Takeaways:

1. The procrastination penalty emphasizes the critical need for early planning in exit strategies.
2. Valuation illusions can lead to unrealistic expectations about the worth of dental practices.
3. Understanding tax implications is pivotal to maximizing the proceeds from a practice sale.
4. The successor mirage highlights the dangers of informal transitions without binding agreements.
5. The high income, low wealth paradox illustrates that high earnings do not guarantee financial security in retirement.
6. Emotional anchors can inhibit dentists from effectively transitioning out of their practices.

Let's discuss your Dental Practice Exit plan today: https://www.klassolutions.com

Foreign.

Hello, my name is Phil Cole.

And just a quick reminder about our rebrand.

We're now the Dental Business Podcast.

Just a new name, same great business content for dental practice owners.

So if you haven't already, check out our updated artwork and help us spread the word about the rebrand.

So now let's dive into today's episode.

And that is why your dentist exit plan is doomed to fail.

You know, you've poured 30 years into building your dental practice.

30 years of early mornings, probably late nights, tough cases, and wrestling with insurance staff and patient care.

If your life's work and you think you've got a solid plan to cash out and sail into retirement, you followed the standard advice, you've chatted with colleagues, and you've got a number in your head.

But what if that was advice that was misleading you straight into a trap.

What if the standard exit strategy in the dental world is fundamentally, maybe catastrophically, designed to fail?

It's a terrifying thought, but it's the reality for a shocking number of dentists.

They hit the finish line, ready to sell the biggest asset they've ever owned, only to find the foundation of their retirement plan is made of sand.

That comfortable future they imagine just evaporates, replaced by the grim prospects of working until their 60s or late 70s.

And hey, we even have the 80s.

Not because they want to, but because they have to.

They watch their life's work get devalued and the financial security they fought for slip right through their fingers.

This isn't a scare tactic.

It's quite an epidemic happening across all the practices across the country.

I've spent years on the front lines of dental practice and their transitions, and I've seen the wins.

But more importantly, I've seen the tragedies.

I've watched brilliant clinicians, master of their crafts, make predictable and entirely avoidable mistakes that cost them hundreds of thousands and sometimes millions of dollars.

They fall into the same traps because our industry trained you to be an expert clinician, but it failed to train you to be an expert CEO.

This podcast is the training you've never gotten.

We're going to expose the critical flaws in conventional exit planning and pull back the curtain on the six predictable traps designed to doom your exit.

More importantly, I'm going to give you the blueprint to navigate around them and bulletproof your future before.

Before it's too late.

So if you're a dentist, whether you plan to sell in the next two years or the next 20, this is the most important financial discussion you'll have.

This year.

So let's get to it.

The first and most common trap is what I call the procrastination penalty.

It's the belief that exit planning is something you'll do when you're ready to exit.

As a dentist, you are a master of delayed gratification.

You survive dental school, residency, and then the lean years of starting a practice.

So the idea of just putting your head down and focusing on the clinical work while pushing off the business stuff until tomorrow feels, well, 100% totally natural.

The fatal flaw here is that by the time you feel burned out and ready to sell, you're already lost the game.

The decision to sell is almost always emotional.

You wake up one day, you're exhausted, fed up with staff drama.

I'm tired of the physical strain, and you just want out.

You call a broker and you say, I'm done.

Just sell my practice.

But selling a practice is a state of burnout.

In a state of burnout, I should say, is like trying to sell a car that's running on fumes with a messy interior.

A sophisticated buyer, especially a corporate group or a sharp private dentist, can smell desperation a mile away.

They see the declining revenue, the outdated equipment, and the team that is in disarray because the leader has missed mentally checked out and possibly checked out for years.

And their offer will reflect that drastically.

People, the hard truth is the most successful high value transitions are planned a minimum, a minimum of three to five years in advance.

Think of your practice as a complex machine.

To get top dollar for it, every part needs to be cleaned, tuned and running in its peak performance.

When a buyer pops the hood.

That doesn't happen overnight.

So what are those three to five years for?

Well, let's just take years five to three before exit the strategic phase.

This is when you get a baseline valuation, not from a free online calculator either, but a real professional appraisal.

This valuation is your report card.

It tells you exactly where your practice is strong and more importantly, where it's weak.

Maybe your overhead is creeping up.

Maybe your hygiene department is underperforming.

This is the time to spot those weaknesses and build a strategic plan to get them fixed.

You're no longer just practicing dentistry.

You're exercising actively grooming your biggest asset for a premium sale.

Years three to two before the exit.

This is your optimization phase.

Now you execute the plan.

You work with a coach or a consultant to streamline your systems so the practice runs on documented protocols, not just your personal charm or your whimsical.

You clean up your financial records Separating personal expenses from your business to present a crystal clear picture of profitability of your practice.

You might make strategic investments in tech or facility upgrades that buyers love.

Every decision gets filtered through one question.

Will this increase the transferable value of my practice?

Now, year one and before the exit, this is the polish phase.

Your financials are pristine.

Your revenue and profit are on a clear upward trend.

Your team is stable and your systems are humming.

You've assembled your transition a team.

A dental specific accounting firm, cpa, a transitional attorney and a top notch transition consultant.

Now when you go to market, you're not selling a problem.

You're now selling a turnkey.

Opportunity.

Waiting until you're tired robs you of all this entire process.

It puts you in a reactive position, at the mercy of the market and the buyer.

You're forced to sell what you have and not what you could have built.

The difference isn't just a few percentage points.

It can be a 20 to 30% hit in your final sale price.

We have had this happen more times than what we want to see as a transition company.

So which affects you on a million dollar practice?

It could be a quarter of a million dollars left on the table.

That's the procrastination penalty.

So the solution is a mind shift.

Your exit plan doesn't start the day you call a broker.

It should have started five years ago.

If you haven't started, well, the clock's ticking.

Get a professional valuation now.

Not to sell, but to plan.

That's why we created the lifetime practice valuation.

So that that planning stage which is the most important can happen.

Now.

The second trap that ensnares countless dentists is the valuation illusion.

This is the seductive yet wildly inaccurate world of back of the napkin math.

You've heard it at conferences.

Practices in this area are selling for 80% of collections.

Or my buddy sold his for two times the revenue.

So relying on these rules of thumb per se to value your life's work in financial is financial malpractice.

It sets unrealistic expectations and leads to to devastating mistakes.

Let's be clear.

Buyer and more importantly, the bank financing them doesn't care about the rules of thumb.

They care about one thing and one thing above all else, profit.

For a smaller practice, selling to another dentist.

This is often called sellers discretionary earnings.

For large practices or corporate buyers, they're going to call it ebitda.

Earnings before interest, taxes, depreciation and amortization.

This is what the true cash flow of the business generates to pay the new owner, cover the loan and provide a return on investment.

Two practices can collect the exact same $1.2 million, yet dramatically have different values.

And I don't think dentists understand that.

So Practice A collects 1.2 million, but has bloated overhead and messy books.

Its real adjusted profit might only be 250,000.

But now let's look at practice B, where it collects that same 1.2 million, but it is run like a tight ship with clean financials.

And its cash flow, or EBITDA, whatever you want to call it, is $400,000.

A buyer is purchasing your profit, not your revenue, using a percentage of collections.

Guess both practices seem equal, but in the real world, practice B is vastly more valuable and will get a higher percentage.

A buyer can afford to pay way more because it's got a higher cash flow.

It supports a larger loan.

If a valuation multiple for that practice type is, let's say, just say five times EBITDA, practice A is worth 1.25, while practice B is worth 2 million.

That's a $750,000 difference from the exact same revenue.

That's why you cannot go off of the usual things that you hear of 80%.

This is why you must become obsessed with profitability in the years leading up to your sale.

Another part of this illusion is potential based pricing.

This is when a seller says, I, I only work three days a week.

The buyer could easily add a fourth day or I don't place implants.

But if the new owner does, this practice is going to explode.

Buyers don't pay for potential, they pay for proven performance.

They're buying your history, not your unproven future.

The financial piece of this illusion is emotional overvaluation.

You've poured blood, sweat and tears into this practice.

That emotional investment I know is real, but it has zero dollar value on a balance sheet.

A buyer is making a cold, calculated business decision.

Confusing your emotional equity with financial equity is a recipe for pricing your practice out of the market, where it languishes for months and years and just go stale.

The solution?

Get a formal professional valuation from a firm that specializes in the dental industry.

Like Class Solutions, we perform a deep analysis of your financials, patient demographics, location, equipment and your marketing data.

This valuation is your anchor to reality.

Don't just guess what your practice is worth.

Know what it's worth.

So we've navigated the first two traps.

You planned ahead.

You optimized your practice and scored a top offer.

You're already picturing life on the lake.

But then the bomb goes off.

It's the tax time bomb.

And it can silently vaporize 30% or more of the sale of your practice.

So this is trap number three and it comes from a huge misunderstanding of how a practice sale is taxed.

The biggest mistake is assuming that let's say you got that top $2 million is all tax at a friendly long term capital gains rate.

And well, it's not.

When you sell a practice, it's almost always an asset sale.

This means the IRS sees you selling a collection of different assets and each is taxed at a different rate.

The negotiation over how the purchase price is allocated across the asset is one of the critical parts of the deal.

So here are the main categories.

One, Goodwill.

This is the intangible value.

Your reputation, your patient base.

This is usually the largest portion of the sale and thankfully it's typically taxed at the lower long term capital gains rate.

Your goal is to allocate as much as possible here.

Next is the hard assets or your equipment per se.

This is your chairs, X rays, units, you know, your computers.

Here's the painful part.

This is subject to depreciation recapture.

So for years your CPAs gave you a tax deduction for depreciation.

Well guess what?

Now the IRS wants their money back and is going to tax it as ordinary income that rates those rates can go as high as 37%.

Next, the covenant not to compete.

The buyer will pay your promise not to open a new practice across the street.

These payments are taxed as ordinary income in nearly every case.

So buyers want to allocate more.

Here you want to allocate less.

And then last there's accounts receivable if the buyer purchases your outstanding balances.

This is also taxes ordinary income.

So let's look at this for a second at that $2 million sale.

So a poorly structured deal, the bomb that it would be would be a naive seller that lets the buyer's team dictate the allocations.

The goodwill at 1.2, let's say you put it at 60% and your hard assets and AR are 600,000, non compete 200,000.

And in this scenario, a massive $800,000 of sale is subject to high ordinary income rates.

The tax bill could easily top 500 to 600,000.

Your $2 million sale just became a $1.4 million sale.

Smart structured deals where the bomb is diffused I would say is a safe a savvy seller guided with a good dental transition consultant and a dental team like a dental CPA negotiates the allocations before signing anything.

So let's take goodwill and put it at 1.7 hard assets and AR at 250,000 and a non compete of 50,000 here now it's only 300,000 is subject to higher tax rates and so the tax bill might be closer to 350 to 400,000.

By simply negotiating this, the seller just put an extra 150 to $200,000 in the retirement account.

Also, your legal entity matters.

If you're a C corporation you can still face double taxation.

I know there's some things that are changing on that possibly but the corporation pays tax and then you pay tax again personally.

An S corp, an LLC is usually much better.

This is yet another reason why early planning is non negotiable.

The solution is to have an experienced dental cpa, a good transition attorney on your team along with the transition consultant.

From the start, never ever sign a letter of intent without your experts reviewing it.

Well, so we're halfway through and you can probably see how easy it is to fall into some of these steps.

So let's continue on though and let's go to the fourth.

The fourth trap is is one of the most painful because almost, or it often, I should say, involves people who trust it's the successor mirage.

The first form, I think, is the associate to owner fantasy.

The logic seems perfect.

You hire a bright young associate, mentor them, and when you're ready, you sell them the practice.

Smooth, seamless, and everyone's happy.

It sounds wonderful, it really does.

But transition advisors report staggering failure rates for these informal handoffs, with some estimating up to 80% fall.

That 80% of them fall apart.

And why?

Because it's all good intentions.

But good intentions aren't a business strategy.

The failure points are predictable.

Often there's no legal binding agreement.

And when I say, I guess I should maybe not say just often, almost all the time.

There's no legal binding agreement, just handshakes and vague promises.

And as years go by, the senior doc imagines a high practice value while the associate buried in student debts sees all the old equipment that hasn't been updated at all, nothing's changed, and has a much lower number in mind.

And then when it's time to talk numbers, the gap is too wide to bridge.

Trust then is broken and the associate you train walks out the door and opens a practice just down the street because there was no legal document.

The second form of the mirage is the first offer is always the best offer fallacy.

This usually comes from unsolicited letters from a DSO or private equity group full of flattery and a huge headline grabbing number.

You get excited and lock into an exclusive period from them, thinking you've hit the jackpot.

I'm telling you, this is just a classic tactic.

That huge number is often tied to such a complex deal with company stock.

Long employment contracts, now five by fives and an earn out where you only get paid if the practice hits targets you no longer control.

Once you dissect these offers, the guarantee after tax cash is often far less than you would have got on the open market.

But by then it doesn't matter because it's too late.

You're emotionally committed to back out, to be committed to backing out.

I'm sorry.

The solution here is structure and competition.

If you want to sell as an associate or to an associate, treat it like a business transaction from day one.

Get a qualified dental attorney to draft a clear buying agreement that that outlines the timeline, valuation method, the financial terms.

This clarity protects both of you.

For unsolicited offers, the rule is simple.

Never entertain a single offer in a vacuum.

The only way to know your practice's true market value is to create a competitive environment.

A good transition consultant does this by confidently marking your practice to a wide pool of qualified buyers.

Now, private dentists, we feel, are the best.

If you want to sell to a corporate group, that's fine, but you know what you get.

But when you have multiple offers, you have power.

You can compare not just the price, but the dental structure, cash at close, and most importantly, not just the money, but the cultural fit.

Competition is the single best way to ensure you get the right price and the right successor.

Now, the fifth trap is insidious.

It's not about the sale, but it's about the 30 years leading up to it.

It's the high income, low wealth paradox.

This is huge.

Dentists are high earners, but a story we see all the time and way too often is they reach their 60s with a high income, but a surprisingly low net worth.

Their entire retirement is balanced on one thing, and it's the sale of the practice.

This happens for a few reasons.

First, I call it the life cycle.

Creepy.

After years of living like a student, it's easy to let your spending rise in lockstep with your income, leaving little room for savings.

Second is treating the business checkbook like it's your own personal atm.

And this happens way too much.

This not only devalues your practice, but it also hides your true financial picture.

But the most critical reason is a weak saving strategy.

Saving whatever is left over is what I Hear all the time the financial successful that the financially successful do exactly the opposite.

They pay themselves first.

The solution is to adopt the mindset of a wealthy CEO.

First, create a strict separation between business and personal accounts.

Pay yourself a consistent salary and live off of that.

The money left in the business is for the business.

Second, automate your savings.

Treat your retirement contributions like a mortgage payment.

Non negotiable.

Set up Automatic transfers for 15 to 20% or more of your gross income into your retirement accounts.

Automation beats procrastination every single time.

Third, use the right retirement vehicles for a high income practice owner.

A simple IRA or 401k isn't just enough.

You need to be working with a financial advisor.

Financial advisor on advanced strategies.

And I say financial advisor because they are, I feel they are different than a financial investment person.

This could include a profit sharing plan, a cash balance plan, a type of pension that can allow for massive tax deductible contributions, sometimes over 100,000 a year.

Your practice should be the engine that funds a diversified portfolio.

Not your only plan.

The sale of a practice should be the celebratory capstone on your wealth.

And it should not be desperate last ditch effort to fund your future.

The final trap isn't about numbers or taxes.

It's about you.

It's the emotional anchor.

The profound challenge of letting go of the practice that has defined you.

For 30 years.

You haven't just been a person, you've been the doctor.

Your identity is woven into your practice, your patients, your staff, your community.

It's the center of your universe.

The thought of that disappearing can trigger a real identity crisis.

Who will I be without my practice?

What will I do all day?

This fear of the void can cause you to unconsciously sabotage your own exit.

You find reasons to delay.

You set an unrealistic price.

You nitpick the buyers, which we see a lot.

It's your subconscious desperately trying to hold on to only the only identity that you know.

You also feel a deep responsibility for your staff and patients.

This can lead to making unreasonable demands on the buyer.

Like insisting they guarantee employment for your entire team and forever.

Which we have a case right now, which we're trying to talk them out of that understanding that it's not possible.

They have to understand this and you have to understand it will kill a deal.

The solution is to plan for your life after retirement with the same diligence that you planned for the sale.

The sale isn't the finish line.

It's the starting line for your next chapter.

You must design that chapter.

Get that chapter that what it looks like years before you sell?

What hobbies have you neglected?

Do you want to travel?

I mean, do you want to volunteer?

Some say that they want to go back to teaching or they want to spend time with just their grandkids.

Start building that new identity while you're still practicing.

You need to be retiring to something, not just from something.

Having an exciting vision for your future makes letting go of the past infinitely easier.

Work with your transition team to find a successor who is a good cultural fit.

This is key.

Knowing you're leaving your life's work in capable, caring hands provides immense peace of mind.

And develop a communication plan with your broker and the buyer to tell your staff at the right time in the right way.

This frames the transition as a positive continuation and not a scary end.

Don't let the emotional weight of your past.

Anchor you down.

Plan your next chapter with intention and you'll find the freedom to finally let go.

So there they are.

The procrastination penalty, the valuation illusion, the tax time bomb, the successor mirage, the high income, low wealth paralyzed paradox, and the emotional anchor.

Each one is a landmine capable of blowing up your retirement.

But now you have the map.

The common thread is proactive, expert guided planning.

Trying to sell your practice the biggest financial transaction of your life without a team of dental experts is like trying to do a root canal on yourself.

The result is going to be messy and it's going to be painful.

Your life's work deserves to be the foundation of a secure and joyful retirement.

You've earned it.

But it won't happen by accident.

It happens by design.

It starts by taking the first step.

If this podcast was valuable, please subscribe and share it with all your colleagues who who need to hear this.

We at CLAS Solutions are on a mission to help every dentist achieve the financial freedom they deserve.

The standard exit strategy might be designed to fail, but your plan doesn't have to be.

Take control, build your team and bulletproof your future.

Thanks for listening to the Dental Business Podcast with Phil Cole.