FIX THIS PRACTICE
Planning for Peace of Mind
Find out how an exit strategy can be your best friend.
By Richard S. Kattouf, O.D.
I've heard you mention the term "exit strategy" in your articles and lectures. Just exactly what does this mean?
--- Dr. C.K. Hilman, via e-mail
Exit strategy refers to the process of selling all or part of your practice to best benefit your retirement. Your timing in the beginning to plan an exit strategy is crucial. Many doctors wait too long, leaving the door of opportunity open for disastrous scenarios. The following is an example.
Story with a moral
Three years ago, I worked with a 67-year-old senior O.D. and his 40-year-old junior partner. They were 50/50 partners with a 14-year-old original contract that contained no exit strategy. I counseled both clients about the importance of allowing me to develop an exit strategy for the senior doctor.
The senior doctor was adamant about not discussing this process. He insisted on continuing practice at his current, full-time, pace. The junior doctor was very much in favor of participating in a scheduled purchase of the senior's share of the practice, but to no avail.
I warned the senior O.D. about the dangers of holding out, but my advice fell on deaf ears. Just a few months after my on-site consultation, he had a severe stroke and was unable to return to the practice.
Because the doctors' contract lacked an exit strategy, the goodwill value of the senior's 50% (worth $250,000) was now reduced to $100,000. This unfortunate situation put the junior doctor in the driver's seat for the purchase amount of the practice. (Keep in mind that to an outside buyer, the goodwill value would've been of even less value.)
When to develop an exit strategy
Start planning your exit strategy at least 5 to 10 years in advance of your desired departure or decreased work time. This may seem premature, but keep in mind that death and disability have no age barriers.
Recently, I helped settle affairs for the practice of a 48-year-old optometrist who passed away in a fatal car crash. Unfortunately, he didn't have an exit strategy in place. As a result, the estate only got a fraction of the fair market value and the goodwill of the practice was gone.
When thinking about developing an exit strategy, concentrate on your loved ones' security -- not on your own desires.
The right path to retirement
The following steps are necessary to develop a proper exit strategy.
- Make sure the market value of your practice is high. Many practices are flat in the areas of gross and net income. Often, patient volume is also stagnant. As part of your exit strategy, develop techniques that produce growth in both net and gross income prior to getting an appraisal.
If, for example, you hire a consultant to help you grow your practice over a period of time, you'll find it was worth the while when you have it appraised.
Professional management consulting can help to achieve these increases in a short period of time. Your investment in consulting services can even become part of the calculated fair market appraisal of the practice. When your profit and loss statements exhibit increases in gross and net income, the valuation of the practice increases significantly.
The point here is simple: The first order of business for your exit strategy is to increase profits. The timing of the appraisal should coordinate with the management consultation to assure the highest market value.
- Professional practice appraisal. Consider contracting with a professional appraiser. You can hire an attorney or someone else who knows the nature of an optometric practice.
- Profile the type of doctor that will best suit your practice, your patients and
yourself. Many times, part of the exit strategy is an arrangement for the seller to stay with the practice as part owner or private contractor. This "professional marriage" necessitates a close scrutiny of the type of individual you're looking for.
- Finances. Is a full payment best for you? Should you be the banker and accept payments? The answers to these questions beg the expertise of your accountant. How you'll be taxed is a high priority.
- Compensation. The seller is paid as a consultant to the practice, a partner or a private contractor.
- Real estate. If you own your building, do you become the landlord, lease the building to the buyer or sell him a portion of the property?
The answers again lie with management consultants and accountants for determining what's most appropriate for your financial situation.
- Contract. This is the best insurance for you and your family. The contract must protect the seller by stipulating that the buyer purchase the fair market value of the remaining practice upon the seller's disability or death. In all the examples above, no such contract or strategy existed.
Keep in mind that you may either want to write the buy-sell agreement yourself, hire a consultant who knows the ophthalmic profession, or contract with an attorney. However, you'll save money by having an attorney just finalize -- not initiate -- the contract.
I could fill this entire journal with horror stories caused by individuals' lack of planning. For example, spouses have been left with only the hard asset value of a practice after 20 or 30 years of practice. What a shame to leave your family in such a vulnerable situation.
Take the preventative approach. Start early, hire competent professionals and plan your exit strategy to ensure that you and your estate reap the financial rewards of your labors and risks.
Dr. Kattouf is in private practice in Warren, Ohio, and he's president and founder of two management and consulting companies. If you'd like Dr. Kattouf to address an issue you have with your practice, call (800) 745-EYES or e-mail
Optometric Management, Issue: March 2001