By Mark Soelberg, CVA, Vice President of Arizona Sales
The purchase or sale of a dental practice is perhaps the most impactful event of a dentist’s career. Financial planning is an important part of preparing for a practice transition. Here are some of the best and worst financial planning practices for dentists (according to a practice transitions broker).
Successful dentists utilize successful financial planning strategies. Here are just a few:
The more time you have to plan, the better your financial decisions and outcomes will be. You can accrue wealth through profit and invest it over time.
To help with your planning, hire a fee-only financial advisor who you can trust. Good advisors will help you know how much debt to take on, when to pay down debt, where to invest, how to protect your estate and more.
Less is not more, and more is not more. This means that both underspending and overspending on practice equipment, improvements, excess staff, marketing, etc. can hurt your bottom line. Find a balance that is enough to maintain a growing practice, but not too much that it no longer makes an impact.
The timing of your capital expenditures can often be as important as the purchases themselves. If you are nearing retirement or a practice sale, speak with a transition consultant before making any major purchases. Experts can also help you see where you can increase or decrease spending.
Knowing your practice value can help in financial planning, as it can set a benchmark for future profitability goals, help determine a future retirement timeline, and even help determine an accurate value of your estate. A practice valuation can also help you be prepared for unexpected circumstances; you never know when you may need to quickly cash out of your practice to deal with health challenges or disability.
Unfortunately, too many dentists make poor financial planning decisions that affect their profitability and wealth now and in the future. Here are a few practices to avoid:
Unless you’ve somehow discovered the coveted magical crystal ball, relying solely on your practice sale to fund your retirement could potentially be detrimental.
Far too often, dentists become too ill to continue practicing, but they are not yet prepared for retirement. Their practices often decrease in value and the proceeds become minimal, requiring them to take a financial hit to retire or continue working with no other options.
The last decade has seen increased growth of practice values and has thus provided a strong seller’s market. While the current environment does not show signs of a dramatic reversal, there is always a risk that market dynamics will shift.
Avoid “keeping up with the Joneses” and worrying about accumulating material goods for yourself or your practice. Being the “best in the business” need only apply to your skill, your team and your service.
Most retiring dentists have spent the last 20 to 30 years of their lives (or more!) honing a skill they’ve practiced everyday: dentistry. They may feel a wide range of emotions at the thought of “hanging up the drill,” or stepping aside from a business they’ve poured their sweat, blood and tears into.
In addition, running a business and treating multiple patients every day is extremely time consuming. For these reasons alone, many dentists find it difficult to take a step back and establish an appropriate exit strategy that will benefit them long term.
As a result, far too many practice owners work past their peak producing years, leading to a dramatic decrease in practice value when they finally decide to sell.
If you know that retirement is on your horizon and you haven’t yet dedicated the appropriate amount of time to establishing a plan, some questions to ponder include:
Don’t wait until you’re ready to retire to engage a transition consultant. The best time to reach out is two to three years before you plan to retire to maximize your financial exit, keep transition options open, and ensure the future success of your practice.
These tips are just a few dos and don’ts when it comes to financial planning. Every financial scenario is unique, so you should consult with an experienced dental financial advisor or wealth management consultant.
If their wealth is managed properly, dentists have a fantastic opportunity to enjoy a prosperous life and a comfortable retirement. Smart financial decisions made throughout your career can affect how and when you can retire. Your financial planning can also determine the flexibility and freedom you have to make decisions when unexpected life events occur.