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Planning for Unexpected Events
and An Overview of
Transition Activities
Roger K. Hill, M.S.A., A.S.A.
Andrew D. Tucker, J.D., C.P.A., C.F.P.
Planning for Unexpected Events:
ABOVE ALL ELSE,
LIFE IS UNCERTAIN.
…EAT DESSERT FIRST.
Planning for Unexpected Events:
The Two Uglies:
▪ Death
▪ Disability
Planning for Unexpected Events
• Partnerships for Security
▪ Built-In Buyer
▪ Mandated Buy-Out
• Death
• Disability
• Retirement
▪ Long-Term Security
Planning for Unexpected Events
• Partnerships for Security (con’t)
▪ Work As Long As You Want
▪ Share Administrative Responsibilities
▪ Collaborative Colleague
Planning for Unexpected Events
• Mergers Offer Protection
• Like Partnerships – Built-In Buyer
• Mandated Buy-Out
• Death
• Disability
• Retirement
▪ Long-Term Security
Planning for Unexpected Events
• Mergers Offer Protection(con’t)
▪ Again, Work As Long As You Want
▪ Share Administrative Responsibilities
▪ Collaborative Colleague
Planning for Unexpected Events
▪ Partnerships vs. Mergers – What Is the Difference?
▪ Partnerships:
• Typically Begin with One Owner
• Other Doctor Buys a Fractional Interest
• Buying Into the Cardboard Box / Making it Bigger
• Taxable Event
Planning for Unexpected Events:
▪ Partnerships vs. Mergers – What Is the Difference?
▪ Mergers:
• Begin with Multiple Owners of Multiple Practices
• Becomes One Practice with Sum of Owners
• Combining Multiple Boxes into One Large Box
• Necessity of Equity Equalization
• Non-Taxable Event
Planning for Unexpected Events
▪ What If I Remain Solo?
• Letter of Intent with Younger Doctor (or Group)
▪ LOI Presents Transactional Details
▪ Provides for Adjustments at Sale Date
▪ Known Purchaser
▪ Equity Preserved
Planning for Unexpected Events
▪ What If I Remain Solo?
• Triggering Events in LOI
• Death of Doctor
• Disability of Doctor
• Optional Provisions for LOI
• Agreed Upon Date for Sale
• Mutually Agreed Acceleration
Planning for Unexpected Events
▪ What If I Remain Solo?
• Insurable Interest for Purchasing Doctor
• Insurance Proceeds Eliminate Bank
• Accelerates Closing the Sale / Preserves Practice
• Who Pays the Premiums?
- Purchasing Doctor
- Selling Doctor (Premiums Added to Sale Price)
Planning for Unexpected Events
▪ Mutual Assistance Arrangements
• Requires Sufficient Doctor Resources
• Written Agreement Necessary
• Limited Effectiveness
• Days Per Week
• Term (3 to 4 Months)
Exit Strategies and Transition Alternatives
Transition Alternatives:
Prototypical Sale
▪ Full Sale
▪ Control
▪ Least Secure
▪ Cash / Note Ratio
▪ Practice Size Limitation
▪ Time Frame 0-2 Years
▪ Asset Sale
Transition Alternatives:
Delayed Sale
▪ Variation on a Theme
▪ Full Sale
▪ Control and Compromise for Security
▪ Cash / Note Ratio
▪ Time Frame 1-3 Years
▪ Asset Sale
Transition Alternatives:
Fractional Sale
▪ Portion of Practice
▪ More Complex
▪ Emotional Aspects
▪ Larger Practices or Time Frame
of More than 5 Years
Transition Alternatives:
Hybrid (Fractional to Full Sale)
▪ Begins as Fractional Sale
▪ Predetermined Buy-Out Date
▪ Purchaser Owns 100.0% At End
▪ “Golden Handcuffs” (Security)
▪ Can Progress to New Fractional Sale
Transition Alternatives:
Mergers
▪ Most Complex
▪ Single Survivor Entity
▪ Longest Time Frame
(Generally 8-10 Years)
▪ Slow Down Merger
Exit Strategies and Transition Alternatives
▪ Pre-Planning Provides Choices
▪ Provides Time for Change/Improvements
▪ The Closer to Transition, the Fewer Choices
▪ Time Frame for Planning: 2-5 Years in Advance
Exit Strategies and Transition Alternatives
Who is Morris Albert?
He Recorded the Song “Feelings”
Exit Strategies and Transition Alternatives
▪ In All of This Planning, There Will Be Feelings
▪ At First, a Bit of Discomfort
▪ Later, a Sense of Relief
▪ Protects Your Family, Staff and Patients
▪ Initial Discomfort Worth the Security
Transition ConsiderationsDifferences in Individual
and Corporate Buyers
Transition Considerations
▪ The Values (Fair Market Value) Will Be Different
▪ Individual Market First Standard Deviation
▪ 56.95% to 96.82% (Mode ~80.00%)
▪ Corporate Market and EBITDA
▪ 4.0 to 7.0 x EBITDA
▪ Equivalent to 100.0% to 150.0% of Revenue
Transition Considerations
▪ Typical Corporate Characteristics (con’t)
• Increased Due Diligence
• Practice (Buyer)
• Stock in Subsidiary (Doctor)
• Legal Documents
• Substantially More Documentation
• Your Legal Representation
Transition Considerations
▪ Typical Corporate Characteristics (con’t)
• Reduced Autonomy Post-Sale
• But, More Gradual Phase-Out
(Than With Sale to Individual)
• Varies by Buyer
Transition Considerations
▪ Comparisons of Post-Sale
• Full Sale to Individual (4 to 6 Months)
• Partnership
• Work As Long As You Want
• Possibility of Part-Time After Buy-Out
• Corporate (Typically 2 Years; Longer if Desired)
• More Gradual Than Full Sale to Individual
Transition Considerations
▪ In the Final Analysis:
• Qualitative and Quantitative Aspects
• These Are Iterative
• Comparative Analysis
• Full Sale
• Partnership
• Corporate
Financial Planning Considerations
▪ Reality: Most doctors are behind in reaching
retirement goals
▪ Same Blueprint for Expected and Unexpected
Retirements
• Unplanned also includes insurance
Financial Planning Considerations
Ibbotson, Roger & A. Milevsky, Moshe & X. Zhu, Kevin. (2007). Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance.
Financial Planning Considerations
▪ Three Step Process:
• How do we need to reach financial independence?
• What are we doing to get there?
• What needs to be done to offset the risk of death or
disability before that point?
Financial Planning Considerations
▪ “Your Number” Depends on:
• Longevity
• Tax Rate
• Investment Returns
• Spending Level (Most Important
Financial Planning Considerations
▪ “Your Number” Depends on:
• Longevity
• Tax Rate
• Investment Returns
• Spending Level (Most Important
Financial Planning Considerations
▪ “Your Number” Depends on:
• Longevity
• Tax Rate
• Investment Returns
• Spending Level (only one that can be exclusively controlled!)
Financial Planning Considerations
▪ Fastest Way to Retirement – Retirement Plans
• Tax deductible contributions
• Tax deferred compounding
• Avoids Net Investment Income Tax on personal investments
• Protected from creditors
• Lower taxes on distribution
• Potentially trigger QBI Deduction ($315,000-$415,000)
Financial Planning Considerations
▪ Goals with Retirement Plans:
• Capture as much as possible of contributions in plan
• Divert as much as practical pre-tax for maximum tax efficiency,
while respecting Goal #1
Financial Planning Considerations
▪ Protecting Against Loss of Human Capital
• Allows us to make up for lost income opportunities
• Loss of Life
• Loss of Ability
Life Insurance Considerations
▪ Obtain Cheapest Coverage Over Time Period Until
Financially Independent (Term – Not Whole Life)
▪ Decrease Coverage Amount as Liquid Assets Grow
▪ Avoid Costly Riders (Accidental Death, Waiver of
Premium, Child Coverage)
Life Insurance Considerations
Ibbotson, Roger & A. Milevsky, Moshe & X. Zhu, Kevin. (2007). Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance.
Blue Line = Life Insurance
Proceeds
Life Insurance Considerations
Disability Insurance Considerations
▪ Have Proper Coverage Over the Period Needed
(Not Lifetime)
▪ Reduce Coverages and Increase Elimination
Period As Liquid Assets Grow to Decrease
Premiums
Disability Insurance Considerations
Ibbotson, Roger & A. Milevsky, Moshe & X. Zhu, Kevin. (2007). Lifetime Financial Advice: Human Capital, Asset Allocation, and Insurance.
Gap Between Dotted
and Red = Disability
Insurance (Partial
Disability)
Disability Insurance Considerations
Other Insurance Considerations
▪ Business Overhead Coverage
▪ Long-term Care
▪ Note on permanent products
McGill & Hill Group, LLCOne-Stop Financial Services Resource
for the Dental Profession
▪ Tax and Business Planning - John K. McGill & Company
▪ Practice Transitions - Roger K. Hill & Company
▪ Legal Services - McGill and Hassan, P.A.
▪ Accounting Services – Jonathan W. White, CPA
▪ Retirement Plans – PenSys, an Ascensus company
▪ Investment Management – McGill Advisors, a division of Brightworth
every step of the way
© 2019 John K. McGill & Co., Inc.
Planning for Unexpected Events
Roger K. Hill, MSA, ASA
• Planning for Unexpected Events
• Exit Strategies and Transition Alternatives
• Transition Considerations
Terms & Definitions
EBITDA - Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure
of a company's operating performance. Essentially, it's a way to evaluate a company's
performance without having to factor in financing decisions, accounting decisions or tax
environments.