Episode 28 – Deeper Dive: Creating Wealth in Your Dental Practice

“Being proactive about taxation upon sale can add thousands to your pocket when you are looking at final value of your practice.” ~Dr. Victoria Peterson

What is your practice really worth?

There are so many layers to building value in your practice! I get it. It can seem overwhelming at times.

During my conversation last episode with Eric Scannell that was the thing that really impressed me: being super proactive in your understanding so you protect and benefit from the value of your practice.

Selling your practice may seem like a long ways away. But now is exactly when you should start thinking about this, so you can make choices now that will add predictable value later. So, today I am unpacking that a bit more and digging deeper into:

  • What being proactive means on a practical scale
  • Balancing certainty vs. risk
  • Protecting the true value of your biggest financial asset

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Are you proactive or reactive? That was my takeaway. As I interviewed Erin Scannell. He’s a Certified Financial Planner with heritage Wealth Advisors. And what that means is that a CFP is a fiduciary for you typically CFPs work on a flat rate fee, they don’t work on a percentage of buying or selling stocks. It’s a different model than working with a traditional broker.

So if you haven’t listened to that episode, please do go back, this will make a lot more sense it was it was just so jam packed with information for business owners from the viewpoint of tax planning, not something that you often talk about with your financial planner. But when you’re at a level of building an investment grade practice, it’s a way of up leveling the advisors that are around you. So you may have had a financial planner that has managed your 401 K has looked at your retirement and you’re on track with that.

But there are layers and layers to financial planning just as there are layers to building a business or working with a consultant. So that was my big takeaway was being proactive about taxation upon sale, and sales could be complete sale of your business, it could be a fractional sale of your business, it could be buying or selling real estate buying and selling stocks. All of them have strategies. That was the other piece I took away is that proactivity means I’ve got a strategy in place and I can predict where I’ll be there are certain milestones.

Now, I may come in plus or minus that milestone, but I know the general direction of where I’m going because I’m strategically planning to be there. And I think sometimes in life, we just we just take too long to discover when something’s happened, right? And then we scramble to get a plan together. And that plan is actually compromised because we didn’t give ourselves enough time. I think the greatest example in dentistry is happening right now.

Are you getting unsolicited offers in the mail? I talk to at least three dentists a week, which is up from zero, pre pandemic, that are getting unsolicited offers to purchase their practice. I just spoke with a gentleman last week, he’s doing 1.5 million works about 24 hours a week, which is terrific. So he’s under 80 hours, as an owner has an associate has an oral surgeon has an orthodontist in and all of that five operatories. He’s doing 1.5 million, he has an offer on the table for 1.5 million. So he’s saying, Wow, 100% of my collections, that’s amazing. They’ll do all the management for me. And I can move on to some of my other entrepreneurial endeavors. And I think that’s a great thing. I mean, if that’s what that’s what you want to do, right? That’s terrific. My investment grade practice hat comes on, though, and I quickly calculate on five operatories, with two doctors running the schedule, optimizing that bringing in ortho and and oral surgery to fill in while you’re away, that he’s actually sitting on a three to $5 million location, right. And so when someone is soliciting to purchase, I propose that nine out of 10 times doctors are leaving hundreds of 1000s, if not millions of dollars on the table.

Because you’re selling out of frustration, you’re selling out of exhaustion, you’re almost always selling pre optimization. Private equity is in our industry for a reason, because they know how to take your business to the next level with the efficiencies with improved profit margins, and just slow growth will get them there. What have you learned those strategies, and what Aaron pointed out is responding to an unsolicited offer, selling your practice when you weren’t planning on selling it within three to six months, could put you behind the tax eight ball costing you 30 to 50%. So that $1.5 million sale might net 800,000. And then you pay off the debt, maybe you’re down to five or 600,000. That’s probably what you’re taking home now. So being thoughtful, being proactive, having a strategic plan so that when the unsolicited offer comes, you’re prepared with better questions, you’re prepared to vet the offer.

So if you’re sitting there with an offer today, just reach out Victoria productive dennis.com, I’ll get you connected to my team, we’ll do a complimentary review of that give you an hour of coaching time to kind of look and see. Is it in my best interest today? Have I really set my financial house in order to be able to say yes to that offer? Is it in my best interest? Or should I wait a year or two years to do this, and I promise you that the markets not gonna go away, the private equity market is not going to go away the scalability of your practice, to either a private buyer or an institutional buyer, that’s not gonna go away. What’s going to change is how savvy a seller you might be, or how savvy a buyer you might become. So imagine that another another scenario was real estate, we worked with a client that had an offer and took the offer was great offer. But within that the purchaser wanted control of the real estate that the seller owned.

And so the contract essentially said, we recognize that you own the building, we’re going to bind you up we have first right of refusal of purchasing the practice, our rent will be this it will not go up beyond that each year. And our purchase price will be this for the for the business. And I think that for selling doctors, this sounds so appealing, because it provides certainty. And certainty is a deep human emotion. It is one of the human emotions that we cannot live without, if you weren’t certain that the roof over your head wasn’t going to collapse, you would be freaking out all the time. So tapping into certainty as they construct contracts is a great tactic. So knowing that I have a buyer in place, knowing that the purchase price is set, knowing that I can go to my planner and say this is how much I’ll get for my building that taps into the emotion of certainty.

However, too much certainty and not taking a risk can leave a lot of money on the table. So let’s say that in the contract, they said that rents will go up one and a half percent a year and you go cool, my rents gonna go up every year, but what if the actual cost of living went up 4% or 8%, and you missed out over that, what if the purchase price which typically real estate grows 4% a year, what if you’re in a hot market like we are today where real estate’s grow in 2020 to 28 36%, you would have locked yourself into a contract. To gain certainty, when there really was no risk, there’s really no risk in saying now I own this asset, it’s mine, I’ll dictate the terms and I will share when and how it’s going to be sold, there’s no risk.

So that’s what I encourage you to do is to make sure that you’re up leveling your advisors, so that you’re looking at any of these decisions, years in advance two years, three years, five years, eight years, 10 years, you would be amazed at what could happen in 10 years.

Whenever I think about investment grade practices, and being an investment grade owner, you’re really building something beyond your patient flow. That’s, that’s your practice. And we want to optimize the practice, real estate we touched on a bit, that’s a second asset that you can develop. Third asset you could develop would be the patient financial portfolio using comprehensive finance or some other in house financial approval system where you carry the paper. Think about that if you get a down payment that covers your hard cost, then what you’re financing is time. Again, doctors will defer that out to banks and others leaving millions of dollars on the table in an treat on unscheduled treatment, because they don’t want to get out of their certainty comfort zone and extending credit. But when you know that what you’re giving credit on is your time not your overhead or hard cost, you really have decreased the risk there.

So for all the things that you’re building, the assets of patient base real estate patient financing, you can have an in house lab, there’s so many things that dental assisting school, so many ways that you can build streams of revenue around your dental practice. And that is what I find so compelling about being an entrepreneur in today’s environment. It really is golden. If you understand a couple of things and surround yourself with financial advisors, business advisors, investment advisors, that are pro entrepreneur, so hear me well, I am not anti DSO, I’m not anti private equity. I think that’s what sparked this time of entrepreneurship.

I am pro entrepreneur, I am pro dentist and surrounding you with support is our goal here. So here’s your three takeaways for today. Erin got into some really deep strategies about setting up trust, doing tax harvesting, preparing in different ways, booking losses on your tax return so that you could offset gains in the future. That’s really too complex for my podcast and monologue. But I want you to take away these three things. Number one, knowing your financial freedom number, knowing what it would take for your money to last for 30 years. And you can go on our website, there’s a great article that I did on dental town, I’ll put the link in the show notes here that has a table, it can help you do the quick math on that. That’s my target. So set your target beyond what my daily goal is for production. Set your target into this is what it takes for my life to work, and then start working backwards to get a two year strategic plan. It really is a fun game to play to say I could be at financial freedom in five years, I might be 40 years old, I might be 50 years old. Now I’m working at choice, because I know that aspect of my life is taken care of.

I’ve got buckets of money. This is my vacation play entertainment bucket, this is my pay off the mortgage bucket, this is my invest in my practice and keep it growing bucket. That’s what happens when you set these long term strategic goals. And then start working backwards and saying if I buy sell hold right here. What are the tax strategies that need to be in place ahead of time? What are the contracting contracts that I need to get together and get organized? That really is the heart of being an investment great practice is organizing towards a strategy. So step one, go back if you haven’t done it already, I’ll say it probably on every episode, discover your financial freedom number. work backwards from there, start looking at your business critically through the eyes of a buyer and say where where am I messy. Where could I clean this up? Where could I tidy things up just a bit to prepare for and be ready when my time comes? Hey, once again, it is so wonderful to interview these compelling guests some within dentistry, some outside dentistry to bring you the information you need to make great decisions.

If you’ve got a topic or a question that you’d like me to cover, please reach out to Victoria at productive dentist.com I’ll be sure to get my team to book guests on here to go into the topics that are most interesting to you.

Thank you for tuning in to this episode of investment grade practices podcast. If you find value in this episode, help us spread the word by passing it along to a dental friend subscribe and give us a Like on iTunes or Spotify. Learn more about building your investment grade practice at productive dentist.com Today

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