By Patrick Houlihan, DDS, with Susan M. Buesching
Making a decision to change an integral part of your life is often fraught with a myriad of feelings — some good, some not so good. The mere anticipation of change can bring with it emotions ranging from anxiety to indecision to exhilaration.When a dentist concludes that the time has come to retire and sell the practice, there’s no question that this decision will be one of the most difficult and stressful decisions of his or her life. That’s understandable, and perfectly normal. But the key to getting through to the other side successfully is to properly evaluate what you want for your future. As Socrates once said, “The secret of change is to focus all of your energy, not on fighting the old, but on building the new.”With the sudden distortions to clinical operations brought about by the COVID-19 pandemic, many dentists are looking to make this transition sooner than previously anticipated. Economic considerations and the new procedures and policies related to clinical practice are influencing dentists to expedite their retirement or, at minimum, making them examine their professional future more closely. But it’s critical that dentists who are considering change not let the weight of the current conditions speed them past the usual crucial considerations and responsive steps toward moving into retirement.
Under normal conditions, without the forbidding fallout of the current pandemic, most dentists don’t have a sudden epiphany and decide to retire from practice. The feeling that it may be time to leave practice most often is the product of a few years of subtle signs that take place. These signs eventually crescendo into an undeniable sense that “the time is right” to think about retiring. I chose the term “the time is right” deliberately because those exact words have been repeated to me many times over the years. This all may seem a bit unscientific and runs contrary to all that we’ve been taught in our science-based dental education. However, empirical knowing is only one base of understanding. We all have an internal compass that guides us towards decision-making, and it’s that personal “knowing” that often leads to change.
The important decision of when and how to leave dental practice should really be the product of substantial reflection and discussion with family and advisers. Once the urge to leave practice becomes an insistent need instead of an occasional pang, it’s often too late to have the flexibility to leave practice the way you desire. The options for your departure become limited if you haven’t planned ahead.
Most of the specific suggestions in this article are for dentists who own their practice, but the overall concepts about planning are just as relevant for dentists who aren’t owners. One additional point to be made is that throughout this article I use the word “retirement.” This word doesn’t necessarily mean that you leave the practice of dentistry entirely. Today, retirement from practice can take many forms. Regardless of the individual choices, a successful outcome depends on prudent foresight. And the first step starts with making the right decisions.
Major decisions to consider
There are four major decisions you should consider in order to launch your retirement from practice ownership. How soon you start this process and how well you plan will determine whether you leave practice on your own terms or are forced to settle for less desirable options. These decisions are as follows:
1. Deciding when the time is right for you to retire.
2. Deciding on your ideal exit from your practice.
3. Deciding on what options are available to leave practice.
4. Deciding on how best to prepare your practice for sale.
All four of these steps are important and necessary, but the process for all of them is initiated by the decision to change. Retirement in 2020 can be quite different than the retirement of even 25 years ago. Due to increased lifespan, lifestyle choices, and changes in the cultural views of aging, retirement today is a personalized process with unlimited options.
According to the ADA Health Policy Institute, the average retirement age of dentists in the United States as of 2017 was 69 years. This number has increased from 65 years since the recession of 2008. No doubt, the 2008 economic downturn factored into many dentists delaying retirement. It’s too soon to say how the pandemic will influence work exodus plans, but early indications are that many dentists who were close to retiring are moving forward.
Selling options today include selling outright, selling and continuing to practice in your own practice on a part-time or even full-time basis, or working at another practice in some capacity. Some colleagues are opting to do locum tenens work (part-time independent assignments), and some are continuing to practice within charity organizations or even mentoring new graduates in community based dental offices. I know of one dentist who only accepts assignments of four weeks or longer, and then only if the assignment are in the upper part of Michigan, in the summertime!
The range of options are varied and can be easily customized. If your preference is to continue on with clinical practice in some form, that certainly can be achieved. If you prefer to continue on working at your own practice after selling, then designate that as a part of a sales agreement. You’re not closing the door to clinical practice for good if you sell, unless that’s your choice.
For most dentists, the decision on when to sell is based significantly on their financial portfolio. Most see this as the tipping point in their momentum to move forward. Therefore, an accurate analysis of your current and future financial health and needs is imperative to ensure success in the next phase of your life. The following are a few things I will share with you based upon my experience in practice transitions.
First, crunch the numbers. Have a clear view of your assets and your liabilities. Know how much personal and professional debt you’re carrying, and do your best to eliminate or reduce as much debt as possible before you sell your practice. This debt includes credit cards, auto loans, mortgages, student loans, and any outstanding debts on your practice.
Second, know the extent of your assets, including IRAs, 401(k)s, savings, and the amount you can expect to receive from the sale of your practice. Determine how much you’ll be able to draw from your cumulative investments each year. Many financial advisers use the 4% rule. This basic calculation suggests that you can expect to take 4% of your invested assets each year without depleting the principle.
Next, it’s important to understand the rules and limitations of Social Security benefits and to decide when the best time to begin receiving those benefits will be. Full retirement age (FRA) is dependent on your birth year. Many can expect to reach FRA age by 66 or 67 years. Be aware of what the additional earning limitations are for collecting before reaching your FRA.
Finally, health insurance and long-term care insurance are critical to maintaining health in retirement without consuming all of your savings. Many financial advisers advocate for $100,000 to $200,000 in a savings fund earmarked for health care expenses. This may seem like an exorbitant amount, but one critical health crisis can quickly deplete personal savings. Medicare is “free” but it doesn’t cover everything. Research any co-insurance alternatives as well as long-term care insurance. If you’ve ever had a loved one in assisted living, you know that the fees are often in excess of $5,000 a month. No one wants to think that it will happen to them. But the truth is that, statistically, the majority of older individuals do not die a sudden death. Most Americans over the age of 65 die from chronic diseases, with heart disease being the No. 1 cause. The bottom line is that medical costs increase with age, and out-of-pocket expenses are high.
In the end, the amount of money you need in retirement is entirely up to you. Financial professionals are often cautious and may advocate for you to continue working to meet designated goals. We hope that we’re all are blessed with long, healthy lives — but the years of our life aren’t guaranteed. And although money is certainly important, your mental health and quality of life are equally important. Decide what your lifestyle will look like after retirement. If you plan to sell your house and live in a cottage in northern Michigan, you may need less income than the dentist who wants to keep two homes and travel the world.
Ideally, start living now off of the amount of retirement income you have anticipated for the future. A “retirement trial” will offer you the chance to live on the budget you have determined and help you to identify potential problems before you actually retire. And here’s a strong note of caution: If you are living with a spouse or partner, make sure that you’re both on the same page. You may be happy to eat at McDonald’s twice a week and shop at Kohl’s, but your partner may have other, more expensive, ideas. Have a realistic discussion before you retire about how you will spend your money. It’s been noted many times that opposing attitudes toward money are the leading cause of divorce in the United States. At minimum, such disagreements lead to stressful relationships. If you come to a consensus before retirement with your partner you’ll add years to your life — literally.
Your ideal exit
The second decision that must be made before selling your practice is to determine what your ideal exit will look like. This is not the time to put restrictions or limits on your desires. Just ask yourself, “If there were no barriers or obstacles, what would walking away from practice look like?” Do you want to continue to earn a living once you sell your practice? Do you want to still practice dentistry clinically, or do you not want to work at all? Is volunteering or helping with grandchildren the future you envision, and what time-frame are you envisioning?
Make sure you have your ideal scenario designed at least in your mind before proceeding to decision number three — the options available to you. Ultimately, not all options may be available to you, but if you know your goal, your post-practice ownership life will be closer to your ideal situation than if you fail to plan and have to deal with whatever transpires. Think of this decision as similar to drawing a blueprint for building your dream house. You’re more likely to end up with a house that fits your goals than if you just started with a pile of wood and began to nail up random boards. You may need to alter your initial blueprint due to practical concerns, but once you know what prototype looks like, you can initiate the process to make that happen, or at least get as close as possible.
You’ll need to decide what circumstances or commitments you need to factor into your plans to retire. These can be both personal and business considerations. Personal contingencies can include such things as financial commitments to elderly family members, tuition bills for children still in college, or a partner or spouse who isn’t onboard with your plans to retire. Professionally, the location of your practice, its size, service mix, lease considerations, or building ownership can also have an effect on the options available to you as you prepare to sell your practice. This can be complex at times, and you may need help from a transition specialist to sort out your options, but the following brief example may help you understand the variations that can occur.
Let’s consider two different practices, each owned by a single dentist. Assume the first practice is a moderately sized practice working 3.5 days per week and netting a profit of 35% of collections. In this situation, it might be very difficult for a young purchasing dentist with significant school debt to afford to purchase this practice, pay his or her student loan debt and practice debt, and still have the selling dentist work three days per week after the sale. This practice buyer would need to do all of the dentistry in the practice to make it financially viable for him or her to purchase it. With this set of parameters, continuing on post-sale would not be an option for the seller.
The second practice is a very large practice with three dentists. The owner/dentist works two days per week and two associates each work four days per week. This selling dentist could expect to have the option to continue working after the sale, by rearranging the doctor lineup at the office. A buying dentist could come A buying dentist could come in and take over one, or possibly both of the associate’s patients and still be able to afford to keep the owner dentist as an associate after the sale.
The point to be understood is that you always have options in how you transition from practice, but the number and kinds of options are often limited by the parameters of your individual practice. If you can look at the scope of your practice logically and without emotional bias, you’ll be in a stronger position to outline a transition path and meet it with success.
Never too late to plan
A frequently asked question is, “When is the best time to start planning for retirement?” Ideally, five years before you want to leave practice is a good time to start, but it’s really never too early – or too late, for that matter. For those dentists expediting their plans to sell due to COVID-19, I would offer that even six months of planning can make a significant difference. One of my most undesirable tasks is having to tell dentists that their practice is not salable except at a substantially reduced price — or isn’t salable at all. Often, this can be traced to a lack of awareness on the part of the dentist. Frequently, as seen with many homeowners, dentists have a skewed view of what their practice is actually worth. The view of their practice is personal and may represent a lifetime of effort. Unfortunately, these perceptions of practice worth often do not translate to the marketplace.
The desirability and value of your practice are a product of what it is today and what its history has been for the last two to three years, not what it was five or 10 years ago. This can work for you or against you. If you assess every aspect of your practice and make necessary improvements where needed, you’ll be able to present it in its best light to potential buyers. It’s much like the tale of two houses on the same street. The one that has been maintained and newly painted is more desirable than the house with peeling paint, a leaking roof, and a yard full of weeds.
You want to present your life’s work, your practice, in its best light. Here are some things you can do in preparation of the day you will list your practice for sale.
Clean up your accounts receivable. I recently saw an accounts receivable aging report stating that the total receivables for that practice were more than $700,000. This seemed impossible to me, since the practice was only collecting $600,000 per year. On closer inspection, I learned that more than $650,000 of the total was more than 120 days old. This particular office had not written off any bad debt in many years. Unskilled bookkeeping made this practice appear like it was poorly run at best. A benchmark for accounts receivable would be to have AR be no higher than the dollar amount of the office’s average monthly production. If a practice is producing $40k per month, the AR should never be greater than $40k. In my experience, most dentists have no idea what their AR is and leave the monitoring of this important financial category to their front desk. This is never a good idea. Know your AR numbers and clean up old debt before listing your practice for sale.
Know your overhead costs. The average dental practice in this country sees profitability of between 35-40%. By profitability, I mean what the actual profit is, not what it says on your financial statements. Getting this number is a little bit of an art, but most of us understand the benefits of owning a practice. Some of these compensations don’t flow to us in the form of what we take from the practice as salary. There are other benefits we receive as practice owners. The total number is a major factor in determining the value of your practice. Not surprisingly, the higher the profit, the higher the value of the practice.
Determining norms for overhead is a very dynamic process, and the numbers I offer here are only meant as very rough estimates, but it will offer a window on where your practice stacks up against dental practices nationwide. The average overhead in a dental practice is between 57% and 63% of collections. The breakdown is as follows:
- Staff costs: 25-30%.
- Lab costs: 8-10%.
- Rent/mortgage payment: 5-6%.
- Dental supplies: 4-6%.
- Everything else:9-15%.
Very often, the practices I’m asked to help sell have overheads in the higher range. This is due to many factors and is usually correctable by the new practice owner, but it is important to know what your costs are and why they may differ from national norms.
Make sure all your “paperwork” is in order and readily accessible. Included in the required paperwork are signed copies of all of your contracts, whether they are with an associate dentist, landlord, supplier, or insurance company. All legal contracts must be disclosed for review to a buyer. If the paperwork you have is not signed, you do not have proof of an agreement. Something that was discussed and verbally agreed to will, more than likely, not hold up in court, and will be a very large red flag to any potential buyer.
If you employ an associate doctor, make sure you have an employment agreement or independent contractor agreement in place, with an enforceable covenant not to compete as a part of the agreement. An associate agreement without a covenant not to compete has blocked many dental practice sales over the years.
Make sure you have your office lease signed, and options to renew in place. Any potential buyer of your practice will need to have the option of staying in your space for the duration of their loan that they receive to purchase your practice. That usually means seven to 10 years. You don’t need a seven- to 10-year lease, but you do need to have options in your lease that would allow that buying dentist to stay.
Know the value of your building if you are planning on selling the building with the practice. Have an appraisal done by someone who is familiar with medical/dental real estate.
Know where the potential for growth in your practice is. If you have room to expand the physical size of the office, know how that could be done. Identify areas where a new owner could conceivably grow the revenues of your practice. For example, if you no longer do endodontics, a new owner could keep those referrals in-house and increase profitability fairly quickly. Maybe it’s orthodontics or some other procedures that your patients have a need for, but which you don’t currently provide. These potential revenue streams make your practice more attractive to a new owner.
Think like the buyer of your practice. Make your practice and office as attractive as possible. If selling the building, be flexible as to price and terms, and even consider the possibility of leasing to the buyer for a period of time before selling. Keep in mind the parameters of 5-6% of collections for rent. Get the building in working order. Leaks, broken office or clinical equipment, and electrical issues should be taken care of. Remember, a fresh coat of paint is an inexpensive way to make a significant improvement. Declutter your office — remove any outdated or unused items from the office, especially old equipment that’s just taking up space; this is always a negative. Seasonal decorations should be stored out of sight or taken home. Likewise, spruce up the outside of the building. An attractive entrance with some inexpensive landscaping or floral containers makes an office welcoming to patients and buyers alike. Also:
- Make sure that every inch of your office is clean.
- If you’re still using paper charts, make sure outdated charts are removed and stored. (An “active patient” is defined in different ways. If the patient has not been seen for more than two years, file the chart in storage.)
The extraordinary circumstances that continue to unfold in 2020 have caused many of us to re-evaluate how we spend our lives. The implications for dentists are numerous. Changes to clinical practice and the economic hardships from practice closures will continue to impact the future of this profession. Whether your decision to retire has resulted from the impact of the pandemic, or was planned prior to this event, evaluation and careful planning are essential to a successful transition.
Selling your practice does not need to be the end of your dental career, unless that is your choice. What is most important is that your post-practice-ownership life brings you the contentment and enjoyment that you deserve. Taking the time to plan for the day you leave practice and getting the proper advice when needed is the best way to ensure that success.
About the Authors
Patrick W. Houlihan, DDS, has been a dentist in private practice since 1983. He has been involved in dental consulting and practice transitions for more than 20 years. He is a guest lecturer at the University Of Detroit School Of Dentistry and at the University Of Michigan School Of Dentistry. Houlihan is also the deputy director of MDA-FIT, a mass casualty Go-Team for the state of Michigan, and a member of the Dental Forensic Unit of Homeland Securities for mass disasters within Michigan and the United States. He resides in Novi, Mich. He can be reached at [email protected].
Susan M. Buesching is a consultant with the Houlihan Group. She has a 20-year history in client-driven industries including the insurance industry and medical/dental fields. She holds a master’s degree in counseling and is a Board Certified Life Coach. She is a member of the Michigan Counseling Association and The International Association of Professional Life Coaches. She can be reached at [email protected].
