After a particularly frustrating month, I advised my financial planner to up the ante so I could retire earlier than originally planned. I probably won't retire anytime soon, but some days I want to slam the door, and never look back.
The new plan came a few days later, and all I could say was, “WOW. That's not going to happen!” I thought I was on track for retirement, but it is unbelievable how much money it will take to maintain my present lifestyle for what may be another 50 years!
The truth is that many business owners don't plan soon enough. While your practice may provide a very nice living, it also must provide enough excess cash to invest so you can one day retire and live as comfortably as you did when you were working. This requires a long-term strategy that must be regularly reevaluated to make certain you stay on track.
A popular exit strategy of some small business owners is to bleed the company dry on a daily basis. I don't mean run it in the red, but pay yourself a nice salary and reward yourself with frequent dividends so that at the end of the year, there is nothing or very little left. This type of operation is sometimes called a “lifestyle company.” Rather than reinvesting money in growing your business, you keep things small, take out a comfortable chunk, and live on the income of the business.
Another exit strategy is simply to call it quits, close the doors, and walk away. We have all had days when we wanted to do that, and this is a possibility as long as you have saved or invested enough money to live off for the rest of your life and are not counting on the value of your business to fund your retirement. It is important to have a professional assess how much money you will need to live comfortably for the rest of your life; you may be surprised by the amount.
The easiest strategy may be passing ownership to another hearing health care professional, a person who will preserve your legacy and continue to serve your patients. An obvious choice for this rite of passage may be an employee who understands the business or one who is hired to assume ownership of the business. The biggest problem with this strategy may be finding someone who has the money to buy the business. It is not uncommon for the seller to finance the sale, and allow the buyer to pay it off over time. That can be a win-win for everyone involved.
My friend Barry Freeman tells me that as many as one-third of hearing health care professionals will retire in the next 10 years, and not enough new people are entering the field to replace them. It is wise to start looking for an employee who may be a potential buyer long before you intend to retire. Some hearing health care networks recruit people just for this purpose.
Acquisition is another type of exit strategy. Manufacturers in past years have acquired private practices to guarantee distribution of their products. In an acquisition, you negotiate a price that is usually based on the “value” of the practice. There is no one right way to value a business, though you could probably come up with several wrong ones. Ultimately, the business is worth whatever you think it's worth based on criteria you set. The trick is finding someone who will pay what you think it's worth. You can start by looking at the value of the assets such as equipment, inventory, furniture, and the active patient list. After all, a new owner would have to buy these things if he were starting a practice from scratch, so the business should be worth at least the replacement cost. A balance sheet can give a good indication of the value of the company's assets.
Another approach is to look at the cash flow of the business. Revenue is the crudest approximation of the worth of a business. If the business generates $300,000 per year, you can think of it as a $300,000 revenue stream. Businesses are often valued at a multiple of their revenue, either gross or net, and that multiple depends on the industry.
Entrepreneurs live for the struggle of launching their own business, but one thing we often forget is that decisions made on day one and all along the way can have huge implications down the road. It's not enough to build a business worth a fortune; you have to make sure you have an exit strategy that will allow you to get your money out when you decide it is time to retire.
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• Comments? Write to HJ at HJ@wolterskluwer.com.