Planning for future retirement and the sale of your veterinary practice
You've carefully cultivated the success of your practice with your sharp eye for business, client relations, and patient care for the last 15 or 20 years. But now the lure of retirement calls. Or maybe your practice sale is just a tiny dot on the horizon. It's still important to prepare for this transition out of practice ownership.
You're facing tough questions: How can you ensure that the value of your biggest investment is at a level to help fund your financial independence? When are you going to sell? Who are you going to sell to? What do you need to consider before a sale? For starters, you need to know how much your practice is worth now so you know what to improve before it's time to sell. Take some tips from Dr. Shores and Dr. Farmer and start planning your exit strategy now. (Note: This is a composite scenario. The names of the individuals and practice have been changed.)
READY FOR RETIREMENTDr. Nancy Shores, age 55, has been the sole owner of Beach Front Animal Hospital for 15 years, and she hopes to retire in five years. She has a buyer lined up and wants to be sure she can afford to reduce her schedule and sell her practice.
To plan for financial security, Dr. Shores must first determine the dollar value of investments she'll need to generate the income she wants to have during retirement. She knows she doesn't want to change her standard of living after she retires. In fact, she plans to travel extensively, which will increase her cost of living. With tax, the required annual income to cover her projected living expenses is $150,000. Dr. Shores has invested in both personal and business assets (see belove "Your plan for financial independence"). Her liquid personal investments include CDs, a Roth IRA, a 401(k), and mutual funds, while her illiquid investments include a rental property. Her business assets include Beach Front Animal Hospital and the real estate the practice is located on, which she owns.
Dr. Shores' advisor has helped her calculate the future value of her personal assets at retirement and compared her current investments to the investment base required to cover her living expenses at retirement. When Dr. Shores sees that her investments, excluding her practice, are $1.1 million shy of her requirements, she knows that her practice has to make up the difference. (Editors' note: Benchmarks 2010: A Study of Well-Managed Practices, features a worksheet to help you summarize your current investment base. To order this year's study, visit http://dvm360.com/benchmarks.)
WHAT'S THE PRACTICE WORTH?
First, Dr. Shores needs to determine the current value of her practice so she'll know where she stands now in relation to where she wants to be. Disappointingly, her practice value comes in at $439,000, more than half a million dollars less than she hoped. Fortunately, the valuation process that gave her that number has also brought to light the areas that need additional attention.
The practice valuator explains that for Dr. Shores to reach her goal of $1.1 million, she'll need to increase her earnings and suggests several ways to do that. Dr. Shores will value the practice again in three years to ensure she's making progress toward her target value and again at the date of the sale so she'll have an accurate reflection of the practice value.
Dr. Shores' associate, Dr. Kevin Farmer, wants to buy 100 percent of Beach Front Animal Hospital. Because Dr. Shores wants to retire in five years, both doctors have decided it would be best to create a development plan so Dr. Farmer can gain an understanding of how the practice operates and the types of decisions he'll make as an owner. Dr. Shores also wants to be sure Dr. Farmer is prepared for the debt load from the purchase, and Dr. Farmer wants to understand the financial benefits he'll gain and the responsibilities he'll assume as an owner.
While Dr. Shores would prefer to delegate staff development to Dr. Farmer as soon as possible, she recognizes that his current strengths are better suited to medical development and the management of facilities, equipment, and technology. She asks Dr. Farmer to take the lead (with her guidance) in these areas now. In successive years he'll add responsibilities. Dr. Farmer will supplement his ownership knowledge by attending practice management sessions at continuing education conferences so he's comfortable making decisions in all areas of management by the time he buys the practice.