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This seemingly counterintuitive line is from the musical “South Pacific.” Most of us believe there must first be a foundation, and then a dream can follow. The truth is the other way around. Without the dream, a foundation can never be laid that will provide a pathway to that dream.
The largest income-producing asset you own is your practice. It is the means to achieving your dream. When administered with careful preparation and proper timing, your transition plan will enable the core of your dream, says Roger K. Hill, practice transitions expert with The McGill & Hill Group.
The common assumption is that transition planning can be done at the time of the transition. This will usually exact a cost both in money and human terms by way of lost opportunities, wasted time, and broken relationships.
Successful transitions (and dreams) begin with a time frame that is usually five years or more in advance. This is not premature when you consider your dream. A well-thought-out transition plan provides:
- A timeline to measure your progress and implement necessary adjustments.
- A plan to help shape all of the aspects (financial, timing, operational, and personal) into a cohesive whole so it is effective both now and in the long run.
- Identification of the earnings available for retirement savings for the present and your transition, including the years of a partnership, if that is the best choice for you.
- A thorough look at several alternative models, as well as different timelines, to assess what is best for you.
- A vehicle for determining the necessary growth to include another doctor while maintaining your earnings.
- Establishment of the after-tax gain from the sale of either the entire practice or partnership interests (i.e., a buy-in and buy-out), provided the plan is constructed properly.
A prepositioning transition plan is comprised of two components: a valuation study (appraisal) and cash flow projections. Most doctors believe the valuation study is the central component in a transition plan. While it is a necessary beginning point, it leaves a number of critical questions unanswered.
For the senior doctor, the question is: “When I enter into this plan, will I be better off or at least neutral from a financial perspective, and over the long term, what is the protocol for selling out when it is appropriate?” The younger doctor will also have a question: “Once I’m an owner and paying overhead expenses, plus the acquisition cost, occasional new capital expenditures, and income taxes, will there be money left for beans and weenies?”
The valuation study is not designed to answer these questions. This brings us to the second component.
Envision a page with your name at the top and 10 columns of numbers; each doctor will have a separate page. Each column represents one year, and the number at the bottom is after-tax cash flow.
Essentially, this illustrates the financial benefit for all of the in-between years as well as transition years after all costs have been considered. Only this will provide the perspective you need. You do not want to compromise on knowledge and perspective.
More importantly, it can be used to model any number of alternatives to establish which transition alternative is best for you, establish timing, and define financial benefits. The following example illustrates what a powerful tool these projections are, provided that they are constructed correctly.
Dr. Franklin has a successful practice with two associates. His time frame for transitioning is approximately five to seven years. By modeling the outcomes of both a partnership (followed by the sale of his remainder interest) or selling the entire practice, he was able to reach a sound decision that was different than he originally thought.
The key to any relationship — or for that matter any dream — is knowing what to expect after all the alternatives are explored. Most failures can be traced to unfulfilled expectations. That makes sense; unfulfilled expectations will invariably undermine the dream.
Alternatively, a transition plan that defines expectations provides a reassuring, commonsense pathway to the dream. Planning and prepositioning is really just bringing your dream to life. As the song says, “If you don’t have a dream, how you gonna have a dream come true?”
John McGill provides tax and business planning exclusively for the dental profession and publishes “The McGill Advisory” newsletter through John K. McGill & Company, Inc., a member of The McGill & Hill Group, LLC. Hill provides transition planning for practice sales, partnerships (buy-in/buy-out), practice mergers, associateships/compensation analysis, and financial forecasting (proforma) through Roger K. Hill & Company, also a member of The McGill & Hill Group, LLC. Visit www.mcgillhillgroup.com for more information.
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