As we race along through life, there comes the realization one day that retirement is literally right around the corner and not some mirage far in the distance. If we have followed our game plan, assuming that we have one, and have stayed the course, then we are probably feeling pretty good at the thought of wonderful travels, days spent leisurely enjoying our hobbies, and time spent with family. Unfortunately, for many, these realizations will not come to pass because of improper planning or a failure to implement. As these unfortunate realizations creep into our lives, we begin to worry and try to figure out what we should do.
First and foremost, don’t panic! The worst thing we can do is to make rash decisions and try to quickly play catch-up. That rarely works and most times makes the situation worse. Let’s assume that we are ready to retire but find that we are short of our goal. What do we need to do?
Since retirement planning is complicated and multi-faceted (and I’m only given so many words for this article), I am going to focus on only one aspect of retirement and that is selling your practice. Selling your dental practice is not as easy as it seems. The first thing that we need to do is get an appropriate valuation of the practice. I would highly recommend using a practice broker for the transaction, as they can not only provide an accurate appraisal of value, but can also assist in the transaction as they have access to a pool of buyers and are familiar with the process. The price for this service can vary by location and managing costs is essential, so be sure these expenses are clear, acceptable to you, and written down.
Next, realize that the value of your practice is never as much as you think it should be. You will feel that the sweat equity you spent in building the practice up and your appraisal value provided do not correlate accurately. The initial response may be that your practice ought to be worth more than that. You are going to have to remember that the value of your practice is primarily based on the income stream that it produces. Secondarily factored in are the location of the practice, age of equipment, and prevalence of new technology. Also, dental practices are notoriously illiquid and sales usually take time.
Let’s talk about these sales issues a little. I get asked many times if a practice is worth more if it produces an amount annually—let’s say one million dollars ($1,000,000)—with private pay patients, as opposed to a practice that incorporates varied dental plans? Actually, $1,000,000 of revenue a year is the same, regardless of how it was acquired, and the practices would be the same value, all things being equal. The advantage for the private pay practice is that it might sell more quickly, and for many dentists that would be a positive. However, remember the primary factor is revenue.
As we get older, there is a tendency to avoid buying new equipment, or innovative new technology, as we don’t want to spend the money on something that can’t possibly be used long enough to give us a good return on our investment. The problem is that younger dentists desire that technology and understand that they will have to acquire it at their own cost when they buy the practice if it is not already available. Not only have I seen this kill deals, but it can, and will, drop the value of the practice. Keep up with technology! Not only will it make your life as a dentist better, but it makes the sale of the practice easier.
The first lesson in real estate is location, location, location. Urban and suburban practices tend to sell readily and at premium prices as that is where younger dentists want to be. Rural practices appeal to a much smaller percentage of buyers, and it is usually to those dentists that have grown up in that environment. So let’s say that we have a practice in northern Pennsylvania in a small community that has served you well over the past four decades, but now you want to sell it and retire and you can’t find anyone to buy it.
I would first recommend that you plan on working two more years, if your health will allow it. It is not the end of the world to work as a dentist for a little longer, and in that two years, you can more than recoup the money that the sale would have generated. You could practically give the practice away now, or sell it for half price, and would still come out good. That might be enough to entice a young dentist to come to the area. Remember that they are already burdened with a tremendous amount of debt and this could be huge for them, especially if the income stream is strong and reliable. If that doesn’t work, then cut back your hours to the point where you would be happy to show up to work, work as long as you can, and then quit. I have seen either of these techniques work very well for dentists in areas that are difficult to sell practices.
Working longer also provides more retirement income as we are producing income, not taking money out of our pension plan, allowing the pension plan to grow more, paying down any debts we have remaining, and allowing Social Security to pay us more, since we will be taking our social security at a later date. For every three years that you continue working, you will generally have fifty percent (50%) more income in retirement. That is substantial and should be considered if we are falling short of our overall retirement goal.
There is so much to retirement planning and selling your practice usually plays an important part, not only to help with finances, but also with the feeling you are continuing the care that your patients receive.
John W. Portwood, Jr., DDS, MS, MSF, CFP, CLU, ChFC, is a practicing family dentist, Certified Financial Planner, and frequent financial lecturer on financial matters that affect dentists.