This article originally appeared in the Principles of Practice Management e-newsletter. Subscribe to this informative twice monthly practice management ENL here.
MY STORY ABOUT EXIT PLANNING STARTED ON A SATURDAY MORNNG IN OCTOBER, ABOUT 14 YEARS AGO. I was in my early 30s, with a family, a mortgage, and a young, growing CPA firm. That morning, I learned that one of my college friends had suffered a heart attack and did not make it. The news was very sad, especially since we had attended her wedding reception less than a year earlier. A few days later, I started feeling chest pains and, since the loss of my friend was still fresh on my mind, I immediately made an appointment with my doctor., who saw me the same day and did the necessary tests and referred me to a cardiologist.
During the following days, I was out of the office a few times to conduct medical exams and tests. Luckily after seeing the specialist, the symptoms turned out to be heartburn and nothing serious. I recall during that ordeal, one of my employees came to my office and asked, “If something happens to you, what happens to us?” That question shaped my view on exit planning, and I learned that it’s never too early to have your succession plan complete.
Step 1: Identify and quantify exit objectives
In this first step of your exit plan, you need to assemble your dream team. You will need a dental attorney, a dental CPA, practice broker, investment advisor, insurance advisor, and your practice consultant. This dream team will help you quantify your retirement needs and identify your current resources. They will need to perform a gap analysis, which will determine the amount of growth you’ll need in your retirement funds and practice valuation to meet your retirement objectives.
At the end of phase one, you should have clear priorities, goals, and benchmarks; set an exit date; determine the current value of your practice; and determine whether your retirement goals are achievable. In addition, this step will allow you to discuss with your CPA the tax consequences of selling your practice, and tax minimization methods. Ideally, you need to start this process at least two to five years before your planned exit date.
Step 2: Maximize and protect value
In my many years of practice as a dental CPA, I’ve seen dentists interested in growing their practices, but rarely do they take adequate steps to protect their assets and practices. In this step, dentists need to focus on preserving and growing the value of their practices and assets. This is done by setting up non-compete agreements with associates and key employees, identifying value drivers, finding tax planning opportunities to maximize cash flow and minimize taxes, developing a practice and personal asset protection plan, and conducting an insurance review.
To maximize the value of the practice and optimize exit options, a dentist needs to focus on increasing cash flow and growing the practice. This can be done by growing the patient base, optimizing treatment plan acceptance, and improving the overall patient experience. One of the simplest things that a dentist can do that can add value to his or her practice is to periodically update the fee schedule and negotiate those fees with insurance companies. Staying on top of the fee schedule (through products such as Sikka Software’s free Practice Mobilizer) and contracted fees can add 5% to 10% on average to revenues. In addition to improving cash flow, practice owners need to work on their office culture and motivate key employees to stay through the transition.
Step 3: Consider transfers to outsiders versus insiders
In this step, practitioners need to determine whether they want to have an outright sale of their practice as opposed to bringing on an associate and transitioning the practice to that person over a period of time. Both options have advantages and disadvantages, so let’s take a look at each option.
With an outright sale, the transaction results in immediate cash from the proceeds of the sale to the seller. It is ideal for someone looking for a quick exit with less financial risk. If you decide to go that route, make sure you avoid falling into these pitfalls:
• Going into retirement mode before closing escrow on your practice sale;
• Doing it alone without an experienced team;
• Running off with the first bidder;
• Risking information leaks;
• Hiding or not disclosing negative news to your broker or buyer; or
• Marketing the practice without preparation
The alternative to an outright transfer is to transfer the practice to an insider, such as an associate who buys in over three to five years. This option works well for sellers who have a longer time horizon and want to grow the practice during that period. Offering a buy-in option is a great way to motivate and retain your key associates who are able to go through with the buy-in. Being diligent in planning for the transition will reduce risk and maximize the success or the transition.
To make this type of transition work best, it’s important to document the understanding between the seller and associate regarding the terms of their transitions. The parties need to have a clear understanding from the beginning about when the transition will take place, how the practice will be valued, how much everyone will be compensated, how to define performance standards, and how to exit the deal if it does not work out.
Step 4: Practice contingency planning
While steps one through three deal with exit planning on your own terms, steps four and five deal with setting up a contingency plan if one dies or becomes incapacitated. Step four deals with setting up a contingency plan for the practice upon premature death or incapacity of the practice owner. The plan is needed to ensure practice continuation until it’s sold. Having a plan will result in the family receiving maximum value in cash for the practice owner’s interest, preserve the jobs of the employees, and continue the care of the practice’s patients. A buy-sell agreement is an example, in addition to using life and disability insurance products to fund a buy-sell agreement or pay for an associate to keep the practice going until it’s sold.
Step 5: Develop a personal contingency plan
In this final step, you will work with your dream team on your personal estate plan. This step will cover not only taking care of your heirs if something happens to you, but it should also cover taking care of yourself in the event you become disabled or incapacitated. Your attorney will need to draft or review your estate planning documents, advanced health-care directives, power of attorney, and other estate planning documents. In addition, if there is a shortage of assets in your estate to take care of you and your loved ones if something should happen, then insurance solutions might be necessary to help you fund those needs.
Having a plan to reach your exit goals will clarify your objectives and help you reach them. As we start a new year, your exit plan should be a top priority, because it’s never too early to have an exit plan.
Bassim Michael, CPA, CVA, MS, is the founder and president of Onlyfordentists.com, a division of Michael & Company CPA. Michael and his team are dedicated to helping dentists understand their financial information, improve their profitability, and lower their taxes. For more than 20 years, Michael has worked with hundreds of dentists throughout the US to help them become better managers and leaders. He’s a frequent speaker on practice management, tax planning, and exit planning. You can listen to a free webinar with Michael that discusses the most recent tax changes and how they impact dental practices. Visit SikkaWebinars.