If you are a doctor or dentist in private practice, you may be daydreaming about the day you retire from medical or dental practice, and spend your days on the golf course or the beach.
But, if you’re like most doctors or dentists, you’re so involved in your day-to-day practice that you hardly have time to sit down for a minute, much less take the time to think about retirement.
Still, unless you’re committed to working until the day you die (and I understand that mentality, I really do–that sounds like me!), you must start planning fairly far in advance of any conceivable retirement date in order to make it work. In other words, if you’re 50 and have been practicing medicine since you were 30, you may have built up a pretty valuable private practice. In fact, for many doctors and dentists, their private practice is a substantial portion of their net worth.
That means you can’t just decide to close the doors of your practice a year from now and hit the links or the beach–you’ve got too much tied up in your practice to just make a quick exit and not reap the benefits of converting your healthcare practice into cold hard dollars. In other words, you need to start planning today on how you are going to exit your practice without leaving the value of your practice on the table.
You need a business succession plan.
If you are a true solo practitioner, there’s no one in the office to buy your practice. So, that means you’re either going to have to go out in the market and find a prospective purchaser (another doctor or dentist practicing in your area, perhaps, or maybe a new provider fresh out of school and residency ready to start a practice in your area) or you’re going to need to find an associate to bring into your practice now and groom that person to be your eventual successor.
What you decide to do regarding your business succession plans is up to you–after all, you’re the boss! But, you should not wait until you’re ready to retire to start planning for the eventual need to find someone to take over your practice. If you’re less than a couple of years from your planned retirement date, then you’re already behind schedule to start working toward your business succession.
The best time to start planning on how your exit from practice is going to look is at least 5 years from your planned retirement date. You can begin talking with other providers in your area to see their level of interest in buying your practice or you can begin looking for an associate doctor or dentist to bring into your practice as an eventual successor to you.
Let’s say that you’ve decided to plan that your business succession be one that happens from the “inside” through the purchase of your practice by a doctor or dentist that you’ve brought into your practice. In many if not most cases, this makes the most sense for a number of reasons.
First, if you bring in another doctor or dentist into your practice, you will be able to see up close and personal how that person practices medicine or dentistry and whether you would like for that person to be the person to carry on your legacy after you retire.
Second, if you bring in a prospective successor and have that person practice with you in your office for several years before your retirement, then he or she will be fully familiar with your practice and will be able to hit the ground running as the owner of the practice when you retire.
Third, it’s more likely that you’ll get a higher sales price for your practice if you sell to an insider–after all, that person will get the benefit of having you essentially vouch for them as they work with you over the course of several years and your patients will be more comfortable with him or her and, thus, more likely to stay with the practice when you retire. In other words, the goodwill value of your practice will be higher and will be enhanced by having your eventual successor work with you over the course of time. If, on the other hand, you sold to an outsider, your patients would have less reason to stay with your practice, and so the outside purchaser might be unwilling to pay as high a price for the practice as would an insider.
Finally, would you rather have someone you just met through a healthcare practice broker make a promise to pay you a substantial amount of money over the course of several years on a promissory note or would you prefer instead to have that doctor or dentist you’ve gotten to know and trust over the course of years of practice together be the one paying the purchase price for the practice to you over time? In my mind, it makes more sense to have someone you’ve worked with and trust be the one paying the bill.
OK, so you’ve decided to get proactive on your eventual business succession and find an associate to bring into your practice. You’ve recruited some recent residents and found one that you like.
What’s the next step?
Well, the next step is to enter into a written contractual relationship with your new business associate that will set out the terms of the prospective practice succession plan coming down the road.
You could, for example, allow your new associate buy-in to the practice a little at a time over the course of several years. One possibility might be to provide for him or her to purchase half of the practice after he or she has been associated with your practice for two or three years. That would give you time to evaluate the appropriateness of the new business associate as a successor to you when you retire. And you could work with him or her for a two or three additional years before you make the final retirement effective and sell the remaining 50% of the practice to him or her.
Now, you might want to keep a majority interest in the practice (or at least the governance interest in the practice) until you decide to officially retire and sell your interest in the practice. So, instead of allowing your business associate to buy 50% of the practice, you might sell him or her 49%.
You will need to establish a purchase price or a methodology for establishing the purchase price at the time of the sale. It could be based on the fair market value of the hard assets and some agreed upon percentage of the accounts receivable, for example, plus some value assigned to the goodwill of the practice. One possibility is to obtain an appraisal of the practice or several appraisals and take the average of them. Whatever methodology you employ, you should be careful to make sure that you get a fair price for your practice interest–after all, you’ve worked hard for a long time to build your practice, and this is the first step towards retirement and practice succession for you.
You will also need to figure out how your business associate will pay you for the interest in the practice that he or she is buying. Typically, the purchase price is paid over time via a promissory note with a market interest rate. The interest in the practice is usually set forth as collateral for the obligation to pay the purchase price over time, but you may want additional collateral, such as a mortgage on the other doctor’s home.
Since the ultimate objective is to retire completely and sell all of your interest in the practice, you should provide that if the other doctor buys in for, say, a 49% interest in the practice after 2 or 3 years, he or she is obligated to purchase the remaining 51% when you decide to sell it. You don’t want a situation where you’ve sold off essentially half of your practice, but you don’t have a willing buyer for the other half interest.
There are obviously a lot of other provisions that you will want to include in any purchase agreement–perhaps a covenant not to compete on your part will be required, but if your goal is retirement, that shouldn’t be a problem for you!
All in all, retirement planning for doctors and dentists requires a proactive approach that is forward-looking. Waiting until you’re close to retirement is a recipe for disaster. Instead, start thinking and planning for business succession several years before you want to retire. Either start looking for possible purchasers who are outside your practice or start looking for someone to bring into your practice who can be the ultimate purchaser of your practice.
Whatever you decide, the key is making sure you get full value for the medical or dental practice that you’ve worked so hard to build up.