Let me start by clarifying what I mean by your ‘endgame’. This is the term that I use for creating an exit strategy. Knowing this is one of the most critical decisions that a practice owner faces throughout their entire career.
Our recent COVID-19 crisis has forced many dentists to realize a few difficult truths: First, dentists are not prepared with enough reserve CASH to see us through unexpected challenges without fear. Second, we have not spent enough time and energy developing our exit strategy. There has never been a better time to focus on this than right now.
I have spent the last 10 years in the business of acquiring practices which has given me great insight into this. It’s rare that I have found anyone who has planned their exit strategy so well that they were able to fully maximize the wealth from practice that they have been working on through their entire career.
When you think about maximizing your wealth, most people will think of the simple ones like cash, stocks, bonds, and real estate. But as Dentists, we hold an asset in our practice and at some point, will need to convert that into one of these other assets. That is what I want to talk about today…
How Do You Set Up YOUR Practice So That You End Up With The Most Cash, Stocks and Bonds?
When I counsel Dentists on their endgame strategies, I start by asking one question… “How engaged do you want to be from today until the day you retire?” The reason I ask that, is that it has a huge impact on the model for exiting that will make the most sense for them.
The amount of wealth that you get out of your practice at your exit really depends on the level of engagement you want to have from now until the end.
There are six Endgame Models that we should look at.
Endgame Model #1: Abandonment
Abandonment means you keep working… just a little less and a little less each day. The practice is doing less and less. It’s earning less and less. Dentistry becomes more of a hobby than a job, until you come to the point where you just quit, and you close the practice.
What I have seen, are the dentists who have done this (some unknowingly) and then try to sell their practice. And the practice is worth next to nothing.
I wouldn’t recommend this model if you have any intention of selling your practice.
PRO’s: Quick exit – you just lock the doors anytime you want
CON’s: there is no wealth attained from the practice, there is no future for your patients, and no future for your team. Sadly, many dentists during the COVID crisis chose this option.
Endgame Model #2: Buyout
The rest of the models that I’m going to talk about end up back here at the buyout. However, they end up here after you’ve built an asset that’s much, much more valuable.
In this strategy, dentists work steadily, then look for someone to buy the practice.
PRO’s: There is a sequenced exit (you know approximately when you’re going to sell, and how long until you exit), the asset is transferred to cash. There is a future for your patients and your team.
CON’s: As a sequenced exit, it can take time to exit. There is no continuing income.
Endgame Model #3: Retire in the Practice
This is for the docs that want to practice full time, bring in an associate and then drop down to a day or two. The associate ramps up, the senior doctor ramps down.
PRO’s: As your engagement in the practice declines, you can reduce your workload to match your engagement and that’s enticing. Your income is split between what you produce and the profit stream coming in from the practice.
CON’s: As the associate doctor ramps up they end up being the one that has the relationship with patients and the team.
I have seen many times where when it comes time to buy the senior doctor out, the junior doctor decides he/she doesn’t want to, and they go to another practice nearby. Often they end up taking the best of the team and many patients with them. This leaves the senior doctor in a bad place. They are low in engagement, they really haven’t been in the practice much and now must start all over again.
Which is why, in my opinion, this is a risky model that I have seen blow up on people multiple times.
Endgame Model #4: Buy-in, Buy-out
This looks like this… an owner doctor enters in an arrangement with an associate doctor. The associate doctor buys a portion of the practice with an agreement that at a set future date he will buy out the rest of the owner doctor’s portion of the practice.
While this sounds good, I’ve seen this be very difficult to manage.
PRO’s: You get immediate cash as the associate doctor buys in. There is a future for your patients and your team.
CON’s: You now have a partnership to deal with (and partnerships are tough.)
Endgame Model #5: Associate-driven growth
This seems like the right place to say, the bigger your practice is when you sell it, the more it’s going to sell for. The more profitable it is, the more you will gain from the sale of it.
In this model, the owner doctor is going to take a period of time and use associates to drive up the practice. This was my model in my practice in Iowa – to have multiple associates. We’re driving the practice up getting bigger, and bigger, and bigger, so there could be an sale down the road and the practice would be worth a lot more.
I worked this model for 20 years. This one takes some time to mature, but you can get multiples out of your practice that you can’t get in the other models.
PRO’s: The practice continues to grow, there is a future for your patients and your team. It puts your practice in a good position to convert to the legacy model.
CON’s: Your growth is fueled by your own money in the bank, limiting your growth to how much the banks will loan you. There tends to be higher turnover with associates (because they aren’t owner-doctors.) You need to be good at managing doctors as well as teams.
Once you have your practice to the size and with the level of engagement that you want, then you’re going to go back to model two, and you’re going to have a sale event or convert it into the legacy model.
The challenge with this model, and I’m seeing it more and more, is that it requires you to have employee dentists. I see a lot of doctors who will expand, or they’ll buy a practice and have associate dentists in that practice. They thought it was going to be easy – but once they are in it, they realize that they don’t have the knowledge, skills, or teams to make it work. This can also suck all the money and energy from the owner doctor who is now making less money and has more headaches. This model is not for the faint of heart – you must be able to learn and develop your own skills as a leader and manager.
Endgame Model #6: Legacy
The legacy model is similar to strategy number five, that you have associate doctors, but then you let those associate doctors buy into the practice.
They don’t necessarily get to buy half, but they can continue to buy into the practice. You can use the money that they buy in with to invest further in more locations, or expanding the current locations you have, or upgrading the facilities, or any other activities that might make the practice more valuable.
While you may not earn as high of a percentage as you once did, but because you’re using the buy-in of the associate doctors to grow the practice, you have a smaller piece of a much bigger pie, your income increases.
You have the access to capital because you have doctors that are investing, and you can use that money to grow the practice.
You can decide to just be a manager, or you can continue to practice and be a manager.
PRO’s: Eventually, you are out of the practice, and you have taken your practice asset and converted it to cash. As you’re getting to that point, you have ongoing passive income. You have increasing income because the practice is growing.
CON’s: The bigger this model gets, the more infrastructure that you have to have. As you’re building this, your income will probably drop a little bit as you’re helping doctors get started with guarantees.
I’ve noticed that the first three or four practices are really hard work (it’s why you see so many ‘groups’ stuck at 4 practices.) You are practicing, and you are doing all the work to keep the other three or four practices running. When you can get past 3-4, it becomes much easier because you learn how to do it, you have experience, and you learn what you need within your team.
The legacy model requires someone who is a charismatic leader to hold this all together. This has to be someone who is really good at connecting people, helping people care for each other, and really keep it going. This can be a tough one.
In my practice, I went from model five (Associate-driven growth) to model six (legacy.) In the legacy model, my one practice is now 12 locations. Then I went to model two (buy-out), and sold all 12 of them. So you can see that all roads tend to lead to the Buy-out Model. But, if I had just been my single practice operating under a retire model and sold my practice, I would have sold it for 1% of what I eventually earned.
It makes a difference how you set this up.