Historically, many dentists have either waited until in their 60s to sell their practice, or possibly brought in an Associate in the hope that he or she would eventually buy the practice. While commonly used strategies, these often led to frustration and/or failure. In fact, there is a much better strategy for many doctors in their mid 40s or older who have a 10 – 12 year time frame to practice, a strategy which employs both of the aforementioned concepts – a Deferred Incremental Practice Sale (IPS for short).
In the Deferred IPS Method, Total Wealth Accumulation is derived from two sources, and is the sum of Wealth Accumulation from Associate Revenue plus Wealth Accumulation from the Practice Sale. Although space limitations preclude demonstrations at how the following numbers are determined, they will serve to demonstrate the concept.
In the “typical” transition process of a middle aged dentist with a 10 – 12 year time cycle to practice, he/she will likely either be frustrated due to one or more failed associate relationships, or merely wait to sell until ready for retirement. A huge loss of income and decreased Quality of Life may be the end result. For example, a successful practice collecting approximately $1,400,000 may result in a sales price of around $1,000,000 (less taxes).
In a structured and planned Deferred IPS program (assumes the same level of collections of $1,400,000), the transition concept is to:
- Have an Associate join the Practice in a non equity position for 2-3 years;
- Have the Associate buy 50% of the Practice after three years and co own the Practice for around seven years;
- Sell the remaining 50% increment of the Practice to him/her and continue working as a non equity party for an additional 2 – 3 years yourself.
Due to the additional revenues during the Associate period of transition, the sales price at least equal to $1,000,000 (although in increments), plus the time value of money from the additional Associate revenues and interest from the sales of the Practice in increments, the net effect is total Wealth Accumulation of about $2,500,000 (pre tax) – almost 2.5 times greater than waiting to sell the Practice in the traditional scenario.
Therefore, with proper planning (and assuming certain factors are present in the Practice – as number of patients, a Seller willing to share control, etc.), a creative transition plan can result in much greater total income, improved quality of life (less work days and less managerial obligations), security of a full value transition in the event of death or disability of the Seller, etc.. For those of you mid career dentists in need of accelerated Wealth Accumulation, this may be a program for your consideration.