Can you achieve 'hakunah matata?'


Title familiar? O.K. Maybe you have a life. For the rest of our readers, this Swahili mistranslation says basically no worries!

Title familiar? O.K. Maybe you have a life. For the rest of our readers,this Swahili mistranslation says basically no worries!

If you broke away from your practice long enough to take your kids tosee the "Lion King," perhaps you would not be the subject of thismonth's sermon.

For thousands of my generation of colleagues, the next decade is theculmination of 40-plus years of devoted service. Some people call it retirement.Whatever you call it, it is going to be a painful experience for too manywho have worked hard and long serving their clients and patients. They sendtheir facts and figures to CPA's, lawyers and consultants like myself toascertain what they can sell their practice for in the next few years. Theanswer is often painful.

Sam and Jack's story

Drs. Sam Smith and Jack Jones have been partners for 40-plus years. Smithis 71 and Jones is 67. They've enjoyed practicing together, but their jointsare just not as well lubricated these days, so they found a potential buyer.They don't want to sell the practice real estate, worth about $400,000.They can lease that to the buyers and each get about $34,000 a year aftertaxes. They need a hefty sale price for the practice. They spent most oftheir savings, each sending three kids to private schools and private colleges.

Nothing but the best for their kids. After all, their investments inthe stock market and their practice will fund their retirement.

Whoops, the stock market in 2000 just took away $700,000 from each ofthem, about 65 percent of their hard-earned savings, so now it's the practicethat they are relying on. But everyone knows that a practice is worth ayear's gross and that would give them about $450,000 each, so they couldget by.

There would be no wild spending sprees, but they could get by. Afterall, Social Security will probably kick in $2,000 a month. Add it up. Eachwould get about $3,000/month from the lease, $2,000/month from Social Security.That's $60,000 a year and 8 percent of half of the $600,000 left of thesale price is about another $24,000 for a total of $84,000/year.

Together, they have grossed almost $900,000 a year and each was taking$138,000 salary for the last three years, so $84,000/$138,000 is about 60percent of their salary as a pension to retire on. They could do it!

Shocked beyond belief

However, when they sent in their last three year's tax materials andother documents to determine a fair selling price for the practice, theywere shocked beyond belief.

Because they had not been paying themselves any rent and fair rent on$400,000 should have been $48,000 per year, their take-home as veterinarianswas reduced by $24,000 each from $138,000 to $114,000.

Further, their combined salaries were $276,000 on a $900,000 gross. Hadthey employed associates to do that work for them, they would have paidthese associates 25 percent of their personal production or about $180,000leaving a shared payroll of $96,000 as profit to the bottom line, and that,sad to tell, is how practice valuation is determined (plus two dozen otherteentsie weentsie other factors).

With a bottom line of $96,000, this $900,000 per year practice (30 percentnet) was valued at only $460,000.

After taxes, each would receive only $150,000. An 8 percent annual returnon this is $12,000.

Add it up again, $3,000/month from the lease, $2,000/month from SocialSecurity, that's $60,000 a year and 8 percent of half of the $300,000 leftof the sales price is about another $12,000 for a total of $72,000/year.

The answer

What could they have done to avoid this sad ending to a great career? Plan ahead! That's the answer. They never minded being the least expensivepractice in town. Actually, they didn't even know that they were the bestbuy around as they never bothered to check. They always had just enoughto make ends meet most months! Those other practices charge way too muchanyway!

If they had only passed on the rent to the clients by increasing feesby 948/900 or 5 percent, their practice would have been worth about $200,000more.

If they had just increased their fees another 5 percent, to exceed 35percent net but they didn't. They were nice guys and loved by clients andpatients alike!

But they failed to look ahead, and now most of their clients will beliving better than they will.

Well, I don't want to sadden or bore you. I just want you to look ahead,and have your practice valued every five years so you, too, can achievehakunah matata no worries!

Related Videos
© 2023 MJH Life Sciences

All rights reserved.