Passive Wealth Accumulation in Dentistry
Since the time of G.V. Black and his famous phrase “Extension for Prevention”, dentists in North America have searched for methods to improve the oral health and appearance of their patients. Along the way, many have achieved financial wealth, whereas others have struggled financially, despite being members of one of the highest paying professions in North America. Why is there such a disparity amongst members of our profession?
Although there are many contributing factors, planning (or lack thereof) is certainly one of the primary considerations. Dentists’ income is either active (income derived when you have your hands in the mouths of your patients) or passive (income derived when somebody else has their hands in the mouths of your patients). One of the purposes of Practice Transitions at any stage in your practice life cycle is to allow you to consider Passive Methods of Income, leading to Wealth Accumulation which allows you either to retire earlier with your original wealth goals obtained, or to retire as planned with greater wealth accumulation than originally planned.
So, how do members of our profession accumulate wealth passively?
1.) Practice Mergers – through a practice merger, you can receive 15%, 30%, or even greater returns on investment since your fixed expenses remain static, and it is primarily production related expenses that you face. A knowledgeable advisor can show you how a 50% return on investment is obtainable over the course of just one year. Arguably, practice mergers may be the best form of investment a dentist of any age may make. Too often dentists look for satellite offices (which create potentially a double set of overhead expenses), when they might be much better pursuing a practice merger. In practice mergers, however, there are several issues of which you must be aware of in order to create the likelihood of success. These include geography, philosophy, and fee schedules. However, under the right circumstances, mergers are the optimal form of passive income!
2.) Incremental Sales – why wait until you are in your 60’s to sell? Start in your mid forties, and if planned correctly, you will potentially receive an additional 250% or more for the value of your practice through multiple sales of an incremental nature than you would by waiting to sell 100% at the end of your career. Proper planning which utilizes the concept of selling your practice in increments over 10 or so years rather than waiting many years to sell it in its entirety has many advantages in addition to increased passive wealth accumulation. Consider the fact that incremental transitions have additional benefits which allow for improved Quality of Life, reduced management responsibilities, and less chairside time.
With an Incremental (or Deferred Incremental) Practice Sale, a Seller and Purchaser each have their own, independent corporations, which in term operate the Practice. This allows for tax advantages for both doctors (as compared to single corporation ownership transition).
3.) Creative Transitions – an experienced and creative practice transition advisor has the skills and knowledge to structure transitions to meet your needs. Did you know that a Seller can receive 100% (or more) of a year’s gross income for the sale of their Practice, or that a Purchaser can pay only 50% of a year’s gross income for the acquisition of a Practice? Are you aware of a transition involving the transfer of only patient records, with compensation based upon time and percentages as guidelines? How about an Incubator Program for a transition – in which a young dentist practices in the facility of an experienced dentist (without any restrictive covenant) and then relocates the practice developed over time to their own location.
Creative transitions also involve the use of deferred tax strategies, turning your Practice from a non interest bearing asset into an interest bearing asset, use of specific terminology I in sales contracts (as in the consideration of “constructive receipt”), and other strategies which may not even be a practical consideration until 10 or more years in the future!
All of the above are possible, and with a skilled expert in the field of Practice Transitions, an accountant, and a financial advisor well trained in creative solutions in meeting your needs, you will be able to establish financial security for you and your family. Most dentists have a very good and high paying job, but in order to make a significant income, they must have their hands in someone’s mouth. Creative Practice Transitions, Incremental Practice Sales, and Practice Mergers are all methods to increase the possibility of passive income, and in some cases, without having your hands in anybody’s mouth, without using your own money, and using your talent in what you know best – dentistry!
This article originally appeared in Dentistry Issues, Summer 2015 Co-Authored by Dr. Ron Prokes, Co-founder and Owner of Legacy Practice Transitions & Legacy Transition Analyst Catherine Etters