Selling a Practice - What Slowing Down Can Cost You
Updated: Feb 26, 2019
Every dentist I have talked to over 25 years has told me that the sale of their practice is an important part of their retirement plan. Before reaching the point of listing their practice for sale, many dentists have cut back and slowed down in preparation for retirement without understanding what it might actually cost them to do so.
On the surface, it seems that a practice with 65 percent overhead that reduces its income $100,000 per year would result in a $35,000 loss in income. Digging a little deeper, the only expenses on the last $100,000 were basically clinical supplies and lab fees, which together usually account for about 15 percent. Add another 10 percent savings for salary cutbacks, (Which by the way, when many dentists slow down in production they don't also reduce the appropriate and corresponding amount in staff labor costs. This leads to an even worse case scenario on the practice profitability, but that's a discussion for another time) and the total incremental expense is 25 percent on the last $100,000 of income. In actuality reducing the practice income by $100,000 only results in an expense savings of 25 percent or $25,000, but it has an unexpected consequence of a loss in owner net income of 75 percent or $75,000. If this practice was listed for sale at a price value of 75 percent of its collections, a reduction of $100,000 would result in a lowering of its price by $75,000.
To understand, let's take a look at the true structure of the economics of a dental practice, that is that the overhead from the first dollar earned up to the break-even point is 100 percent. After the break-even point, overhead expense is approximately 25 percent of the incremental earnings. While the blended rate may be 65 percent, it doesn't paint an accurate picture in understanding the cost of slowing down.
It's important to understand when considering retirement that the sale proceeds of a practice will approximately equal the income a dentist could earn for the next three years. With this understanding and continuing to practice, the dentist is working those next three years for free. Hopefully this helps to make a more informed decision about slowing down and weighing the true costs when determining the advantages of having extra "free" time headed toward retirement.
Grant Gerke is the founder and president of Mountain Top Practice Transitions. He has spent 25 years in the dental industry and personally services the Western United States. He is located in Portland, OR and can be reached at (503)-701-6697 or write to him: firstname.lastname@example.org