Finding The Right Exit Strategy: Striking A Personal Balance Between Financial & Emotional Readiness

You're listening to the Phil Klein Dental Podcast. So at some point in your career, you will decide to exit out of your practice if you're a practice owner. So the question is, when do I start thinking about this? And it's good to be prepared for everything, and especially when it comes to your dental practice. So do you need to prepare two years in advance, five years in advance, 10 years in advance? To tell us more about this is Eric Miller, our guest today. He has been in the financial planning industry for over 20 years. He's the co-owner and chief financial advisor at Econologics Financial Advisors. He takes pride in helping practice owners become what he calls the financial heroes of their own stories and has taken this passion to over 600 families in the past decade. During this time, he's had over 15,000 conversations with practice owners regarding money, investing, practice expansion, practice transitions. taxes, estate planning, and so forth. So he certainly knows a lot about this topic. Eric, thanks for being on our show. Thanks for having me on, Phil. Appreciate it. To begin, if someone is thinking about exiting a practice, what should they be really focused on and what do you recommend to them? Simple. Two things that you got to ask yourself when it comes to exiting a practice. I think paramount before anything else. Number one is your emotional readiness. You know, are you finished with the game? Is there anything else that you felt like you need to prove or anything you also wanted to achieve? Because... know, you know, if you want to practice, you know, you're going 100 mile an hour. And if you don't have a replacement activity of something that you're going to do afterwards, then it can cause a problem, you know, and I've seen it happen. So I think the first question you have to ask yourself is like, am I emotionally ready to exit the practice? Second question is going to be then, am I financial financially ready? Have I created enough wealth? Because. Look, when you sell that practice, you're never going to make as much income off the sale proceeds as you do while you're a practicing dentist. So you really have to make sure that you've created enough wealth outside income sources that in combination with the sale proceeds is going to allow you to live the financial life that you want to live. Those are really the two main things that I really try to stress to someone that's even considering selling. Are those two questions, your emotional readiness and your financially readiness? And have you really thought those two things through? So I would assume, Eric, that it's really important for a dentist to really think about how they're going to exit their business. before they get to 66 years old or before they get so tired and their eyes are fatigued or their back is really hurting them and they can't do it anymore, right? Because that's not a good situation to be in when you want to sell your practice. So you really need to plan for this in advance, I assume. Yeah, I think we lean more on, okay, what does your financial situation look like? Because, you know, when you're looking at selling, again, you know, You have to look at your practice as something that has some value to it. And unfortunately, when I see someone that's in that condition where they've gotten to that age and they start getting burnt out a little bit, it's reflected in the value of the business. And it's probably a reason why they're getting burnt out is because of that. So it's just paramount to then start looking at, hey, have you prepared yourself financially to be able to sell the practice? And then what's the method? that you're looking at to, to be able to sell, you know, are you going to sell to an associate? Is there a DSO? Are you going to sell to a competitor? You know, you have to start looking at like, what is my, what is my out strategy right here? And really, and truly, I want to start looking at that much sooner if possible. That's why I think the young Dennis on here, start thinking about your exit strategy the day that you start your practice. That's not super practical. But it does make a lot of sense when you think about it. Do most dentists sell their practice to their associate? Do they say, okay, I'm going to retire in approximately five years. I'm looking to get out. And they take an associate on and then they transition that office, their practice to that associate. Is that the most common or what are the most common processes that you've seen in exiting a dental practice? I think it really depends on the era that you're talking about. If you're talking about pre-2015, it was probably more selling to associates. But then as what happened to the veterinary industry and the physical therapy industry and a lot of these healthcare industries, a mountain of private equity money has moved in. And because there's so much money that these private investors needed to get a yield, they said, hey, let's move it into this healthcare space where we can start to accumulate these practices. And I think that's where some of the consolidation has occurred. And that, you know, it's been, I mean, you may have an opinion on corporate and how they function and, you know, the care that they deliver. but they do not know how to run a business. And I'm seeing a lot more people that are selling to these corporations right now, primarily just because they're going to get values that are much higher than if you sell to an associate. Yeah, so that whole arena has changed. The landscaping has certainly moved towards DSOs, dental service organizations, like you mentioned, and some of these companies are just gigantic. A small group, for instance, would pick up 30, 40, 50 offices, and they would sell to the larger group that has 1,000 offices, and it just keeps going, and everybody keeps making money along the way. The key thing is that the dentist who built the office up in the first place comes out with some money that makes them financially sound. Who do you recommend a dentist talk to for consulting when they're looking to exit their practice? Eric will be right back to answer that question in a moment. But first, when it comes to fighting dental disease, we all understand the importance of an effective prevention strategy. This includes patient home care compliance, regular hygiene visits, and using the best prevention products available. That's why so many dental practices rely on VOCO's award-winning preventive care product line. Recommended by top dental clinicians, Remin Pro, Proflorid Varnish, Admira Protect, and Grandiose Seal are tried-and-true products that are effective, easy to apply, and result in successful clinical outcomes with high patient satisfaction. Whether it's for fluoride treatment to seal pits and fissures or to treat hypersensitive teeth, VOCO's premium preventive care products help you win the battle against tooth decay and sensitivity. So when you're thinking prevention, think VOCO. Request your free sample today at vocoamerica.com. Well, you definitely have to have a team because if you're thinking about exiting, you obviously need to have a good CPA. You're going to need legal representation. Do you need a broker? You know, I think it all depends on the size of your practice. You know, if you have a fairly large practice with multiple associates, I probably would get some kind of a... mergers and acquisitions person involved, and then a financial advisor as well. So I think you're going to need all of those on your team because they're going to really help you with different areas. The accountant's obviously going to help you from the tax aspect. The attorney's going to help with all the purchase agreements and the LOIs. the non-competes and reviewing all that. And then your financial advisor is going to help you with, okay, what the heck do I do with this mountain of money that I'm about to get? I don't want to blow it. I don't want to just have it sit in the bank account earning 2%. What do I do with it? So it is kind of stressful. I mean, I'm a person that has never done this before. It is the largest financial transaction. in your life, I just would not go at it alone. So what areas do you believe create the most value in a practice? Well, look, I mean, you can go through a number of different areas, but most practices are going to get valued on a multiple of their net earnings, right? Which is your, call it your profit, you know, the EBITDA, whatever terminology you want to use. It's got to be valued on that. That would certainly be a huge component when it comes to valuing a practice. What's another thing? Well, depending on who you're selling to as well, if you're selling to corporate, they're going to want more than just you. So what's going to add value to a practice? Having multiple associates certainly will have that. Having some systems in place, good marketing. good PR, you know, good social media presence. You know, these are all things that, I mean, if you're going to buy a business, you're going to want, you're, you're going to want to see these things in place. If you don't see them, you're like, oh, I'm gonna have to fix this. And that of course is going to have an effect on, on the value. So, you know, I think it just goes back to, you know, if you have. good policy and procedure, good leadership in the organization, people that have been there don't show a lot of turnover. These are all going to be things that are attractive to a seller that will give them confidence to give you a higher multiple. I always thought there was just a pure formula for the acquirer to come in and say, I want to buy Dr. Smith's office. What's his revenue? What's his bottom line? And here's the multiple in this area. This is what corporate will pay. If it's a corporate purchase, is that still how it works? I mean, I've seen some of the formulas of what they come up with and it's, it's super complex, but you know, I think the rules of thumb, you know, before was, Hey, you know, 50 to 60% of your collections. You know, I think you can probably throw that out the window. Maybe it's still true for, for smaller one doctor practices. But I would say mostly that if you have a practice that has. you know, an EBITDA of over six to $800,000. If you have multiple associates, you know, you have good systems, you have good leadership, you're in a demographically good area. The location has room to expand and grow. You know, that's not, it's not unheard of for you to be in that seven to eight times earnings range, which is pretty significant. And so again, it just goes back to knowing who you're going to sell to and what do they want. And following what you just said, what do they want? Here's another question. How much in advance should a dentist prepare when looking to exit a practice? In other words, if the practice would get more money by selling it to a corporation where they want the dentist to stay on. So if the owner is ready to get out in five years, maybe that owner should sell now. reap the benefit of saying, yeah, I'm going to be around here for five more years. And that's what that particular acquirer wants. Does that make any sense? It does, except my experience has been that, you know, these people have run these practices for so long. They've been in charge for so long. And then once you sell to corporate, you are an employee. And that doesn't sit well with a lot of people that have owned their practice for a number of years. That's probably one of the things that I've learned and just, you know, going through the experience is just, You know, the corporate comes in, they say they're not going to change anything, but of course they do because they own the business. They can do whatever they want to. And yeah, there's non-competes and, you know, they give you an employment agreement and, you know, you know, going into, which you should negotiate very hard as far as your employment agreement of exactly what you want, how you want your life to look. But, you know, after a couple of years, it seems like, you know, I just don't like this anymore. And I see a lot of people just kind of leave after two years. But to your point, if you got five years that you're looking at and you're okay with being an employee, then it would be time to start looking at preparing for an exit. Most of these corporations, I mean, they close pretty quick. The due diligence phase is, I mean, they've got it taped so they know exactly what they need. They can usually do it in 90 days, somewhere around there, three months. maybe four to five months. So it's a pretty quick cycle when you think about it. You know, when you sell a home or when you're about to sell a home, you can do comps and say, okay, in this area, these homes went for $500,000, $550,000 would be really good, whatever. How do you ensure that you're getting the maximum value out of your practice when you sell it? That's a good question. I think certainly you have to kind of keep a pulse on what practices are selling for nationwide. And if you can do that, look, I mean, but every sale is going to be different. It's going to have different circumstances. It's going to have nuances. You're in different locations that may have an effect on the sale. You know, I've seen some corporations like pay for like a practice that was doing. Not really well at all. And I'm like, why did they pay so much for this practice? And, you know, it just turns out they loved the location and they thought that it could be like an anchor practice. So they were willing to pay much more than I would have ever paid for it. But, you know, again, it's just it's circumstantial depending on your location and what the buyer is looking for. So, Eric, we really appreciate you on the show. And I know you're going to be doing more podcasts with us. on related topics like financial advisor for the dentist why the traditional financial advisor is failing you I know that's one podcast that we have on the horizon and then of course we will be talking about why private practice is not a job. Many of us as dentists look at private practice as a job, but it's really a long-term business investment. And we're going to be talking to you about that. But until then, what's the best way to reach you, Eric, if any of our listeners are interested in getting some financial advice from you regarding any of their financial concerns? Yeah, super easy. You can just go to wealthforpracticeowners.com, wealthforpracticeowners.com, and that'll direct you to some of our dental specific... information and you can download that from there. Very good. Thank you very much, Eric. Thank you. If you're enjoying this podcast, please leave a review or follow us on your favorite podcast platform. It's a great way to support our program and spread the word to others. Thanks so much for listening. See you in the next episode.