Too Young to Have an Exit Strategy? Think Again!

A Doctor with Little Wiggle Room

Recently I met a dentist whom I'd like to call Dr. Missed-the-Boat, but out of politeness I'll call him Dr. X, instead. He is in his sixties and wants to retire. However, he does not have enough savings to do so. He had been counting on significant cash from a practice sale, but he's a periodontist in a rural area where potential buyers are rare and new dentists are finding it viable to start a practice from scratch, rather than buy an existing one. In addition to these demographic challenges, Dr. X has a more traditional practice and does not deal with implants, whereas all of the new dentists who looked at the practice showed interest in implants. The specialist's referral sources are also traditional and, therefore, do not have much value to the potential buyer. Dr. X has only three operatories, so taking in an associate who would later buy the practice isn't an option, which further limits him. After a full career in his profession, Dr. X finds that his prospects for a long and prosperous retirement are bleak. He may have to practice much longer than he wants to, then settle for selling the equipment—if he can.

I meet a lot of dentists like Dr. X, who are in their fifties and sixties and feeling the toll of a lack of planning for their exit. It's unfortunate to see them with so little wiggle room. With the many opportunities in your career for foresight and control of your own destiny, it would truly be a shame if you did not reap the full financial and personal rewards of your profession in your exit transition. Our goal at Pride Institute is to prepare you to retire in style with a well-planned—and early-planned—exit strategy.

A Doctor with Lots of Wiggle Room

In contrast to Dr. X, we counsel Dr. Y, who, in his thirties, mapped out a strategy to transition his practice at age 50. Now approaching 50, he finds that he loves his profession so much that he does not want to leave, after all. This is a great scenario, because Dr. Y will have attained the financial freedom to retire but can elect to continue practicing because he loves to and not because he has to . Dr. Y is a shining example of how planning early gives you more and better options. It also demonstrates how you can change your exit strategy as you modify your goals throughout your career.

Are you thinking that you can't design an exit strategy because you're unable to specify with certainty what your future goals are? Do you feel that if you can't prepare an exit strategy that is set in stone, it's better not to prepare one at all? We would advise you to guard against these “perfectionist” tendencies, which dentists are prone to adopting. Our philosophy at Pride is to encourage you to create your exit strategy as early as possible, regardless of how imperfect it may be. Your exit strategy acts as a gauge to guide you in making significant decisions throughout your career and magnetizes you forward. As leadership guru Ken Blanchard says, “A person who does not have a goal will be used by someone who does.” The chances of your having better control of your exit from your practice are much higher with a strategy than without one. So how do you prepare your exit strategy?

The Four Stages of a Practice

There are essentially four stages in the life of a dental practice. Understanding what stage you are in and where you are headed gives you a wider perspective on your career and helps you prepare your exit strategy. The president of Hufford Financial Advisors, Brian Hufford, and I created an easy-to-use model to help you understand the stages you pass through in your practice.

The first is the growth stage , which generally lasts for up to the first five years in practice. This is when you are establishing systems, staff, and adequate cash flow. Your active patient base (anyone coming to the office for any reason within the last 18 months) is zero to 800. Your focus is on organizing, cash flow, and establishing office systems. You are molding your practice at this stage, and the decisions you make about the location and nature of your facility, type of practice, clinical procedures, staffing, etc. can profoundly affect your entire career. Knowing the kind of exit you'd like to have at this stage can be very helpful in your decision-making. For example, determining the destination where you would ultimately want to practice can significantly affect the type of facility you choose, the location, and the leasing versus buying decisions you make.

The next stage is the peak performance stage. Dr. Rich Green of Pankey Institute helped us choose the name for this period of great growth, renaissance, and the maximizing of your potential as a dentist. The peak stage generally spans from five to 25 years or more into practice. This is when your active patient base is 800 to 2500, and you are fine-tuning your systems, upgrading your practice vision, introducing innovations, fully funding your retirement, and finding ways to continuously improve and keep the practice interesting to you, your staff, and your patients. A major focus is on your return on investment. In your quest for continuous improvement, you're interested in advanced clinical skills, staff motivation and achievement, new marketing strategies, reinvesting in your practice. After having practiced for a long period, it's vital to guard against burnout and keep rekindling enthusiasm—yours and your staff's. Financially, you should be enjoying your greatest years, living a lifestyle worthy of the commitment and investment you made in your profession. Obviously, the decisions you make in peak performance can enhance an ultimate exit from your practice or undercut it. For example, if you fail to stay current with technology, or to grow your patient base, or to keep up with the latest clinical innovations, or to otherwise reinvest in your practice, you will have a more difficult time selling it later.

Next is the conversion stage , which is 10 to three years before you make a major transition, such as selling your practice outright or creating a partnership or associateship arrangement. Your decisions may include downsizing your practice to exit without a sale, or increasing your practice value in anticipation of a sale. If your active patient base is above 2500, you may need to take on an associate to insure that you don't create a busyness issue. If the value of your practice is low, or your retirement savings are inadequate, or you need to invest in new clinical models or an aggressive marketing plan to attract a successor, you still have time to make needed changes. Like Scrooge, you may be visited by ghosts—of Practice Past, Present, and Future—and if you are distressed by what you see in the conversion stage, you can still change your life .

The fourth stage is the exit phase, in which your retirement is three or fewer years away. Here you are dealing with the cards you have. Here you are concerned with seamlessly transitioning . This can include clearly defining the mechanics of your exit, insuring that your practice statistics make your office extremely desirable in today's highly competitive buyer's market, and preparing your patients and staff for a transition.

Preparing Your Exit Strategy

A good exit strategy will define your goals for the next five, 10, 15, and 20-plus year increments. The purpose of creating these goals is to align what you are doing today with the finish line you would like to reach. By approaching your practice with a long-term perspective, you may look at the major decisions you make today differently, such as how much debt you are willing to take on, the kind of marketing to do, the building up of a patient base that needs dentistry into the future, the kind of technology and clinical techniques you want to offer, etc.

The following are the key questions to address when establishing an exit strategy. Imagine the difference it would have made if Dr. X had considered these issues in the early phases of his career. What will your answers be?

When is the best time for me to exit in order to fulfill both my personal and professional goals? By knowing how long he wanted to practice, Dr. X could have projected how much retirement savings he would have needed to accumulate each year, then saved adequately to realize his goal by his desired exit date.

What kind of a transition would I ultimately want to have? Would I like the option down the road of bringing in an associate who would later buy my practice? Or would I prefer a direct practice sale? What is optimum exit option for my practice? The earlier Dr. X had considered this, the more he could have molded his strategy to have his exit happen the way he desired. If you're not a people-person and are not used to working with someone, a partnership or associate–to–buy-in may not be the best option. Maybe a direct sale would be the better exit. Because Dr. X did not consider and plan earlier for his option of choice, he has to take whatever option is available.

Should I rent or buy a facility? What makes sense for my short-term and long-term needs? Will I need a change of facility or the ability to expand my facility when I'm nearing retirement to accommodate an additional dentist? Dr. X owned the building where he practiced. In the growth phase, when he made the decision to plumb only three operatories, he could have projected that later on he might want to expand to accommodate a new dentist as part of his transition strategy, and therefore arrange to leave space to do that, or he could have leased a smaller facility before buying a larger one, or entertained other options.

Do I want to stay cutting-edge , with the most up-to-date technology and clinical techniques? How should I maintain my referral sources so they will be valuable not only to me but also to a potential buyer? Dr. X may have decided to offer implants ten years earlier if he had considered the positive impact of this on his practice value.

How will I save for my retirement? What kind of cash flow can I expect? What kind of savings do I need? How can I accumulate more than the bare minimum I need in savings, just in case an unexpected event occurs to reduce my assets? Dr. X could have projected what he would need for retirement and saved all along by arranging his production goals, practice growth, and lifestyle choices to support his retirement savings.

What is my practice worth now? What will happen if my practice does not have the value I'm expecting down the road? Dr. X could have taken steps to increase the value of his practice to a potential buyer, or instead decided not to count on a practice sale for retirement. Your practice may not have the same value 20 years from now that it does today, which makes it imperative to be saving more money now to fund your retirement. But because Dr. X waited until he was in his sixties to address these issues, he was between a rock and a hard place.

Will my practice still have value after I stop running it? Dr. X could have earlier been aware of the demographic trends of decreasing dental school graduates coupled with increasing baby-boomer dentists retiring to know sooner than he did that he would encounter a scarcity of prospects.

What do I need to do now to improve the value of my practice and to make it attractive to a potential purchaser? How can I transition effectively and get a return on investment from my practice? If Dr. X wanted to incorporate new methods and technologies, he could have increased the value of his practice to a buyer.

Are there any potential obstacles that could block my exit strategy? As mentioned, Dr. X's failure to expand his services may have deterred buyers. He could, on the other hand, have been doing too many specialized treatments. You can face a similar challenge if you are doing so much full-mouth reconstruction that there may not be any treatment left in your patient base when you want to sell your practice, or your practice may be priced too high for a buyer, or you may limit the potential buyers to only those wanting the same subspecialty. (It is, of course, desirable to be giving comprehensive care. However, in order to sell your practice, you may need to have a steady stream of new patients to offset those whose restorative and esthetic treatment is completed.)

What are the long-range economic indicators telling me? Is my geographic area building up or going down? Dr. X practiced in a rural area with limited growth potential. Perhaps he could have explored relocating his practice to a neighboring community with higher growth.

Can I plan to reduce the amount of tax I have to pay on exit? How should I structure the transaction if I am a sole proprietor versus an S-corporation or a C-corporation? What are the tax consequences of how the sale is structured for both the buyer and the seller? The answers to these questions can be more important than the price agreed on for the sale.

These are the questions to address in planning now for the best possible outcome later. You've trained too long and worked too hard to leave the twists and turns of your career to chance. An exit strategy gives you the opportunity to direct your course to your chosen destination. Never think you are too young to control your own destiny.

Amy Morgan is CEO of Pride Institute

Originally published in Dental Economics, June 2005