When is the right time to sell your practice?

Maybe not as early as you think.

Retirement at 65 is ridiculous. When I was 65 I still had pimples.

— George Burns

Retirement kills more people than hard work ever did.

— Malcolm S. Forbes

John B. Pinto

The audience for this month’s column is that cohort of surgeons, in larger or smaller practices, who own most or all of their companies. This probably takes in a third or more of the 7,000 or so private ophthalmic practices in America, which remain essentially mom-and-pop, boutique, first- or second-generation enterprises.

Let’s pretend, for just a moment, that you are the CEO of Chevron Oil. In the largest publicly held companies such as Chevron, the core responsibility of every officer and board member, every day of the week, every quarter of the year, is to enhance shareholder income, value and wealth. To do this, you undertake strategic and tactical initiatives so that the owners of the company come out ahead. Every company decision is seen through this lens.

Now, back to your own practice, where your responsibility is no different than that of a Fortune 500 CEO: You quite likely feel obliged — within ethical and legal boundaries and within limits on your personal energy and talents — to enhance shareholder income, value and wealth. Your income. Your wealth.

This is pretty easy to figure out mid-career and earlier. Simply get up every morning, work hard, treat every patient as if they were your only customer, keep your nose clean and control costs. But the mission can get blurry in the last few years of a surgeon-owner’s career.

On one hand, free time can start to become more valuable to you than income, and energy levels can start to dwindle. On the other hand, with every passing year, and particularly in the present climate, surgeons can get more panicky about their financial preparation for retirement.

As you pass through your 50s and then your early 60s, you spend more time thinking about a succession plan and how you will one day extract maximal residual value from your practice while also finding a good caretaker for staff and patients when you are ready to move on.

There has never been a larger cohort of peri-retirement eye surgeons in America, so I am getting more calls than ever from doctors who ask, “Is it time to sell my practice? Or should I keep working?” The answer may surprise you in your role as the CEO of your closely held practice.

Let’s look at simple sample numbers that illustrate at least one answer to the question of whether it is time to retire.

• Imagine a practice, Jones Eye Center, with $1 million in annual collections.
• This practice has a typical 65% cost margin and pays its owner, Dr. Jones, $350,000 per year before taxes.
• The practice is debt-free.
• Dr. Jones works in a leased 2,500-square-foot office with five exam lanes and a relatively contemporary assortment of testing and treatment equipment.
• An appraisal shows that the tangible equipment and furnishings have a fair market value of $200,000. Drugs and optical goods inventory come to $20,000. The recoverable accounts receivable are worth about $80,000.
• Depending on location and buyer pool, a practice such as this may have a goodwill value of anything from zero to $300,000. Let’s use $150,000 as a reasonable mid-range expectation.
• So, all up, Dr. Jones’ practice is worth about $450,000.

Dr. Jones, who is in good health at age 62, has ambivalent feelings about practicing — he could go either way, retire now or keep on working. He asks, “Should I sell my practice now or work for 5 more years?”

Here are the numbers

What would you recommend? Work for 5 years or sell out now? Let’s assume that if Dr. Jones is going to keep working, his practice will chug along at the current pace and keep generating an annual income of $350,000.

If Dr. Jones keeps working and sells in 5 years:

• Dr. Jones will earn $350,000 for 5 years, or $1.75 million.
• Let’s assume practice values fall drastically, and all that Dr. Jones can take away from a practice sale in 5 years is the recoverable value of his accounts receivable, the salvage value of his equipment, which by that time will be 5 years older, and a few dollars for inventory. No one is willing to pay him any intangible or goodwill value, and he pockets only about $250,000.
• So, he has pulled in a total of about $2 million over 5 years, keeping this discussion simple by not factoring in tax consequences.

If Dr. Jones sells out now:

• He will get the value of the practice as above: $450,000.
• Fast forward 5 years, and Dr, Jones would have this amount plus a minor amount of compounded interest — perhaps $500,000 in all at today’s miserly rate of safe returns — again, before any tax effects.
• So, before tax impacts, Dr. Jones will be about $1.5 million ahead if he works for another 5 years.

With or without the math exercise, more surgeons are realizing, at any age, that working longer than they planned makes good sense. As a result, unless they become disabled or disenchanted with practice life, more eye surgeons than not are delaying a practice sale and holding on until the bitter end. This is especially the case for ophthalmologists with investment setbacks, who are obliged to work longer than they ever planned.

In addition to the numbers, there can be a variety of subjective reasons to sell later rather than at some customary retirement date.

You are obviously not just the CEO-owner of your practice. You are also the guts and motive force of the operation. Beyond a fiduciary role, you also have a responsibility to manage your professional career and to optimize the abundant satisfactions of doing great work, solving problems, helping others and getting daily praise.

Even if now may be the culturally accustomed time to sell because you have reached the arbitrary age of 65, you may not be emotionally or professionally ready for retirement or even semi-retirement.

As grand as these issues are financially, they loom larger at a personal level. Even if you are now only in your 40s, its not too soon to think about how you are going to play out the last few years of your professional life. If you are like an increasing number of clients, you may come to the realization that you are going to be working longer than you ever planned. If that is the case, be sure you are enjoying the ride.

• John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consulting firm established in 1979. He is the author of John Pinto’s Little Green Book of Ophthalmology; Turnaround: 21 Weeks to Ophthalmic Practice Survival and Permanent Improvement; Cash Flow: The Practical Art of Earning More From Your Ophthalmology Practice; The Efficient Ophthalmologist: How to See More Patients, Provide Better Care and Prosper in an Era of Falling Fees; The Women of Ophthalmology; and his new book, Legal Issues in Ophthalmology: A Review for Surgeons and Administrators. He can be reached at 619-223-2233; e-mail: pintoinc@aol.com; website: www.pintoinc.com.