Exhausted? Fed up?
Exploring the question of whether you can afford to retire early
Over the last few years, and in the recent decade in particular, we have witnessed the age at which dentists sell their practices prior to retirement come down, with the majority of my clients now selling between the ages of 50 and 55. While the increasing burden of administration and compliance has been a factor and more recently the stress of running the practice through the pandemic, most often their decisions are based on financial matters.
There are significant factors making retiring dentists sell their practices earlier than they would have anticipated:
Peak values: Firstly, owners realise the values of practices are at a record high. We have seen a sharp rise in values over the last decade and the way in which values are calculated are far more sophisticated meaning that this has a bigger correlation with the profit. The positive news is that there has not been any negative impact on goodwill because of COVID-19 and values look to stay strong.
Hassle factor: Dentists seeking retirement often tell me their reasons for wishing to sell are to reduce or eliminate the hours of administrative work required or the staffing issues – recruiting, sickness cover and more recently the stress of COVID-19 and all that it brings in the ways in which the practice has changed.
A number of dentists who sell their practice may wish to remain in the practice as an associate – to carry on the clinical aspects of dentistry, which they still enjoy. While this is not often a requirement from buyers, I have dealt with a number of dental practice sales in which the principal wanted or needed to stay on, and this was part of the sales brief. As we are in such a buoyant market, the vendor certainly has more choices than ever.
Retirement income: Many of my clients are ‘cashing in’ on the high value of their practices and therefore eliminating the risk that these values may go down in the future. However, should they still need an income, they often agree to remain at the practice as an associate. This does not necessarily mean a fixed ‘tie in’ with ‘financial retentions’ (money held back from the sale proceeds) but secures a position for them to continue working until they are ready to retire.
While, as a principal, you’ll understand that your income will likely fall after the transition to associate within your former practice, the loss is often not as much as you think. For example, if a principal had earnings of £150,000 that reduced by £40,000 to £110,000, the net loss of income would actually be around £24,000 per annum once tax liabilities are accounted for. This net loss could be mitigated in other ways. The sale of practice proceeds may be used to clear any outstanding business loan, mortgage or other loans. This will reduce the amount of net income required. Other expenses, such as surgery insurance, practice expenses (locum cover), life cover and income protection, are often also reduced.
Practice sale proceeds could also be invested to generate a regular income to add to the associate earnings. Contributions to pensions potentially stopped – although it would be vital to seek expert independent advice before doing so. This would usefully form part of a personal financial review with an independent financial adviser. My independent financial advisor (IFA) colleagues say their clients are often pleasantly surprised by the outcomes from such reviews.
The practice sales market has been very active over the last decade and are no signs of this slowing down. Therefore, many principals are seeking to cash-in the value of their practice because, if sale prices do go down, it could mean them working for a number of years to make up the difference. If early retirement seems attractive, you should seek professional advice on the likely value of your practice and your potential income in retirement.
PFM Dental and Thorntons Law are hosting a free ‘Preparing for Retirement’ seminar in Glasgow on the 22June which is ideal for anyone considering the sale of their dental practice or retirement. To book your free place or for more information visit https://pfmdental.co.uk/planning-for-retirement-seminar-scotland/ or contact Laura Naylor on 01904 670 820
Martyn Bradshaw is a Director of PFM Dental and heads up the sales and valuations department. Established in 1990, PFM Dental is a leading professional service provider for the dental profession providing sales and valuations, wealth management, financial advice and accountancy.