02 Jun When is the right time to sell?
For most dentists, the sale of their practice is something they think will happen far off into the future when they are ready to quit and have plenty of money to retire. Most don’t spend any time thinking about, much less pre-planning, a practice sale. They just don’t worry much about selling until something unforeseen happens that forces a doctor to consider a practice sale.
Strictly from a financial perspective, the best time to sell a practice is obviously when the practice is at its peak market value. From the “Professional Career Life Cycle” below, you can see that a practice goes through 3 stages. The GROWTH stage lasts until the doctor/owner reaches what we call his or her “Solo Economic Threshold” (typically 10 to 12 years. The Solo Economic Threshold is the point where a dentist reaches the limit he or she can personally produce (also called “Solo Economic Dependency”). This could be caused because the doctor truly is doing all he or she can physically do or it could be that the doctor is simply not wanting to expend any more energy than he or she is already. Whatever the case, once the doctor reaches this production threshold, the practice is no longer in a growth mode.
A practice then transitions from the Growth stage into the practice’s MATURITY stage. Other than slight annual increases in practice production due primarily to annual fee increases, the Maturity stage signifies that the practice production has peaked. For all practical purposes, a dental practice is about as large as it will ever be at this point unless the dentist considers one of the various growth transition options available to the dental profession (practice merger, associate leading to co-ownership, etc.).
So, a practice owner will achieve the highest equity return if the practice is sold at some point in the MATURITY stage. But, unfortunately, most practices are not sold until they are well down the timeline into the DECLINE stage and at a point that is far, far below the practice’s peak market value.
Why do most dental practices sell below their peak market value?
Well, not to
overstate the obvious, but most dentists wait too long simply miss out on the opportunity to sell at the most opportune time.
Why do most dentists wait too long before they sell?
Two primary reasons: Dentists frequently don’t recognize they are in a decline until they are well into the decline; and, most dentists don’t fully understand the valuable transition options they have available to them as practice owners.
Most practitioners don’t understand that they don’t have to own a practice to continue to practice dentistry. A few dentists discover early in the MATURITY stage that they can sell their practice at its peak value, thereby converting the practice equity into useable cash, and continue to practice as an associate for the purchaser for as long as they wish. The financial advantage of having the cash from your practice equity 20 years before retirement instead of at retirement is staggering.
For example, let’s say a 45-year-old doctor owns a practice worth $600,000. This doctor is busy enough and cozy in the proverbial “comfort zone.” By his own admission, it is unlikely that he will put forth the effort to take the practice to a significantly higher level. This is further confirmed as he has been at or around this $600K value level for several years now. If our 45-year-old converted his practice equity into cash today and invested the after-tax portion ($480,000) for the next 20 years at only 6% interest, he would accumulate approximately $1,600,000 by age 65. Consequently, to net the exact same amount by selling the practice at retirement (unrealistically assuming that ordinary income tax rates and long-term capital gains rates do not increase any over the next 20 years), he would have to sell the practice for $2,000,000 (paying taxes of $400,000 to net the same $1,600,000) at age 65. That means that his practice would probably have to have a gross collected production of around 3 million dollars a year by age 65. Are you kidding me? That is not even feasible enough to be classified as a fairy tale!.
So with so much money at stake, why don’t more dentists sell early in the MATURITY stage?
Frankly, more than you might think do sell early. But the rest don’t simply because they don’t understand they can sell and still maintain their current annual income to live. The PARAGON PreSale program was developed just for this purpose. In the PreSale, a dentist sells his practice and remains with the practice as an associate for the purchaser for as long as he desires. And, it is not unusual for the selling dentist to increase his or her production income after selling. PARAGON has several clients who sold their practices more than 15 years ago and are still practicing dentistry with the purchaser. Virtually every one of these doctors is now working less time and making more money from their production than they did before they sold (ask your PARAGON consultant to explain how this occurs).
Are there risks to waiting to sell once the practice has reached its peak value even though the practice may hold this peak value for 10 to 15 years?
Yes, aside from the loss of retirement income accumulation as explained above, there are several other factors to consider. First is the substantial cost of waiting. If our 45-year-old dentist waits one more year to sell it would cost him over $100,000 at age 65 ($480,000 invested at 6% for 19 years equals $1,496,592). $100,000 is about 17% of his current practice value just for procrastinating one year. That means our 45-year-old dentist would have to increase his practice’s gross income by 17% over the next 12 months just to break even. Can you realistically increase the gross income of your dental practice by 17% in just 12 short months? Second, anything that happens to a dentist health wise after reaching the MATURITY stage can only lower the value of the practice. A disability or an extended illness will just make the practice less productive and thus less valuable. And third, death of the dentist would devastate the market value by reducing it as much as 50% within 45 days of the death of the doctor.
With all of this logical advice and guidance, why do so many dentists neglect to sell when they should?
We honestly wish we had an answer for this question. Once a practice reaches its peak value it makes no financial sense not to sell. You can maintain a substantial current income for as long as you desire. You can work when you want to work and only see the patients you want to see. You can pick and choose the procedures you enjoy doing. You can accumulate significantly greater sums of money by retirement age by selling early. You can be in a position to retire at a much earlier age than those dentists who don’t sell early. There appears to be every reason to sell and far as we can see no logical reason in waiting to sell!
PARAGON has always contended that there is only one reason to own a dental practice. That is to build the practice to its peak value as quickly as possible to be able to sell the practice as quickly as possible. Selling at peak value is the best route to retirement and makes the last 10 to 20 years of a dental career much more enjoyable, much more rewarding and far less stressful.
