“I can’t retire.”
Tom is a dentist. He has a busy practice. It took him decades to accumulate his client list, build his staff, and outfit his office. Some of his clients have been with him for over 20 years. Tom makes a great living; takes Fridays off; and throws amazing staff parties.
But he can’t stop. Ever.
“If I want to take the summer off, there’s no money coming in. My staff has to take the summer off too, and they can’t afford it. And if I’m not available to my clients, they’ll switch to another dentist. Then I won’t have the cash flow to pay the staff anyway. I’m close to sixty, and my business owns me. What can I do?”
Many entrepreneurs don’t build a business; they just buy themselves a job.
Maybe they’re a specialist, like a chiropractor or dentist or veterinarian. Maybe their business is built around them. Maybe they really are irreplaceable. And maybe, in some cases, that’s even okay.
Until it’s not.
Until they need to retire, and realize they don’t have a way to “cash out”. They can’t sell their business, because it’s all built around themselves as a specialist. They can’t sell their client list, because they have no predictable revenues. They can’t sell their building, because they don’t own it. And maybe worst of all: if they DO retire, their staff will be out of a job. It’s like working for a Pharaoh: a great job to have, until he goes underground…then you’re going with him!
Tom needs to sell the business. But what is he selling, exactly?
The equipment is the easy part.
The client list has some value, but none of his clients are really tied to his practice. They could all simply go elsewhere at any time. And if Tom starts cutting back his availability, his clients definitely WILL go elsewhere.
What Tom is really selling is the trust he’s built with his clients. Thanks to his years of caring service, he has one opportunity to pass them to another dentist. This turnover has to happen with the utmost care.
First, Tom needs to build a business that’s salable. He must record all of his operations and processes down to the finest detail. Whether Tom takes a temporary partner or makes an outright sale, the client experience must stay consistent to maximize value to the buyer.
Second, Tom needs to ask himself what kind of retirement he wants. Is he ready to be finished forever? Would he rather stay on part-time for a few years? Would he like to work ONLY with a few very long-term clients?
Finding a buyer comes third, and there’s a long process involved. One dentist might simply take over Tom’s clients, or they might be split between several dentists. In those cases, Tom can deliver a much higher value if he makes a personal recommendation to the client:
“Mary, I’m retiring in June. I’d like you to make your next appointment with Dr. Smith. I chose Dr. Smith for your care because she’s an expert on denture care, and I know you have a lot of concern about your dentures. I’ve fully briefed Dr. Smith on your history and she’s made a time for you in her schedule. Let’s call her office together now.” That smooth handoff is a win for Tom, a win for Dr. Smith, and a win for the client. It’s frictionless and stress-free.
For the sake of this article, though, let’s walk through the wholesale buyout of Tom’s practice, from its fixtures to its client list.
The fourth step in the sale is the transition period. The real value to the buyer is the clients who stay with the practice when Tom retires. So Tom must:
- Stay on at the practice for at least a year, taking care to introduce the new dentist to his clients;
- Build up the new dentist as an expert and local authority;
- Insist that all clients book their next appointments with the new dentist;
- NOT keep “some clients” for himself, but remove himself from delivery for everyone equally;
- Be available to cover vacations, but not tell clients when he’ll be in the office.
What should Tom charge for his practice?
The basic calculation is a three-year discounted cash flow model.
Tom would total his income from the last three years of his practice (personal take, including all benefits received from the business) plus the value of his assets.
Then he’d subtract any outstanding loans or bad debt to come up with the book value.
The buyer would also likely have to assume the balance of Tom’s mortgage, staff costs, and ongoing fixed costs. These numbers could be intimidating to a new dentist, making Tom’s transition plan even more critical.
In some cases, the final purchase price is flexible, depending on client retention.
For example, if Tom agreed to sell his practice for $500,000, he might be paid in quarterly installments over the next year. And those installments would be based on retention. I’ve been involved in sales where this model was used, and really like it. For example, Tom might receive $100,000 on the first day of the sale, and then a multiple of the remainder after 3 months and 6 months, depending on client retention.
If, after 3 months, the practice has 90% retention, then Tom receives 90% of $200,000 (the payment owed after 3 months).
If, after 6 months, the practice has 70% retention, then Tom receives 70% of the final $200,000 payment.
The math would look like this:
$100,000 up front
$180,000 ($200,000 second payment x 90% retention rate)
$140,000 ($200,000 third payment x 70% retention rate)
$420,000 final value of the practice.
The nice thing about this model is that Tom is compelled to ensure the smoothest possible transition to the new dentist. After the six-month mark, Tom could be hired part-time to cover vacations, etc. if he still wants to work a little. I’d still recommend a six-month period where Tom sees NO clients to prevent schedule cherrypicking.
There are many ways to negotiate the sale of an owner-operator business in the service industry. But the first steps are always the same: the business must be built to sell. Operations must be completely turnkey so the buyer can focus on client relationships instead of figuring out how to run a practice.