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
