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Picture an optometrist.
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He's 58.
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He's owned his practice for a little over 20 years.
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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?
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When do I sell?
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What happens when I do?" He's heard numbers, he's been to the conferences.
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Somebody told him practices like his go for a multiple of EBITDA.
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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.
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Here's the question he hasn't asked yet, not what is my practice worth?
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The question is, what does this sale actually need to do for me?
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What does it need to deliver for my retirement to 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.
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And that's what I wanna talk about today Hey, everybody.
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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.
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I'm Evon Mendrin, Certified Financial Planner practicitioner and owner of Optometry Wealth Advisors, an independent financial planning firm just for optometrists nationwide.
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And thank you so much for listening.
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So this episode kicks off, or really continues something I've been wanting to put together for a little while.
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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.
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It's a handful of 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.
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And that imbalance shows up in the outcomes.
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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.
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it wasn't set up in a way a buyer actually could step into and purchase and run successfully.
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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.
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And we'll go through a quick overview, and then we'll zoom in.
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So what are those questions?
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Number one, what value do you actually need to make the retirement plan work?
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That's today's episode.
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Two, what's your ideal exit path?
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Who do you ideally want to pass on that business to?
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Who are you selling to and how?
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Number three, is the practice actually ready to sell based on those things in the first questions above?
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And I just did an episode 160, with Erich Mattei on that topic, so I'll link to it in the show notes.
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Go check it out if you haven't.
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Question number four, how's the deal gonna be taxed?
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Because that can change your take-home dramatically.
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That tax planning angle and opportunity is really important.
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And then number five, what happens to the money afterwards?
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Once it's in your hands, what does it need to do, and what do you choose to do with it?
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And today we're starting with that first one, the retirement math.
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And I'm starting here on purpose because this is the question that sets the floor for all the others.
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It tells us how much flexibility or lack of flexibility we have for all of the other steps and questions that follow.
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Here's what I mean by that.
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Your practice valuation, the number everyone sort of obsesses over, only actually matters in relation to 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.
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Because the practice is an asset on your balance sheet.
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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.
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And one of the most important goals you're building assets toward is being financially independent.
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it's making work optional.
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So that's it.
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That's the whole thing.
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The value of the practice is only meaningful in the context of that gap, i- in solving that retirement goal.
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And here's why it sets the floor.
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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.
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You're just guessing.
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You don't know whether an offer is good or bad because you don't have anything to measure it against.
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Yes, you can measure it against earnings.
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You can measure it against other practices for sale.
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But the 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.
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The return of your investments only really matters in the context of do they help you to meet your goals?
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And let me give you two quick examples to make this real.
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Let's talk about two different optometry practices.
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Same price, roughly the same market.
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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.
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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.
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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.
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When we run his math, he needs more like$1.4 million after tax to make retirement work.
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Now, those two optometrists are going to run completely different sale processes.
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At least they're going to aim for different outcomes.
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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.
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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.
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Owner two doesn't have that flexibility.
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He may have to chase a higher price, which means maybe a narrow set of borrowers.
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Maybe he has to talk to the consolidators, larger buyers.
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Maybe he's more locked into a particular timeframe.
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His options are more constrained purely because the number he needs is bigger.
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Same practice, totally different strategy, and the only thing that changed was that gap, that retirement gap, and that's why we start there 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.
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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.
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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.
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Whatever it may be, that's your primary investment.
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But at some point you're going to hit constraints.
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At some point you're just gonna run out of things to buy in the business.
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you're gonna see diminishing returns on just buying more equipment, on more stuff in the business.
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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?
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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.
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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.
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You're essentially pre-funding that future buyout.
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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.
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Now let's imagine you are five to 10 years away from exit.
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If it all comes down to that gap, let's actually start to build it.
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Like, how do we actually build out this sort of retirement gap?
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Now, this is something we do with clients, right?
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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.
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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?
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Because it is a range, right?
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There is no, there isn't really one single number.
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There is a range of outcomes that can make that work.
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And so what is that range?
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We wanna test that.
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Now, for you, what are the factors that go into that?
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it starts with the least glamorous number of all financial planning, what does your life actually cost?
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Specifically, what will your retirement lifestyle costs look like in today's dollars?
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And this is a step that almost everyone wants to skip.
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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.
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Because ultimately being financially independent, making work optional, is about having enough stuff and sources of income to cover your ideal lifestyle expenses, right?
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So everything is founded and based on what you actually need to live on throughout the rest of your life.
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Now, the further you are away from retirement, obviously the more uncertain that spending number is.
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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.
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So for example, what typically goes down in retirement?
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commuting costs potentially, depending on the goals of the family, a work wardrobe.
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often debts are paid off.
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for example, the mortgage can be a pretty big one if that's paid off.
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Not always, but very often.
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Payroll taxes on practice income, like those are expenses you're not gonna see anymore.
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what typically goes up?
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healthcare costs can often go up, especially later on in retirement in terms of real healthcare expenses, but there's also health insurance premiums.
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Especially if we are retiring before 65, before Medicare, you have to purchase health coverage out of pocket.
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So then we're planning on tax planning and see if we can lower that number through premium tax credits.
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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.
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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.
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Because you have more time, and we often say every day is a Saturday now because you have more time to do things.
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and you also have the energy and the health to do things.
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Another thing may be possibly housing.
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Housing may change if you are downsizing or relocating or something like that.
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So we can make some reasonable adjustments based on what we expect or want to change in retirement.
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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 or, or covering other expenses or one-time vacations or just things like that.
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So we can kind of go through that exercise and see, okay, what are our reasonable starting spending numbers that are necessary?
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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?
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And, I think a common mistake is just sort of guessing, like we'll need 80% of our current spending and that's it.
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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.
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So we really want to get some clarity around that so we have a good starting point.
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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.
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And in a real projection, of course, we would include things like inflation over time, but we're just trying to get our basic ingredients here, our basic building blocks.
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part number two, building block number two is map what's already there to cover those expenses.
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So that starts with guaranteed income.
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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.
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pensions, if you have a spouse especially that has a pension, those are things we want to take into account.
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Also, other non-guaranteed income like rental income, those are things we want to take into account.
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And then there's the other assets.
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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.
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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.
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Now, a- as an advisor, we really would be projecting this out over the years, taking taxes into accounts, and modeling this out.
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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.
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And then once we do that, we can figure out what's the gap, right?
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What is the range of values needed from that practice sale in order to make this retirement plan feasible?
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And what structures are needed in order to make that feasible?
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and that gap, that range of values, becomes our negotiating floor for the sale of your practice.
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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.
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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 tends to determine your retirement planning rather than your retirement planning determining the deal that's necessary.
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And so once we have an idea of what's required from a potential practice sale, then we can go through the other steps.
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and it's really important because this gap tells us what timeline we can work with.
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Can you afford to wait for the right buyer?
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Do you have the flexibility to structure that out over a certain amount of years?
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Or does the math require a sale at a certain year?
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and it determines the buyer type.
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Does your minimum floor require a higher multiple buyer, assuming your practice large enough to draw those buyers?
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Or can you accept the lower multiple that might come from, an OD to OD sale or maybe an internal sale?
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the payment structure, can you structure the payout over a certain amount of years versus all at once?
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Or do you need to get the full value at close?
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A continuation, do you need to plan on working part-time or full-time after that sale to make retirement feasible?
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or is work fully optional?
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Knowing what's required of your retirement plan tells you whether an offer is worth accepting.
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And too many owners don't have this number.
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Too many owners don't have clarity around this.
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Too many owners step into it unsure of what they really need, what their family really needs.
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And so as you are preparing for a future exit from your practice, start from that perspective.
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What does this business need to do for my family?
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And how does it impact the amount of optionality you have and the flexibility you have when you go to exit your business?
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'Cause we will exit our businesses at some point.
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We all will.
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What's really at stake is how much flexibility you have to do that on your terms.
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And then we can test scenarios.
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We can run what if scenarios.
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what if you delay sale even further?
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what if healthcare needs come up and you have to exit the practice earlier?
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What about stretching out the transition over X amount of years versus selling out all at once?
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What if you have a really bad market year early on in retirement?
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How does that impact all this?
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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.
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Because if we have an idea of what really negatively impacts this retirement plan, then we can turn those into planning conversations.
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We can turn those into conversations around, hey, do we need to make adjustments around spending?
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do we need to make adjustments around how much we're saving towards retirement?
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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?
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And the earlier you can have these conversations to think about this, the more flexibility you have.
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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 profitable to improve the value at sale.
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Someone that's running this math just before or while they're in the process of selling their practice doesn't have that flexibility.
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And so the earlier you are, the more time you have to make improvements in all these things.
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and again, the goal isn't necessarily to get less from your practice.
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That's not what we're trying to do.
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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.
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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 And so a quick recap.
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What are the four ingredients or building blocks we take into account here?
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It's your spending number, it's your retirement goals, right?
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Your spending number.
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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.
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And then what's needed in order to cover the gap from there.
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And if you're thinking about this and you're not sure where you stand in all this, and you're not sure how to prepare for this reach out to me.
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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.
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A- and then what comes after that, alongside really great practice consultants and tax professionals and attorneys.
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And so reach out.
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If you have questions about this, please reach out.
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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.
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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.
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We will catch you on the next episode.
00:19:48.989 --> 00:19:50.449
In the meantime, take care
00:00:00.353 --> 00:00:01.463
Picture an optometrist.
00:00:01.774 --> 00:00:02.564
He's 58.
00:00:02.704 --> 00:00:05.514
He's owned his practice for a little over 20 years.
00:00:05.586 --> 00:00:19.989
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?
00:00:20.390 --> 00:00:21.339
When do I sell?
00:00:21.339 --> 00:00:25.321
What happens when I do?" He's heard numbers, he's been to the conferences.
00:00:25.321 --> 00:00:29.692
Somebody told him practices like his go for a multiple of EBITDA.
00:00:30.102 --> 00:00:47.438
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.
00:00:48.338 --> 00:00:52.048
Here's the question he hasn't asked yet, not what is my practice worth?
00:00:53.097 --> 00:00:56.618
The question is, what does this sale actually need to do for me?
00:00:56.917 --> 00:01:15.560
What does it need to deliver for my retirement to 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.
00:01:15.950 --> 00:01:22.596
And that's what I wanna talk about today Hey, everybody.
00:01:22.596 --> 00:01:30.686
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.
00:01:30.706 --> 00:01:40.495
I'm Evon Mendrin, Certified Financial Planner practicitioner and owner of Optometry Wealth Advisors, an independent financial planning firm just for optometrists nationwide.
00:01:40.506 --> 00:01:41.825
And thank you so much for listening.
00:01:42.296 --> 00:01:48.016
So this episode kicks off, or really continues something I've been wanting to put together for a little while.
00:01:48.085 --> 00:01:58.215
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.
00:01:58.215 --> 00:02:16.985
It's a handful of 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.
00:02:17.705 --> 00:02:20.156
And that imbalance shows up in the outcomes.
00:02:20.156 --> 00:02:34.415
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.
00:02:34.846 --> 00:02:39.876
it wasn't set up in a way a buyer actually could step into and purchase and run successfully.
00:02:39.936 --> 00:02:48.515
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.
00:02:49.205 --> 00:02:51.836
And we'll go through a quick overview, and then we'll zoom in.
00:02:51.895 --> 00:02:52.756
So what are those questions?
00:02:52.756 --> 00:02:56.825
Number one, what value do you actually need to make the retirement plan work?
00:02:57.195 --> 00:02:58.225
That's today's episode.
00:02:58.336 --> 00:03:00.135
Two, what's your ideal exit path?
00:03:00.566 --> 00:03:03.596
Who do you ideally want to pass on that business to?
00:03:03.605 --> 00:03:05.145
Who are you selling to and how?
00:03:06.045 --> 00:03:12.015
Number three, is the practice actually ready to sell based on those things in the first questions above?
00:03:12.635 --> 00:03:18.725
And I just did an episode 160, with Erich Mattei on that topic, so I'll link to it in the show notes.
00:03:18.725 --> 00:03:19.836
Go check it out if you haven't.
00:03:20.395 --> 00:03:22.945
Question number four, how's the deal gonna be taxed?
00:03:22.955 --> 00:03:26.026
Because that can change your take-home dramatically.
00:03:26.026 --> 00:03:29.086
That tax planning angle and opportunity is really important.
00:03:29.665 --> 00:03:32.216
And then number five, what happens to the money afterwards?
00:03:32.496 --> 00:03:37.186
Once it's in your hands, what does it need to do, and what do you choose to do with it?
00:03:37.816 --> 00:03:40.216
And today we're starting with that first one, the retirement math.
00:03:40.216 --> 00:03:46.515
And I'm starting here on purpose because this is the question that sets the floor for all the others.
00:03:46.616 --> 00:03:52.407
It tells us how much flexibility or lack of flexibility we have for all of the other steps and questions that follow.
00:03:52.848 --> 00:03:53.777
Here's what I mean by that.
00:03:53.777 --> 00:04:10.127
Your practice valuation, the number everyone sort of obsesses over, only actually matters in relation to 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.
00:04:10.737 --> 00:04:12.768
Because the practice is an asset on your balance sheet.
00:04:13.598 --> 00:04:20.028
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.
00:04:20.588 --> 00:04:24.987
And one of the most important goals you're building assets toward is being financially independent.
00:04:25.017 --> 00:04:26.348
it's making work optional.
00:04:26.468 --> 00:04:27.877
So that's it.
00:04:27.887 --> 00:04:28.648
That's the whole thing.
00:04:28.658 --> 00:04:35.798
The value of the practice is only meaningful in the context of that gap, i- in solving that retirement goal.
00:04:36.747 --> 00:04:38.937
And here's why it sets the floor.
00:04:39.267 --> 00:04:48.237
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.
00:04:48.798 --> 00:04:49.668
You're just guessing.
00:04:50.348 --> 00:04:55.307
You don't know whether an offer is good or bad because you don't have anything to measure it against.
00:04:55.788 --> 00:04:57.497
Yes, you can measure it against earnings.
00:04:57.497 --> 00:04:59.637
You can measure it against other practices for sale.
00:04:59.637 --> 00:05:11.776
But the 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.
00:05:11.776 --> 00:05:17.531
The return of your investments only really matters in the context of do they help you to meet your goals?
00:05:18.300 --> 00:05:21.230
And let me give you two quick examples to make this real.
00:05:21.321 --> 00:05:23.440
Let's talk about two different optometry practices.
00:05:23.562 --> 00:05:25.382
Same price, roughly the same market.
00:05:25.952 --> 00:05:35.473
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.
00:05:35.492 --> 00:05:43.853
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.
00:05:45.413 --> 00:05:57.252
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.
00:05:58.062 --> 00:06:03.658
When we run his math, he needs more like$1.4 million after tax to make retirement work.
00:06:04.377 --> 00:06:09.848
Now, those two optometrists are going to run completely different sale processes.
00:06:09.848 --> 00:06:12.677
At least they're going to aim for different outcomes.
00:06:13.267 --> 00:06:24.067
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.
00:06:24.228 --> 00:06:33.798
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.
00:06:34.817 --> 00:06:36.807
Owner two doesn't have that flexibility.
00:06:37.228 --> 00:06:42.338
He may have to chase a higher price, which means maybe a narrow set of borrowers.
00:06:42.858 --> 00:06:46.057
Maybe he has to talk to the consolidators, larger buyers.
00:06:46.418 --> 00:06:48.708
Maybe he's more locked into a particular timeframe.
00:06:49.377 --> 00:06:53.708
His options are more constrained purely because the number he needs is bigger.
00:06:53.930 --> 00:07:09.384
Same practice, totally different strategy, and the only thing that changed was that gap, that retirement gap, and that's why we start there 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.
00:07:10.394 --> 00:07:29.223
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.
00:07:29.973 --> 00:07:55.173
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.
00:07:55.673 --> 00:07:58.543
Whatever it may be, that's your primary investment.
00:07:58.653 --> 00:08:00.934
But at some point you're going to hit constraints.
00:08:00.934 --> 00:08:04.353
At some point you're just gonna run out of things to buy in the business.
00:08:05.204 --> 00:08:10.764
you're gonna see diminishing returns on just buying more equipment, on more stuff in the business.
00:08:11.533 --> 00:08:20.723
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?
00:08:21.024 --> 00:08:33.943
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.
00:08:34.583 --> 00:08:42.153
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.
00:08:42.984 --> 00:08:45.323
You're essentially pre-funding that future buyout.
00:08:45.333 --> 00:08:53.464
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.
00:08:53.562 --> 00:08:56.131
Now let's imagine you are five to 10 years away from exit.
00:08:56.741 --> 00:08:59.491
If it all comes down to that gap, let's actually start to build it.
00:08:59.501 --> 00:09:03.211
Like, how do we actually build out this sort of retirement gap?
00:09:03.211 --> 00:09:05.591
Now, this is something we do with clients, right?
00:09:05.591 --> 00:09:14.532
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.
00:09:14.542 --> 00:09:23.032
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?
00:09:23.062 --> 00:09:24.192
Because it is a range, right?
00:09:24.192 --> 00:09:27.442
There is no, there isn't really one single number.
00:09:27.442 --> 00:09:29.591
There is a range of outcomes that can make that work.
00:09:29.591 --> 00:09:30.701
And so what is that range?
00:09:30.701 --> 00:09:31.692
We wanna test that.
00:09:32.552 --> 00:09:34.731
Now, for you, what are the factors that go into that?
00:09:34.751 --> 00:09:39.792
it starts with the least glamorous number of all financial planning, what does your life actually cost?
00:09:39.802 --> 00:09:44.351
Specifically, what will your retirement lifestyle costs look like in today's dollars?
00:09:44.371 --> 00:09:47.302
And this is a step that almost everyone wants to skip.
00:09:47.682 --> 00:09:55.861
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.
00:09:55.922 --> 00:10:06.221
Because ultimately being financially independent, making work optional, is about having enough stuff and sources of income to cover your ideal lifestyle expenses, right?
00:10:06.221 --> 00:10:12.172
So everything is founded and based on what you actually need to live on throughout the rest of your life.
00:10:12.192 --> 00:10:18.282
Now, the further you are away from retirement, obviously the more uncertain that spending number is.
00:10:18.282 --> 00:10:27.831
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.
00:10:27.831 --> 00:10:30.672
So for example, what typically goes down in retirement?
00:10:30.682 --> 00:10:35.261
commuting costs potentially, depending on the goals of the family, a work wardrobe.
00:10:35.361 --> 00:10:36.711
often debts are paid off.
00:10:36.741 --> 00:10:39.792
for example, the mortgage can be a pretty big one if that's paid off.
00:10:40.011 --> 00:10:41.451
Not always, but very often.
00:10:41.861 --> 00:10:46.892
Payroll taxes on practice income, like those are expenses you're not gonna see anymore.
00:10:47.381 --> 00:10:48.432
what typically goes up?
00:10:48.491 --> 00:10:57.341
healthcare costs can often go up, especially later on in retirement in terms of real healthcare expenses, but there's also health insurance premiums.
00:10:57.351 --> 00:11:04.442
Especially if we are retiring before 65, before Medicare, you have to purchase health coverage out of pocket.
00:11:04.991 --> 00:11:11.022
So then we're planning on tax planning and see if we can lower that number through premium tax credits.
00:11:11.432 --> 00:11:19.101
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.
00:11:19.692 --> 00:11:29.871
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.
00:11:30.038 --> 00:11:36.328
Because you have more time, and we often say every day is a Saturday now because you have more time to do things.
00:11:36.948 --> 00:11:39.399
and you also have the energy and the health to do things.
00:11:39.879 --> 00:11:42.178
Another thing may be possibly housing.
00:11:42.198 --> 00:11:46.658
Housing may change if you are downsizing or relocating or something like that.
00:11:47.109 --> 00:11:52.808
So we can make some reasonable adjustments based on what we expect or want to change in retirement.
00:11:52.808 --> 00:12:04.849
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 or, or covering other expenses or one-time vacations or just things like that.
00:12:05.308 --> 00:12:11.369
So we can kind of go through that exercise and see, okay, what are our reasonable starting spending numbers that are necessary?
00:12:11.788 --> 00:12:17.979
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?
00:12:18.009 --> 00:12:24.479
And, I think a common mistake is just sort of guessing, like we'll need 80% of our current spending and that's it.
00:12:24.538 --> 00:12:40.438
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.
00:12:40.708 --> 00:12:44.578
So we really want to get some clarity around that so we have a good starting point.
00:12:44.589 --> 00:12:55.458
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.
00:12:56.442 --> 00:13:04.773
And in a real projection, of course, we would include things like inflation over time, but we're just trying to get our basic ingredients here, our basic building blocks.
00:13:05.232 --> 00:13:10.273
part number two, building block number two is map what's already there to cover those expenses.
00:13:10.283 --> 00:13:12.692
So that starts with guaranteed income.
00:13:13.113 --> 00:13:23.972
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.
00:13:24.182 --> 00:13:29.731
pensions, if you have a spouse especially that has a pension, those are things we want to take into account.
00:13:30.032 --> 00:13:35.022
Also, other non-guaranteed income like rental income, those are things we want to take into account.
00:13:35.572 --> 00:13:36.892
And then there's the other assets.
00:13:37.211 --> 00:13:47.451
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.
00:13:47.461 --> 00:13:56.001
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.
00:13:56.011 --> 00:14:03.692
Now, a- as an advisor, we really would be projecting this out over the years, taking taxes into accounts, and modeling this out.
00:14:03.701 --> 00:14:14.542
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.
00:14:15.042 --> 00:14:19.461
And then once we do that, we can figure out what's the gap, right?
00:14:19.461 --> 00:14:25.708
What is the range of values needed from that practice sale in order to make this retirement plan feasible?
00:14:26.519 --> 00:14:29.519
And what structures are needed in order to make that feasible?
00:14:30.019 --> 00:14:36.778
and that gap, that range of values, becomes our negotiating floor for the sale of your practice.
00:14:37.178 --> 00:14:48.548
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.
00:14:49.058 --> 00:15:07.208
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 tends to determine your retirement planning rather than your retirement planning determining the deal that's necessary.
00:15:07.219 --> 00:15:13.678
And so once we have an idea of what's required from a potential practice sale, then we can go through the other steps.
00:15:13.698 --> 00:15:18.649
and it's really important because this gap tells us what timeline we can work with.
00:15:19.019 --> 00:15:21.068
Can you afford to wait for the right buyer?
00:15:21.499 --> 00:15:25.769
Do you have the flexibility to structure that out over a certain amount of years?
00:15:26.158 --> 00:15:28.698
Or does the math require a sale at a certain year?
00:15:29.208 --> 00:15:30.798
and it determines the buyer type.
00:15:31.369 --> 00:15:37.658
Does your minimum floor require a higher multiple buyer, assuming your practice large enough to draw those buyers?
00:15:38.219 --> 00:15:44.479
Or can you accept the lower multiple that might come from, an OD to OD sale or maybe an internal sale?
00:15:44.928 --> 00:15:49.629
the payment structure, can you structure the payout over a certain amount of years versus all at once?
00:15:50.058 --> 00:15:52.288
Or do you need to get the full value at close?
00:15:52.869 --> 00:15:59.788
A continuation, do you need to plan on working part-time or full-time after that sale to make retirement feasible?
00:16:00.538 --> 00:16:02.058
or is work fully optional?
00:16:03.171 --> 00:16:07.900
Knowing what's required of your retirement plan tells you whether an offer is worth accepting.
00:16:08.301 --> 00:16:10.171
And too many owners don't have this number.
00:16:10.221 --> 00:16:12.110
Too many owners don't have clarity around this.
00:16:12.140 --> 00:16:16.760
Too many owners step into it unsure of what they really need, what their family really needs.
00:16:16.860 --> 00:16:22.230
And so as you are preparing for a future exit from your practice, start from that perspective.
00:16:22.480 --> 00:16:25.400
What does this business need to do for my family?
00:16:25.980 --> 00:16:33.270
And how does it impact the amount of optionality you have and the flexibility you have when you go to exit your business?
00:16:33.301 --> 00:16:35.711
'Cause we will exit our businesses at some point.
00:16:35.951 --> 00:16:36.721
We all will.
00:16:38.051 --> 00:16:41.990
What's really at stake is how much flexibility you have to do that on your terms.
00:16:42.610 --> 00:16:44.760
And then we can test scenarios.
00:16:44.760 --> 00:16:46.270
We can run what if scenarios.
00:16:46.610 --> 00:16:48.740
what if you delay sale even further?
00:16:49.061 --> 00:16:52.171
what if healthcare needs come up and you have to exit the practice earlier?
00:16:52.591 --> 00:16:57.591
What about stretching out the transition over X amount of years versus selling out all at once?
00:16:58.270 --> 00:17:01.270
What if you have a really bad market year early on in retirement?
00:17:01.341 --> 00:17:02.581
How does that impact all this?
00:17:02.591 --> 00:17:15.590
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.
00:17:15.590 --> 00:17:23.290
Because if we have an idea of what really negatively impacts this retirement plan, then we can turn those into planning conversations.
00:17:23.290 --> 00:17:27.221
We can turn those into conversations around, hey, do we need to make adjustments around spending?
00:17:27.691 --> 00:17:30.881
do we need to make adjustments around how much we're saving towards retirement?
00:17:31.340 --> 00:17:38.540
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?
00:17:38.980 --> 00:17:44.280
And the earlier you can have these conversations to think about this, the more flexibility you have.
00:17:44.381 --> 00:18:01.951
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 profitable to improve the value at sale.
00:18:02.010 --> 00:18:09.211
Someone that's running this math just before or while they're in the process of selling their practice doesn't have that flexibility.
00:18:09.211 --> 00:18:13.671
And so the earlier you are, the more time you have to make improvements in all these things.
00:18:14.070 --> 00:18:17.361
and again, the goal isn't necessarily to get less from your practice.
00:18:17.361 --> 00:18:18.461
That's not what we're trying to do.
00:18:18.461 --> 00:18:26.381
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.
00:18:27.030 --> 00:18:38.903
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 And so a quick recap.
00:18:39.294 --> 00:18:42.334
What are the four ingredients or building blocks we take into account here?
00:18:42.544 --> 00:18:45.874
It's your spending number, it's your retirement goals, right?
00:18:45.874 --> 00:18:46.753
Your spending number.
00:18:47.054 --> 00:18:54.364
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.
00:18:54.894 --> 00:18:58.003
And then what's needed in order to cover the gap from there.
00:18:58.219 --> 00:19:04.719
And if you're thinking about this and you're not sure where you stand in all this, and you're not sure how to prepare for this reach out to me.
00:19:04.719 --> 00:19:16.739
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.
00:19:16.749 --> 00:19:24.558
A- and then what comes after that, alongside really great practice consultants and tax professionals and attorneys.
00:19:25.118 --> 00:19:26.288
And so reach out.
00:19:26.288 --> 00:19:28.128
If you have questions about this, please reach out.
00:19:28.128 --> 00:19:37.759
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.
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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.
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We will catch you on the next episode.
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In the meantime, take care
