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4 Succession Scenarios for Dentists

Even if you consider yourself years away from retirement, it’s smart to begin your dental practice succession plan now. Doing so helps to ensure that you will have a detailed, well-thought-out succession plan that meets your needs and those of your loved ones.

Here are four succession scenarios for dentists:

  1. Sell to an unrelated party.

Selling your practice to an unrelated party may be the least emotionally complicated option, but it may not provide some of the other benefits many dentists want. These include the satisfaction of passing your practice on to someone you love (a next generation dentist within the family), or on to someone you respect (a junior dentist or long-time employee). 

Also, selling to an unrelated party may bring in lower offers than a selling dentist anticipated. This happens because it is unlikely that the new dentist will be able to retain all of the current patients. Some people do not like change and will leave simply because of the ownership change.

2. Sell your practice to a dental professional in your practice.  

On the other hand, you may get a higher buyout price from someone within the practice who (a) is already emotionally invested in the practice’s success, and (b) maintains connection with the current clients. 

This may also be the simplest succession plan option from a continuity and cash flow perspective. Since it is fairly common for practice owners to stay in the practice temporarily after the sale to help transition current patients, many dentists like the idea of doing so with a dentist they know and work well with rather than with someone new. If the entire buyout process spans a few years, this arrangement helps the purchasing dentist maintain cash flow and acts as an annuity for the selling dentist. This plan also eliminates the challenge of finding a qualified dentist who is professionally and financially able to take over.

This option also could include a sale to practice-wide professionals and employees, e.g., an employee stock ownership plan (ESOP), a strategy with the most tax advantages. These plans are set up for two major reasons.

  • They function as a retirement plan for current and future employees.

  • They work as an exit strategy for owners while maintaining the current state of the practice.

For practices structured as a C-corporation, the retiring dentist can reinvest their share of the sale of their business interest and defer taxes. This means that no tax will be paid up front if it is rolled over into a retirement account. For owners with a sizable gain from the sale of their interest, this could mean thousands, if not millions, of dollars in tax.

An S-Corporation does not have this advantage, but any portion of ownership held by the ESOP will be tax-free. For example, let’s say the ESOP holds 30% of the shares of a practice and the net income for the year was $1,000,000. This means that $300,00 of that income will be tax-free.

It is nearly impossible to set up an ESOP for a professional partnership-structured practice.

An ESOP is a great option because it maintains the integrity of a dental practice. This works great for closely held practices, or practices with a retiring dentist who has a large share of ownership. The retiring dentist gets their retirement proceeds up front and the dental practice isn’t strapped for cash.

3. Sell to a corporate entity (DSO).

Dental Support Organizations (DSO) typically own dozens and sometimes hundreds of dental practices under a single corporate umbrella, the majority of which are branded under one trade name. Through a centralized administrative function, the DSO takes care of daily operational management such as supplier contracts, accounts receivable, payroll and practice strategy.

For dentists looking to sell their practices, transitioning to corporate dentistry offers some interesting possibilities:

  • The opportunity to work fewer hours before eventually exiting the practice, while potentially earning a high income as a salaried employee

  • Clearly defined continuing education programs

  • Removing yourself from the hassle of hiring, firing and staff management

  • Options to move between practices within the DSO

  • Topnotch administrative support and practice development services  

DSOs succeed because they have the resources to reduce overhead, negotiate with insurance companies and recruit investors to fund the development of practices. For patients, these economies of scale translate to flexible financing, convenient hours, and the possibility of lower fees.

One of the major requirements of the DSOs is that the selling dentist and any longtime associates stay after the sale is complete and work back in the practice. Most want the seller to stay a minimum of three years.  

The employment salary is typically market rate. Several DSOs have benefits that the seller will be able to participate in, as well. If you have a great benefits package that you are currently providing your staff, there is a good chance that will be reduced to the benefits package the DSOs offer their other practices.

When DSOs evaluate a practice, they want to know what you are paying your staff, benefits, sick time, holiday pay and any other compensation or days off you may provide them.  Again, if you give your staff extra personal holidays, extra bonuses, or other perks, you can expect those to be eliminated. If you have special payments or provide free dental work or discounts, there’s a chance those will be cut as well.

Make phone calls, check websites, and talk with dentists who've sold their practices to get an idea of the positives and the negatives associated with selling to a DSO. It is vital to do the necessary research and decide which one can offer a solution in line with your goals.

4. Terminate the practice and liquidate your assets.

In some cases, dentists want to retire and find themselves with a practice they cannot sell.

If closing a dental practice becomes necessary, the owner should review all of the local, state, and federal laws — including the Health Insurance Portability and Accountability Act (HIPAA) — governing the discontinuance of a dental practice.

The tangible assets, such as dental and office equipment, may be sold to another dentist, a company that specializes in purchasing used equipment, or donated to a charitable organization. If you decide to donate it to a charitable organization, all or part of it may not be tax-deductible. Be sure to check with us.

Next Steps

Proper succession planning is a vital step for securing your financial future and protecting your legacy when the time comes to sell your practice.

To achieve your desired exit plan, you should prioritize the succession planning process well in advance of leaving your practice. Consider:

  • What are your plans after you leave your practice?

  • How much money do you need from your practice to retire?

  • What impact will your retirement have on your other assets, including your estate plan and your family members?

  • Are you invested in seeing your practice survive after you leave?

  • Are you simply interested in selling the business without the legacy?

  • Will the practice survive without you?

There is no one-size-fits-all solution that will guarantee your wishes. If you plan far enough in advance though, you will have the time to think about (and answer) these questions to implement your ideal exit strategy.

Dental practice owners who fully understand their succession options, set a course of action to execute the plan, and seek assistance to ensure the plan is carried out as desired have the greatest chance of seeing the best results.

Gulf Coast Accounting & Tax Services can help guide you through the process and lead you toward a successful result.

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