GAP Australasian Dentist Sept Oct 2020

Category 116 Australasian Dentist W hen a dentist practice owner is in the last 10 years of their career, the decision of when to sell looms over them. Selling now or selling later can have a big impact on how the practice owner can fund their retirement. Many practice owners communicate some variation of the following calculation as a reason to sell later: “I have been offered $X for the practice now … however, the practice is stable, and I am planning on working for another five years anyway. If I work for another five years and the practice continues as it is (and has been), I would receive $X from the practice in salary and profit from the practice over that period. I could then, after five years, sell for much less than $X and still be ahead.” While on the surface this argument may seem like a valid way to look at the situation, here are 6 major issues with this reasoning: 1. You are assuming that the fortunes of the practice for the next five years will be somewhat stable. a. If you are talking about the last 5 years of your career, there is a good chance this won’t be the case. The last few years of a dentist’s career are almost never as clinically productive as the years that preceded it. The final years are usually characterised by working less hours per week and less weeks per year for lifestyle or health reasons. b. You are relying on key man availability and their contribution to remain the same. If you have dentists working for you who make a meaningful contribution to your revenue and profit, you are relying on their availability and contribution remaining the same and, if not, that they will be easily replaced. This is not always a safe assumption. c. You are betting on the underlying conditions of the economy to remain the same for the next five years. This isn’t necessarily going to be the case. Within a five-year period, there are often changes in a local economy (drought, mining boom and bust, local employers falling on hard times, etc.) or there could be a downturn in the national and global economy (GFC, COVID-19). These changes in the economy change consumer/patient behavior. d. You are relying on the underlying conditions of the industry to remain the same. In the last 10 years, there have been significant changes in the dental industry that affect your ability to maintain your business. For example, the dentist to population ratios have changed significantly, as have the ease of dentist recruitment, the way that the government funds dentistry (CDBS, CDDS, DRISS), etc. 2. EVEN IF the practice billings are stable…. your profit/take home will NOT be. To maintain your take home at the same level it is now, it isn’t enough for your business to be stable (as the premise suggests). Expenses like wages, rent, consumables, etc., go up every year. So, even if your practice billings are stable for the next five years, your take home profit will almost certainly be declining over that time. Your revenue/billings need to be growing at the same rate as expenses are JUST FOR YOUR PROFITS TO STAY THE SAME. 3. The risk of capital loss If the practice’s performance revenue and/ or profit is diminished or ruined for any reason over the five years, it isn’t just the owner’s commission and profit that is at risk … the appraisal of the practice upon sale at the end of the five years will also be compromised. 4. EVEN IF the profit was stable over time…What about Post-Tax money? It is not how much you make, but how much you keep. The premise equates $X as a sale price with $X in salary and profit over five years… Post-tax those are two very different values. The quantum of tax payable on the sale of a business will depend upon your Simon Palmer The sell-now Vs sell-later calculation By Simon Palmer columnists