The Optometry Money Podcast Ep 164: Planning Your Practice Exit – The Retirement Math That Sets the Floor

Transcript for The Optometry Money Podcast Ep. 164 Planning Your Practice Exit: The Retirement Math That Sets the Floor

Evon: [00:00:00] Picture an optometrist. He’s 58. He’s owned his practice for a little over 20 years. It’s a good practice, profitable, good location, a patient base that genuinely loves him and his staff, and he’s started to think like a lot of us will do sometime in our late 50s, “Okay, what does the back half of this look like?

When do I sell? What happens when I do?” He’s heard numbers, he’s been to the conferences. Somebody told him practices like his go for a multiple of EBITDA. Somebody else threw out a percentage of collections, and a private equity group sent him a letter last year, depending on the size of his practice, with a number on it that made his eyebrows go up So he’s got a rough sense in his head of what the practice is worth, and his gut’s telling him he’s gonna be fine.

Here’s the question he hasn’t asked yet, not what is my practice worth? The question is, what does this sale actually need to do for me? What does it need to deliver for my retirement to [00:01:00] actually work

Because those are two completely different questions, and the gap between them, between what we assume the practice is worth and what we actually need it to do for us, that gap is where a lot of the issues come up and the regret lives. And that’s what I wanna talk about today

Introduction to the Episode

Evon: Hey, everybody. Welcome back to the Optometry Money Podcast, where we’re helping ODs all over the country make better and better decisions with their money, their careers, and their practices. I’m Evon Mendrin, Certified Financial Planner practicitioner and owner of Optometry Wealth Advisors, an independent financial planning firm just for optometrists nationwide. And thank you so much for listening.

So this episode kicks off, or really continues something I’ve been wanting to put together for a little while.

It’s a series on planning for the sale of your practice, and the reason I wanted to do a whole series instead of just one episode is that selling a practice isn’t really just one decision. It’s a handful of [00:02:00] decisions that all lean on each other, and practice owners, you, tend to spend close to two decades building the thing, building the business, and then sometimes only taking somewhere around maybe a few months actually planning how we exit, how we hand it off. And that imbalance shows up in the outcomes. I’ve seen owners walk away from what looks like a clean, great deal and then find out the retirement plan comes up short once the taxes settle out, or they go on to sell and realize that the practice just wasn’t ready, or deals fall apart.

it wasn’t set up in a way a buyer actually could step into and purchase and run successfully. So o- over the next few weeks, I wanna walk through five questions that are worth thinking about long before a sale ever shows up on your calendar. And we’ll go through a quick overview, and then we’ll zoom in.

5 Questions to Answer When Planning to Exit Your Optometry Practice

Evon: So what are those questions? Number one, what value do you actually need to make the retirement plan work? That’s today’s episode.

Two, what’s your ideal exit [00:03:00] path? Who do you ideally want to pass on that business to? Who are you selling to and how? Number three, is the practice actually ready to sell based on those things in the first questions above? And I just did an episode 160, with Erich Mattei on that topic, so I’ll link to it in the show notes.

Go check it out if you haven’t. Question number four, how’s the deal gonna be taxed? Because that can change your take-home dramatically. That tax planning angle and opportunity is really important. And then number five, what happens to the money afterwards? Once it’s in your hands, what does it need to do, and what do you choose to do with it?

And today we’re starting with that first one, the retirement math. And I’m starting here on purpose because this is the question that sets the floor for all the others. It tells us how much flexibility or lack of flexibility we have for all of the other steps and questions that follow.

The Most Important Context for Your Practice Value is How it Supports Your Family Financial and Retirement Goals

Evon: Here’s what I mean by that. Your practice valuation, the number everyone sort of obsesses over, only actually matters in relation to [00:04:00] one other number, and that is the number that is the gap between what you’ve already got built up outside of the practice and what your retirement plan actually needs to be successful. , Because the practice is an asset on your balance sheet. It’s there to support the goals of your family, both in terms of the income that it generates as well as the value of the practice.

And one of the most important goals you’re building assets toward is being financially independent. it’s making work optional. So that’s it. That’s the whole thing. The value of the practice is only meaningful in the context of that gap, i- in solving that retirement goal.

And here’s why it sets the floor. Until you actually figure out that number, every conversation about price and structure and who you’re going to sell to, it’s all theoretical. You’re just guessing. You don’t know whether an offer is good or bad because you don’t have anything to measure it against.

Yes, you can measure it against earnings. You can measure it against other practices for sale. But the [00:05:00] most important context is how the value of that business impacts your family and your family’s planning goals And I feel the same way about the return of all of your other investments. The return of your investments only really matters in the context of ,

do they help you to meet your goals? And let me give you two quick examples to make this real.

Let’s talk about two different optometry practices. Same price, roughly the same market. Owner number one has done a great job building wealth outside of the practice, maxed out retirement plans for years, has a solid taxable investment account, house is nearly paid off.

Maybe there’s a rental property, commercial property . When we run the math, it turns out he needs maybe $400,000 after tax out of the sale to be completely fine. Owner number two, same kind of practice, similar outcome, similar income over the years, but more of the lifestyle got spent along the way, less got saved away outside of the business.

When we run his math, he needs more [00:06:00] like $1.4 million after tax to make retirement work. Now, those two optometrists are going to run completely different sale processes. At least they’re going to aim for different outcomes. Owner one can sell to an associate at a really reasonable, friendly price, take his time, structure it however he wants, and walk away whenever he feels like it.

He’s got all the flexibility in the world to craft that exit in the way that he wants because he really doesn’t need the maximum squeezed out, maximum value out of the sale. Owner two doesn’t have that flexibility. He may have to chase a higher price, which means maybe a narrow set of borrowers. Maybe he has to talk to the consolidators, larger buyers.

Maybe he’s more locked into a particular timeframe. His options are more constrained purely because the number he needs is bigger. Same practice, totally different strategy, and the only thing that changed was that gap, that [00:07:00] retirement gap, and that’s why we start there

Earlier Practice Owners Have More Time to Prepare for Their Future Exit

Evon: Now, if you are decades away from retiring or exit the practice, don’t s- don’t click off the episode because this applies to you too. The more you prepare yourself outside of your practice for that future period of retirement, for that future period of making work optional, financial independence, the more you prepare yourself now outside of just the value of your practice, the more flexibility and optionality you’re gonna have as you get to that point.

And so the more effectively you take your practice income, even decades before exit, the the more effectively you take your practice income, reinvest it first into the business, that’s your primary and first investment, whether it’s training or building up the team, whether it’s your own clinical skills or leadership skills, whether it’s hiring additional associates, whether it’s building out additional lanes, new equipment.

Whatever it may be, that’s your primary investment. But at some point you’re going [00:08:00] to hit constraints. At some point you’re just gonna run out of things to buy in the business. you’re gonna see diminishing returns on just buying more equipment, on more stuff in the business.

And so from there, how effectively are you taking that cash flow that the business is generating from you and reinvesting into other assets outside of the business? Retirement accounts, taxable investment accounts, health savings accounts, IRAs, rental real estate, the commercial property your business operates in, other real estate properties if real estate makes sense for you and your family.

The more effectively you can take those dollars and reinvest those over the decades, the more you’re gonna prepare yourself for that future exit. You’re essentially pre-funding that future buyout. So the more you can prepare yourself earlier on in your years of ownership, the more flexibility and optionality you’re gonna have as you get to that point.

Figuring the Retirement Gap 5-10 Years from the Exit of Your Practice

Evon: Now let’s imagine you are five to 10 years away from exit.

If it all comes down to that gap, let’s actually start to build it. Like, how [00:09:00] do we actually build out this sort of retirement gap? Now, this is something we do with clients, right? This is part of our process of helping our clients plan for the exit of their business and plan for that transition into retirement after exiting the practice.

And a really important part of that is figuring out what are the ranges of values we need to get after tax in order to make that retirement plan work? Because it is a range, right? There is no, there isn’t really one single number. There is a range of outcomes that can make that work.

And so what is that range? We wanna test that.

Lifestyle Spending is the Foundation of Figuring the Optometrist’s Retirement Gap

Evon: Now, for you, what are the factors that go into that? it starts with the least glamorous number of all financial planning, what does your life actually cost? Specifically, what will your retirement lifestyle costs look like in today’s dollars?

And this is a step that almost everyone wants to skip. people wanna jump straight to, you know, “What is my practice worth and what are my investment returns gonna be?” But your spending is the foundation that the entire plan sits on.

Because ultimately being financially independent, making work optional, is [00:10:00] about having enough stuff and sources of income to cover your ideal lifestyle expenses, right? So everything is founded and based on what you actually need to live on throughout the rest of your life.

Now, the further you are away from retirement, obviously the more uncertain that spending number is. So a logical starting point is to start with your current spending, that current spending could be our base, and then we can adjust for what we expect to change in retirement. So for example, what typically goes down in retirement? commuting costs potentially, depending on the goals of the family, a work wardrobe. often debts are paid off.

for example, the mortgage can be a pretty big one if that’s paid off. Not always, but very often. Payroll taxes on practice income, like those are expenses you’re not gonna see anymore. what typically goes up? healthcare costs can often go up, especially later on in retirement in terms of real healthcare expenses, but there’s also health insurance premiums.

Especially if we are retiring before [00:11:00] 65, before Medicare, you have to purchase health coverage out of pocket. So then we’re planning on tax planning and see if we can lower that number through premium tax credits. So that health insurance number is really important, and then later on in life, as we see through research, that healthcare costs tend to increase as well.

then there’s also things like travel and hobby spending and fun spending earlier in retirement, especially in the so-called go-go years, like right away that first f- that first chunk of years in retirement. Because you have more time, and we often say every day is a Saturday now because you have more time to do things.

and you also have the energy and the health to do things. Another thing may be possibly housing. Housing may change if you are downsizing or relocating or something like that. So we can make some reasonable adjustments based on what we expect or want to change in retirement.

And very often we’ll talk with a family about different goals that they want to see come up in retirement, paying for kids’ weddings [00:12:00] or, or covering other expenses or one-time vacations or just things like that. So we can kind of go through that exercise and see, okay, what are our reasonable starting spending numbers that are necessary?

What are the fun things we want to plan for, and what are the sort of the one-off goals we want to accomplish in retirement as well? And, I think a common mistake is just sort of guessing, like we’ll need 80% of our current spending and that’s it. we actually want to map it out because very often, especially the first time I go through this with a client, regardless of where they’re at in their career, what we think we’re spending and what we actually are spending money on as we go through the categories can be very different.

So we really want to get some clarity around that so we have a good starting point. So ingredient number one is figuring out what an ideal lifestyle looks like in terms of costs, a- and we can start with our current spending a- and adjust from there. And in a real projection, of course, we would include things like [00:13:00] inflation over time, but we’re just trying to get our basic ingredients here, our basic building blocks.

What Income and Investments Are Currently Available to Cover Your Lifestyle? And What’s the Gap?

Evon: part number two, building block number two is map what’s already there to cover those expenses. So that starts with guaranteed income. Social Security is a part of that, and there’s a real conversation in terms of when and how to start Social Security benefits, especially if you’re a married couple with two different, benefits to plan around.

pensions, if you have a spouse especially that has a pension, those are things we want to take into account. Also, other non-guaranteed income like rental income, those are things we want to take into account. And then there’s the other assets. We have all the assets that you’ve built up, so those are your retirement accounts, 401(k) accounts, IRAs, maybe a cash balance plan, a HSA, taxable investment accounts. All of these assets are there, and so we can figure out what is a reasonable amount we can draw from that to cover your expenses over your lifetime.

Now, a- as an advisor, we really would be projecting this out over [00:14:00] the years, taking taxes into accounts, and modeling this out. Now, This isn’t an episode about the detailed math of retirement spending, of retirement planning, but we wanna gather the ingredients and the building blocks that are already there to cover those expenses.

And then once we do that, we can figure out what’s the gap, right? What is the range of values needed from that practice sale in order to make this retirement plan feasible? And what structures are needed in order to make that feasible? and that gap, that range of values, becomes our negotiating floor for the sale of your practice.

And this is really important, because without knowing that negotiating floor, without knowing what’s roughly necessary in order to make that plan work for your family, you’re sort of negotiating in the dark. And you don’t always necessarily have the confidence to say, “Yes, that’s a deal that makes sense for my family,” or, “No, it doesn’t.”

And very often what happens is that the deal itself [00:15:00] tends to determine your retirement planning rather than your retirement planning determining the deal that’s necessary. And so once we have an idea of what’s required from a potential practice sale, then we can go through the other steps. and it’s really important because this gap tells us what timeline we can work with. Can you afford to wait for the right buyer? Do you have the flexibility to structure that out over a certain amount of years? Or does the math require a sale at a certain year?

and it determines the buyer type. Does your minimum floor require a higher multiple buyer, assuming your practice large enough to draw those buyers? Or can you accept the lower multiple that might come from, an OD to OD sale or maybe an internal sale? the payment structure, can you structure the payout over a certain amount of years versus all at once? Or do you need to get the full value at close? A continuation, do you need to plan on working part-time or full-time after that sale to make retirement [00:16:00] feasible? or is work fully optional?

Knowing what’s required of your retirement plan tells you whether an offer is worth accepting. And too many owners don’t have this number. Too many owners don’t have clarity around this. Too many owners step into it unsure of what they really need, what their family really needs. And so as you are preparing for a future exit from your practice, start from that perspective.

What does this business need to do for my family? And how does it impact the amount of optionality you have and the flexibility you have when you go to exit your business? ‘Cause we will exit our businesses at some point. We all will. What’s really at stake is how much flexibility you have to do that on your terms.

And then we can test scenarios. We can run what if scenarios. what if you delay sale even further? what if healthcare needs come up and you have to exit the practice earlier? What about stretching out the transition over X amount of years versus selling out all at once?

What if you have a really bad market [00:17:00] year early on in retirement? How does that impact all this? So those are all what if scenarios that we can test and take a look at, and we can look at all of the uncertainties around projecting out the next 30 years of your life or more and figure out where the cracks are.

Because if we have an idea of what really negatively impacts this retirement plan, then we can turn those into planning conversations. We can turn those into conversations around, hey, do we need to make adjustments around spending?

do we need to make adjustments around how much we’re saving towards retirement? do we need to make improvements to the value of our practice in order to get it to a place we need to be when we’re ready to go?

And the earlier you can have these conversations to think about this, the more flexibility you have. When you compare someone who’s doing this five to 10 years before they wanna exit their practice, they have a lot of time to both adjust the amount that they’re contributing and investing towards retirement, but also, and maybe most importantly, to make improvements in their business and make it more [00:18:00] profitable to improve the value at sale.

Someone that’s running this math just before or while they’re in the process of selling their practice doesn’t have that flexibility. And so the earlier you are, the more time you have to make improvements in all these things.

and again, the goal isn’t necessarily to get less from your practice. That’s not what we’re trying to do. We wanna make your practice as valuable for a buyer as possible, but the goal is to frame the value of your business in the right context. The goal ultimately is to figure out what your family needs from the value of that business, and then take that information into your negotiations, into your exit planning

Episode Recap and Conclusions

Evon: And so a quick recap. What are the four ingredients or building blocks we take into account here? It’s your spending number, it’s your retirement goals, right? Your spending number. It’s what’s currently covering it in terms of your guaranteed income and your other income and your, and your investments that you have right now.

And then what’s needed in order to cover the gap from there.

And if you’re thinking about this and you’re not [00:19:00] sure where you stand in all this, and you’re not sure how to prepare for this reach out to me.

This is a core part of the work that we do in serving the families we serve, are all these really important financial aspects of preparing and planning for the exit of one of the most important parts of your life, the business.

A- and then what comes after that, alongside really great practice consultants and tax professionals and attorneys. And so reach out. If you have questions about this, please reach out.

I’ll throw a link in the show notes, and if you want to just have a free consultation or intro call, I’d love to hear about what’s on your mind financially,and we can try to put together a path from there.

We’ll also throw all of the links to other episodes and resources I mentioned here in the show notes, in the meantime, I really appreciate your time and your listening to the episode.

We will catch you on the next episode. In the meantime, take care [00:20:00]