57. Why Your Dentist Exit Plan is Doomed to Fail
Takeaways:
- The procrastination penalty emphasizes the critical need for early planning in exit strategies.
- Valuation illusions can lead to unrealistic expectations about the worth of dental practices.
- Understanding tax implications is pivotal to maximizing the proceeds from a practice sale.
- The successor mirage highlights the dangers of informal transitions without binding agreements.
- The high income, low wealth paradox illustrates that high earnings do not guarantee financial security in retirement.
- Emotional anchors can inhibit dentists from effectively transitioning out of their practices.
Let's discuss your Dental Practice Exit plan today: https://www.klassolutions.com
Transcript
Foreign.
Speaker A:Hello, my name is Phil Cole.
Speaker A:And just a quick reminder about our rebrand.
Speaker A:We're now the Dental Business Podcast.
Speaker A:Just a new name, same great business content for dental practice owners.
Speaker A:So if you haven't already, check out our updated artwork and help us spread the word about the rebrand.
Speaker A:So now let's dive into today's episode.
Speaker A:And that is why your dentist exit plan is doomed to fail.
Speaker A:You know, you've poured 30 years into building your dental practice.
Speaker A:30 years of early mornings, probably late nights, tough cases, and wrestling with insurance staff and patient care.
Speaker A:If your life's work and you think you've got a solid plan to cash out and sail into retirement, you followed the standard advice, you've chatted with colleagues, and you've got a number in your head.
Speaker A:But what if that was advice that was misleading you straight into a trap.
Speaker A:What if the standard exit strategy in the dental world is fundamentally, maybe catastrophically, designed to fail?
Speaker A:It's a terrifying thought, but it's the reality for a shocking number of dentists.
Speaker A:They hit the finish line, ready to sell the biggest asset they've ever owned, only to find the foundation of their retirement plan is made of sand.
Speaker A:That comfortable future they imagine just evaporates, replaced by the grim prospects of working until their 60s or late 70s.
Speaker A:And hey, we even have the 80s.
Speaker A:Not because they want to, but because they have to.
Speaker A:They watch their life's work get devalued and the financial security they fought for slip right through their fingers.
Speaker A:This isn't a scare tactic.
Speaker A:It's quite an epidemic happening across all the practices across the country.
Speaker A:I've spent years on the front lines of dental practice and their transitions, and I've seen the wins.
Speaker A:But more importantly, I've seen the tragedies.
Speaker A:I've watched brilliant clinicians, master of their crafts, make predictable and entirely avoidable mistakes that cost them hundreds of thousands and sometimes millions of dollars.
Speaker A:They fall into the same traps because our industry trained you to be an expert clinician, but it failed to train you to be an expert CEO.
Speaker A:This podcast is the training you've never gotten.
Speaker A:We're going to expose the critical flaws in conventional exit planning and pull back the curtain on the six predictable traps designed to doom your exit.
Speaker A:More importantly, I'm going to give you the blueprint to navigate around them and bulletproof your future before.
Speaker A:Before it's too late.
Speaker A:So if you're a dentist, whether you plan to sell in the next two years or the next 20, this is the most important financial discussion you'll have.
Speaker A:This year.
Speaker A:So let's get to it.
Speaker A:The first and most common trap is what I call the procrastination penalty.
Speaker A:It's the belief that exit planning is something you'll do when you're ready to exit.
Speaker A:As a dentist, you are a master of delayed gratification.
Speaker A:You survive dental school, residency, and then the lean years of starting a practice.
Speaker A:So the idea of just putting your head down and focusing on the clinical work while pushing off the business stuff until tomorrow feels, well, 100% totally natural.
Speaker A:The fatal flaw here is that by the time you feel burned out and ready to sell, you're already lost the game.
Speaker A:The decision to sell is almost always emotional.
Speaker A:You wake up one day, you're exhausted, fed up with staff drama.
Speaker A:I'm tired of the physical strain, and you just want out.
Speaker A:You call a broker and you say, I'm done.
Speaker A:Just sell my practice.
Speaker A:But selling a practice is a state of burnout.
Speaker A:In a state of burnout, I should say, is like trying to sell a car that's running on fumes with a messy interior.
Speaker A:A sophisticated buyer, especially a corporate group or a sharp private dentist, can smell desperation a mile away.
Speaker A:They see the declining revenue, the outdated equipment, and the team that is in disarray because the leader has missed mentally checked out and possibly checked out for years.
Speaker A:And their offer will reflect that drastically.
Speaker A:People, the hard truth is the most successful high value transitions are planned a minimum, a minimum of three to five years in advance.
Speaker A:Think of your practice as a complex machine.
Speaker A:To get top dollar for it, every part needs to be cleaned, tuned and running in its peak performance.
Speaker A:When a buyer pops the hood.
Speaker A:That doesn't happen overnight.
Speaker A:So what are those three to five years for?
Speaker A:Well, let's just take years five to three before exit the strategic phase.
Speaker A:This is when you get a baseline valuation, not from a free online calculator either, but a real professional appraisal.
Speaker A:This valuation is your report card.
Speaker A:It tells you exactly where your practice is strong and more importantly, where it's weak.
Speaker A:Maybe your overhead is creeping up.
Speaker A:Maybe your hygiene department is underperforming.
Speaker A:This is the time to spot those weaknesses and build a strategic plan to get them fixed.
Speaker A:You're no longer just practicing dentistry.
Speaker A:You're exercising actively grooming your biggest asset for a premium sale.
Speaker A:Years three to two before the exit.
Speaker A:This is your optimization phase.
Speaker A:Now you execute the plan.
Speaker A:You work with a coach or a consultant to streamline your systems so the practice runs on documented protocols, not just your personal charm or your whimsical.
Speaker A:You clean up your financial records Separating personal expenses from your business to present a crystal clear picture of profitability of your practice.
Speaker A:You might make strategic investments in tech or facility upgrades that buyers love.
Speaker A:Every decision gets filtered through one question.
Speaker A:Will this increase the transferable value of my practice?
Speaker A:Now, year one and before the exit, this is the polish phase.
Speaker A:Your financials are pristine.
Speaker A:Your revenue and profit are on a clear upward trend.
Speaker A:Your team is stable and your systems are humming.
Speaker A:You've assembled your transition a team.
Speaker A:A dental specific accounting firm, cpa, a transitional attorney and a top notch transition consultant.
Speaker A:Now when you go to market, you're not selling a problem.
Speaker A:You're now selling a turnkey.
Speaker A:Opportunity.
Speaker A:Waiting until you're tired robs you of all this entire process.
Speaker A:It puts you in a reactive position, at the mercy of the market and the buyer.
Speaker A:You're forced to sell what you have and not what you could have built.
Speaker A:The difference isn't just a few percentage points.
Speaker A:It can be a 20 to 30% hit in your final sale price.
Speaker A:We have had this happen more times than what we want to see as a transition company.
Speaker A:So which affects you on a million dollar practice?
Speaker A:It could be a quarter of a million dollars left on the table.
Speaker A:That's the procrastination penalty.
Speaker A:So the solution is a mind shift.
Speaker A:Your exit plan doesn't start the day you call a broker.
Speaker A:It should have started five years ago.
Speaker A:If you haven't started, well, the clock's ticking.
Speaker A:Get a professional valuation now.
Speaker A:Not to sell, but to plan.
Speaker A:That's why we created the lifetime practice valuation.
Speaker A:So that that planning stage which is the most important can happen.
Speaker A:Now.
Speaker A:The second trap that ensnares countless dentists is the valuation illusion.
Speaker A:This is the seductive yet wildly inaccurate world of back of the napkin math.
Speaker A:You've heard it at conferences.
Speaker A:Practices in this area are selling for 80% of collections.
Speaker A:Or my buddy sold his for two times the revenue.
Speaker A:So relying on these rules of thumb per se to value your life's work in financial is financial malpractice.
Speaker A:It sets unrealistic expectations and leads to to devastating mistakes.
Speaker A:Let's be clear.
Speaker A:Buyer and more importantly, the bank financing them doesn't care about the rules of thumb.
Speaker A:They care about one thing and one thing above all else, profit.
Speaker A:For a smaller practice, selling to another dentist.
Speaker A:This is often called sellers discretionary earnings.
Speaker A:For large practices or corporate buyers, they're going to call it ebitda.
Speaker A:Earnings before interest, taxes, depreciation and amortization.
Speaker A:This is what the true cash flow of the business generates to pay the new owner, cover the loan and provide a return on investment.
Speaker A:Two practices can collect the exact same $1.2 million, yet dramatically have different values.
Speaker A:And I don't think dentists understand that.
Speaker A:So Practice A collects 1.2 million, but has bloated overhead and messy books.
Speaker A:Its real adjusted profit might only be 250,000.
Speaker A:But now let's look at practice B, where it collects that same 1.2 million, but it is run like a tight ship with clean financials.
Speaker A:And its cash flow, or EBITDA, whatever you want to call it, is $400,000.
Speaker A:A buyer is purchasing your profit, not your revenue, using a percentage of collections.
Speaker A:Guess both practices seem equal, but in the real world, practice B is vastly more valuable and will get a higher percentage.
Speaker A:A buyer can afford to pay way more because it's got a higher cash flow.
Speaker A:It supports a larger loan.
Speaker A:If a valuation multiple for that practice type is, let's say, just say five times EBITDA, practice A is worth 1.25, while practice B is worth 2 million.
Speaker A:That's a $750,000 difference from the exact same revenue.
Speaker A:That's why you cannot go off of the usual things that you hear of 80%.
Speaker A:This is why you must become obsessed with profitability in the years leading up to your sale.
Speaker A:Another part of this illusion is potential based pricing.
Speaker A:This is when a seller says, I, I only work three days a week.
Speaker A:The buyer could easily add a fourth day or I don't place implants.
Speaker A:But if the new owner does, this practice is going to explode.
Speaker A:Buyers don't pay for potential, they pay for proven performance.
Speaker A:They're buying your history, not your unproven future.
Speaker A:The financial piece of this illusion is emotional overvaluation.
Speaker A:You've poured blood, sweat and tears into this practice.
Speaker A:That emotional investment I know is real, but it has zero dollar value on a balance sheet.
Speaker A:A buyer is making a cold, calculated business decision.
Speaker A:Confusing your emotional equity with financial equity is a recipe for pricing your practice out of the market, where it languishes for months and years and just go stale.
Speaker A:The solution?
Speaker A:Get a formal professional valuation from a firm that specializes in the dental industry.
Speaker A:Like Class Solutions, we perform a deep analysis of your financials, patient demographics, location, equipment and your marketing data.
Speaker A:This valuation is your anchor to reality.
Speaker A:Don't just guess what your practice is worth.
Speaker A:Know what it's worth.
Speaker A:So we've navigated the first two traps.
Speaker A:You planned ahead.
Speaker A:You optimized your practice and scored a top offer.
Speaker A:You're already picturing life on the lake.
Speaker A:But then the bomb goes off.
Speaker A:It's the tax time bomb.
Speaker A:And it can silently vaporize 30% or more of the sale of your practice.
Speaker A:So this is trap number three and it comes from a huge misunderstanding of how a practice sale is taxed.
Speaker A:The biggest mistake is assuming that let's say you got that top $2 million is all tax at a friendly long term capital gains rate.
Speaker A:And well, it's not.
Speaker A:When you sell a practice, it's almost always an asset sale.
Speaker A:This means the IRS sees you selling a collection of different assets and each is taxed at a different rate.
Speaker A:The negotiation over how the purchase price is allocated across the asset is one of the critical parts of the deal.
Speaker A:So here are the main categories.
Speaker A:One, Goodwill.
Speaker A:This is the intangible value.
Speaker A:Your reputation, your patient base.
Speaker A:This is usually the largest portion of the sale and thankfully it's typically taxed at the lower long term capital gains rate.
Speaker A:Your goal is to allocate as much as possible here.
Speaker A:Next is the hard assets or your equipment per se.
Speaker A:This is your chairs, X rays, units, you know, your computers.
Speaker A:Here's the painful part.
Speaker A:This is subject to depreciation recapture.
Speaker A:So for years your CPAs gave you a tax deduction for depreciation.
Speaker A:Well guess what?
Speaker A:Now the IRS wants their money back and is going to tax it as ordinary income that rates those rates can go as high as 37%.
Speaker A:Next, the covenant not to compete.
Speaker A:The buyer will pay your promise not to open a new practice across the street.
Speaker A:These payments are taxed as ordinary income in nearly every case.
Speaker A:So buyers want to allocate more.
Speaker A:Here you want to allocate less.
Speaker A:And then last there's accounts receivable if the buyer purchases your outstanding balances.
Speaker A:This is also taxes ordinary income.
Speaker A:So let's look at this for a second at that $2 million sale.
Speaker A:So a poorly structured deal, the bomb that it would be would be a naive seller that lets the buyer's team dictate the allocations.
Speaker A:The goodwill at 1.2, let's say you put it at 60% and your hard assets and AR are 600,000, non compete 200,000.
Speaker A:And in this scenario, a massive $800,000 of sale is subject to high ordinary income rates.
Speaker A:The tax bill could easily top 500 to 600,000.
Speaker A:Your $2 million sale just became a $1.4 million sale.
Speaker A:Smart structured deals where the bomb is diffused I would say is a safe a savvy seller guided with a good dental transition consultant and a dental team like a dental CPA negotiates the allocations before signing anything.
Speaker A:So let's take goodwill and put it at 1.7 hard assets and AR at 250,000 and a non compete of 50,000 here now it's only 300,000 is subject to higher tax rates and so the tax bill might be closer to 350 to 400,000.
Speaker A:By simply negotiating this, the seller just put an extra 150 to $200,000 in the retirement account.
Speaker A:Also, your legal entity matters.
Speaker A:If you're a C corporation you can still face double taxation.
Speaker A:I know there's some things that are changing on that possibly but the corporation pays tax and then you pay tax again personally.
Speaker A:An S corp, an LLC is usually much better.
Speaker A:This is yet another reason why early planning is non negotiable.
Speaker A:The solution is to have an experienced dental cpa, a good transition attorney on your team along with the transition consultant.
Speaker A:From the start, never ever sign a letter of intent without your experts reviewing it.
Speaker A:Well, so we're halfway through and you can probably see how easy it is to fall into some of these steps.
Speaker A:So let's continue on though and let's go to the fourth.
Speaker A:The fourth trap is is one of the most painful because almost, or it often, I should say, involves people who trust it's the successor mirage.
Speaker A:The first form, I think, is the associate to owner fantasy.
Speaker A:The logic seems perfect.
Speaker A:You hire a bright young associate, mentor them, and when you're ready, you sell them the practice.
Speaker A:Smooth, seamless, and everyone's happy.
Speaker A:It sounds wonderful, it really does.
Speaker A:But transition advisors report staggering failure rates for these informal handoffs, with some estimating up to 80% fall.
Speaker A:That 80% of them fall apart.
Speaker A:And why?
Speaker A:Because it's all good intentions.
Speaker A:But good intentions aren't a business strategy.
Speaker A:The failure points are predictable.
Speaker A:Often there's no legal binding agreement.
Speaker A:And when I say, I guess I should maybe not say just often, almost all the time.
Speaker A:There's no legal binding agreement, just handshakes and vague promises.
Speaker A:And as years go by, the senior doc imagines a high practice value while the associate buried in student debts sees all the old equipment that hasn't been updated at all, nothing's changed, and has a much lower number in mind.
Speaker A:And then when it's time to talk numbers, the gap is too wide to bridge.
Speaker A:Trust then is broken and the associate you train walks out the door and opens a practice just down the street because there was no legal document.
Speaker A:The second form of the mirage is the first offer is always the best offer fallacy.
Speaker A:This usually comes from unsolicited letters from a DSO or private equity group full of flattery and a huge headline grabbing number.
Speaker A:You get excited and lock into an exclusive period from them, thinking you've hit the jackpot.
Speaker A:I'm telling you, this is just a classic tactic.
Speaker A:That huge number is often tied to such a complex deal with company stock.
Speaker A:Long employment contracts, now five by fives and an earn out where you only get paid if the practice hits targets you no longer control.
Speaker A:Once you dissect these offers, the guarantee after tax cash is often far less than you would have got on the open market.
Speaker A:But by then it doesn't matter because it's too late.
Speaker A:You're emotionally committed to back out, to be committed to backing out.
Speaker A:I'm sorry.
Speaker A:The solution here is structure and competition.
Speaker A:If you want to sell as an associate or to an associate, treat it like a business transaction from day one.
Speaker A:Get a qualified dental attorney to draft a clear buying agreement that that outlines the timeline, valuation method, the financial terms.
Speaker A:This clarity protects both of you.
Speaker A:For unsolicited offers, the rule is simple.
Speaker A:Never entertain a single offer in a vacuum.
Speaker A:The only way to know your practice's true market value is to create a competitive environment.
Speaker A:A good transition consultant does this by confidently marking your practice to a wide pool of qualified buyers.
Speaker A:Now, private dentists, we feel, are the best.
Speaker A:If you want to sell to a corporate group, that's fine, but you know what you get.
Speaker A:But when you have multiple offers, you have power.
Speaker A:You can compare not just the price, but the dental structure, cash at close, and most importantly, not just the money, but the cultural fit.
Speaker A:Competition is the single best way to ensure you get the right price and the right successor.
Speaker A:Now, the fifth trap is insidious.
Speaker A:It's not about the sale, but it's about the 30 years leading up to it.
Speaker A:It's the high income, low wealth paradox.
Speaker A:This is huge.
Speaker A:Dentists are high earners, but a story we see all the time and way too often is they reach their 60s with a high income, but a surprisingly low net worth.
Speaker A:Their entire retirement is balanced on one thing, and it's the sale of the practice.
Speaker A:This happens for a few reasons.
Speaker A:First, I call it the life cycle.
Speaker A:Creepy.
Speaker A:After years of living like a student, it's easy to let your spending rise in lockstep with your income, leaving little room for savings.
Speaker A:Second is treating the business checkbook like it's your own personal atm.
Speaker A:And this happens way too much.
Speaker A:This not only devalues your practice, but it also hides your true financial picture.
Speaker A:But the most critical reason is a weak saving strategy.
Speaker A:Saving whatever is left over is what I Hear all the time the financial successful that the financially successful do exactly the opposite.
Speaker A:They pay themselves first.
Speaker A:The solution is to adopt the mindset of a wealthy CEO.
Speaker A:First, create a strict separation between business and personal accounts.
Speaker A:Pay yourself a consistent salary and live off of that.
Speaker A:The money left in the business is for the business.
Speaker A:Second, automate your savings.
Speaker A:Treat your retirement contributions like a mortgage payment.
Speaker A:Non negotiable.
Speaker A:Set up Automatic transfers for 15 to 20% or more of your gross income into your retirement accounts.
Speaker A:Automation beats procrastination every single time.
Speaker A:Third, use the right retirement vehicles for a high income practice owner.
Speaker A:A simple IRA or 401k isn't just enough.
Speaker A:You need to be working with a financial advisor.
Speaker A:Financial advisor on advanced strategies.
Speaker A:And I say financial advisor because they are, I feel they are different than a financial investment person.
Speaker A:This could include a profit sharing plan, a cash balance plan, a type of pension that can allow for massive tax deductible contributions, sometimes over 100,000 a year.
Speaker A:Your practice should be the engine that funds a diversified portfolio.
Speaker A:Not your only plan.
Speaker A:The sale of a practice should be the celebratory capstone on your wealth.
Speaker A:And it should not be desperate last ditch effort to fund your future.
Speaker A:The final trap isn't about numbers or taxes.
Speaker A:It's about you.
Speaker A:It's the emotional anchor.
Speaker A:The profound challenge of letting go of the practice that has defined you.
Speaker A:For 30 years.
Speaker A:You haven't just been a person, you've been the doctor.
Speaker A:Your identity is woven into your practice, your patients, your staff, your community.
Speaker A:It's the center of your universe.
Speaker A:The thought of that disappearing can trigger a real identity crisis.
Speaker A:Who will I be without my practice?
Speaker A:What will I do all day?
Speaker A:This fear of the void can cause you to unconsciously sabotage your own exit.
Speaker A:You find reasons to delay.
Speaker A:You set an unrealistic price.
Speaker A:You nitpick the buyers, which we see a lot.
Speaker A:It's your subconscious desperately trying to hold on to only the only identity that you know.
Speaker A:You also feel a deep responsibility for your staff and patients.
Speaker A:This can lead to making unreasonable demands on the buyer.
Speaker A:Like insisting they guarantee employment for your entire team and forever.
Speaker A:Which we have a case right now, which we're trying to talk them out of that understanding that it's not possible.
Speaker A:They have to understand this and you have to understand it will kill a deal.
Speaker A:The solution is to plan for your life after retirement with the same diligence that you planned for the sale.
Speaker A:The sale isn't the finish line.
Speaker A:It's the starting line for your next chapter.
Speaker A:You must design that chapter.
Speaker A:Get that chapter that what it looks like years before you sell?
Speaker A:What hobbies have you neglected?
Speaker A:Do you want to travel?
Speaker A:I mean, do you want to volunteer?
Speaker A:Some say that they want to go back to teaching or they want to spend time with just their grandkids.
Speaker A:Start building that new identity while you're still practicing.
Speaker A:You need to be retiring to something, not just from something.
Speaker A:Having an exciting vision for your future makes letting go of the past infinitely easier.
Speaker A:Work with your transition team to find a successor who is a good cultural fit.
Speaker A:This is key.
Speaker A:Knowing you're leaving your life's work in capable, caring hands provides immense peace of mind.
Speaker A:And develop a communication plan with your broker and the buyer to tell your staff at the right time in the right way.
Speaker A:This frames the transition as a positive continuation and not a scary end.
Speaker A:Don't let the emotional weight of your past.
Speaker A:Anchor you down.
Speaker A:Plan your next chapter with intention and you'll find the freedom to finally let go.
Speaker A:So there they are.
Speaker A:The procrastination penalty, the valuation illusion, the tax time bomb, the successor mirage, the high income, low wealth paralyzed paradox, and the emotional anchor.
Speaker A:Each one is a landmine capable of blowing up your retirement.
Speaker A:But now you have the map.
Speaker A:The common thread is proactive, expert guided planning.
Speaker A:Trying to sell your practice the biggest financial transaction of your life without a team of dental experts is like trying to do a root canal on yourself.
Speaker A:The result is going to be messy and it's going to be painful.
Speaker A:Your life's work deserves to be the foundation of a secure and joyful retirement.
Speaker A:You've earned it.
Speaker A:But it won't happen by accident.
Speaker A:It happens by design.
Speaker A:It starts by taking the first step.
Speaker A:If this podcast was valuable, please subscribe and share it with all your colleagues who who need to hear this.
Speaker A:We at CLAS Solutions are on a mission to help every dentist achieve the financial freedom they deserve.
Speaker A:The standard exit strategy might be designed to fail, but your plan doesn't have to be.
Speaker A:Take control, build your team and bulletproof your future.
Speaker A:Thanks for listening to the Dental Business Podcast with Phil Cole.
