In this article, Graham Hutton, Dental Specialist Financial Planner at Wesleyan Financial Services, discusses what practice owners and shareholders should be thinking about when it comes to exit strategies.
When it comes to thinking about exit strategies, it’s important to have a plan in place that addresses both the commercial aspect of selling your business (or your share in it), as well as your personal aspirations.
The commercial aspect generally includes ensuring you have the appropriate agreements in place, your business is as organised and as profitable as it can be, and that you have a plan for the future - whether that is for your partner(s) to take over and buy your share, or for the sale of the practice as a whole.
The personal aspect of an exit strategy includes deciding what you want to do after you leave - and to have a plan in place for that. For many people, it’s important to feel as though they have a purpose in life, and that doesn’t generally change at retirement.
Whatever your plans are - travelling the world, spending time with family, buying a holiday home or embarking on a new career or hobby - it really helps to have a good idea of what you want to do. It isn't wise to assume that when you reach a certain age you will just sell the practice, as A: Will that provide you with enough income? And B: What will you do with the money from the sale of the practice?
When is the right time to start preparing for your exit strategy?
Preparation for an exit strategy should ideally begin five to ten years prior to selling your business. Getting organised as early as possible can help you to present your practice in the best possible way and get the best possible result.
The purchase of a dental practice or a share is a major achievement in the career of any dentist. While a lot of thought and planning goes into acquiring the practice (and subsequently the day-to-day management and running of it), many dentists may not have considered how much careful thought and planning will be required in order to maximise the value of their asset when it comes to walking away.
In my experience, anyone that intends to sell their practice next year and retire immediately afterwards hasn’t given themselves enough time to make positive changes.
The commercial aspect of exit strategies
Profitability of the practice
When a dental practice is sold, it is based upon EBITDA (earnings before interest, taxes, depreciation and amortisation). EBITDA is used as an indicator of the overall profitability of the business. What's more, the sale value of the practice will be based on a multiple of your EBITDA.
Having an overview of your business and understanding where things can be improved can ultimately improve profits and help to maximise the value of the practice. This is why it’s important to start preparation for sale as early as possible.
Reviewing your business agreements
Having the right business agreements in place is paramount to most organisations, including dental practices. Not having the right business agreements in place can negatively impact the value of the practice, and ultimately your personal plans for the future.
Many practice owners rely on the sale of their share in the practice as an integral part of their retirement plan – however, what some people don’t realise is that their plan may not necessarily be resting on solid foundations, due to not having the right business agreements in place.
When thinking about business agreements, I would ask any practice owner or shareholder to consider the following:
- What would happen to the business and its value in the event of the long-term absence or death of one of the partners?
- Who would cover their share of the expenses?
- What would happen to their share of the profits if they were to pass away?
- Or, if they were to exit the business prematurely, on what financial terms would this be?
It's important for all practice owners to understand exactly what agreements they have in place and what they do and don’t make provision for, to protect the value of the practice and to understand what that value is. These factors not only impact your exit strategy plans, but also your retirement, your family and ultimately your legacy.
The commercial aspect of exit strategies
Retirement
Retirement is often the final outcome of an exit strategy. When it comes to establishing the ideal timeframe for retirement – which could be anything from age 55 to 67 – it's a good idea to start thinking about what you would like to do around 20 years prior to exiting. This becomes more detailed over time, allowing you to develop your retirement strategy.
Five years prior is the time to make sure you have everything lined up and prepared for. This is also the time to make sure that any financial shortfalls you may have can be made up.
During those five to ten years, it makes sense to plan for your exit strategy at the same time. This includes sharpening up your plans and making sure that your business is as profitable as possible, as generally speaking, the more profitable it is, the more viable it is for someone to buy it.
Seeking professional guidance
A Specialist Financial Planner from Wesleyan Financial Services can help you to formulate an exit strategy and identify areas that need addressing, including when and how to address them.
We also work in conjunction with other professionals, such as dental solicitors and accountants. They are able to help maximise the profitability of the business, as well as ensuring that if you are planning for retirement, any pension contributions you make are as tax-efficient as possible.
My job is to help clients to think about planning for the future - the short, medium and long-term. This is not so much about forming an exact date, but more about helping them reach a position where they have choices and can make the most of their years of hard work, transitioning into their next chapter in life as smoothly as possible.
At Wesleyan Financial Services, we have a team of Specialist Financial Planners available to provide support and guidance on a range of financial matters – from practice protection to estate and legacy planning. You can find out more about our Dental Specialist Financial Planners on our website.
Tax treatment depends on individual circumstances and may be subject to change in future.