Exit timing can be voluntary or forced. Either way, it must be preplanned to ensure the highest value is received on sale or transfer. Yes, you can plan in advance for a forced outing. More on that later. Assuming you don't want to just walk away from your practice or hold a fire-sale of your business, you need to know that a good exit strategy usually takes 6 or 7 years from start to finish.
Start by assembling your team. The bare minimum of experts needed to design and implement your plan is two: an attorney, and a CPA who is well versed in business valuation. Need help finding one of those, call us. We know some. Now, on to the second step: education.
Your team will do their best to educate you about your applicable alternatives. To help you get a head start, here are a exit strategies to think about before your first full team planning meeting.
Sale to an Individual. Sale to an individual other than a co-owner. The buyer may qualify for an SBA loan or other financing; but will most likely want you to "hold the note" so that he can pay you from the future cash flow generated by your business. Traditionally a retiring dentist would be paid 20% up front and the remainder in installment payments over time. The retiring dentist would continue to work in the business for a period of time as an independent contactor (for expense deduction purposes). This continued employment ensures a smooth transition, increases the likelihood that staff and clients would stay with the new dentist, and helps ensure the retired dentist would get his installment payments. Independent contactor status is not always available and if it is, you'll need to work with your CPA team member to lock it down.
Sale to a Corporation. Today corporate buyers dominate the landscape. They offer highly competitive purchase prices and are often willing to pay a premium, especially if you agree to stay on as an employee for a term of years. Corporate buyers generally pay full price at the closing table, thought, they may want you to accept part of that payment in their corporate stock. That stock might be hard to sell due to restrictions on the stock and a limited number of potential buyers. They might can your employees and kill your brand. But, if you want to sell for a premium, this might be the way to go.
Sale to Employee/Buy In. Want to retire 5 years from now so you can fully fund your Defined Benefit retirement plan? Value your employees or your brand? If your practice can support an associate dentist, consider raising your own successor. You don't give up any control as you would with co-ownership. You can arrange the transaction as a buy in over time (say at 20% a year) or a complete sale at a future date (say in 5 years). The longer the time frame, the higher the risk that the transaction could fail if everything isn't nailed down in writing ahead of time.
Sale to a Co-Owner/Buy Out. The structure of a co-owner's buy out of your practice will depend in large part on the current business structure and how the CPA for the practice handles distributions. Financing can be a concern as the lender may require the exiting dentist to guarantee the loan. So, the sales are usually financed with outside assets or through the practice. Regardless, a buy-sell agreement should be implemented and funded at the very start of the partnership for the best chance of success. If you can't afford to fully fund the buy-sell when it is signed, consider using life insurance as a cheap funding vehicle.
Forced or Coordinated Exit. It is often wise to plan for the forced or coordinated exit of a business owner, including yourself. It is best to plan to at least (1) lock down a business value, and (2) dictate ownership. For example, if your business partner were to pass away, you might suddenly find yourself in business with a surviving spouse who has no interest in letting you buy your deceased partner's share. If you pass away, your spouse might need the security of receiving a fair price for the business. If a co-owner gets sued for divorce, becomes disabled or files bankruptcy, you might want to force them to sell their portion of the business back to the firm or the other co-owners. But, at what price? Advance planning with a purchase and sale agreement or a buy-sell agreement that gets triggered when a certain event occurs can be used or this purpose. Common triggers include: death, divorce, disability, bankruptcy, and attaining a certain age (generally retirement age).
In addition to the above strategies, mergers and solo group arrangements and other strategies merit consideration. When you meet with your team, they'll help you focus on the most appropriate strategies for you and your business.
For help assembling your team or for more information on business exit strategies, call us to speak with an attorney at (904) 705-7355.
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