3 years would have a value between $361,161 and $643,857.
In contrast, I am confident that during the past 3 years the value of the unsold, illiquid practice of a doctor of a practice established for many years declined in vale, remained the same, or at best increased marginally. It is not unusual to see a precipitous decline in value, not to mention the high risk of disability or death.
Thus a doctor who sold his or her practice for $300,000 and invested the proceeds in a retirement fund would be ahead after 3 years from $61,161 at the 6.38% to $343,857 at the 28.99% rate. These funds do not include any money earned while working at the practice should the doctor desire to do so.
The thrust of this discussion is not to recommend investment in a mutual fund, bonds, cds, or any other investment. The point is to highlight the opportunity cost associated with the decision to wait to sell a practice. Discuss with your financial planner your investment options and their return should you sell your practice. Regardless of the rate, it will be greater than the return of your practice investment.
That is, maintaining an investment in a static or declining asset (the practice) can be expensive.
The wise dentist gathers information and facts, weighs the options, and makes an informed, intelligent decision rather than simply maintain the status quo.
So take time to educate yourself on what options are available to you. You can continue to practice as long as you desire and at the same time use the value of your Practice to achieve your retirement fund goals.
At Transition Consultants, we specialize in helping the doctor unlock the value of the Practice at it’s maximum potential and contribute to a secure and dignified retirement. Please call for a free consultation about the numerous options available to you.
James M. Robertson
713-822-5705
