I have heard from many dentists that it has never been as difficult to be a practice owner as it is today. The good news is that your dental practice is likely worth a great deal of money. Many dentists are thinking of selling. Most are not ready to retire and still enjoy dentistry, but they are still considering selling. After all, you don’t need to own a dental practice to practice dentistry.
So, what do you need to know in order to answer the question, “When should I sell my practice?”
Before you begin to investigate whether you are in a position to consider selling, you need to resolve the following questions:
1. If I sell, will I be able to fund my lifestyle costs without the income from the practice?
2. What is my practice worth?
3. Am I eligible for the lifetime capital gains exemption (LCGE)? If not, what do I need to do to make the shares of my professional corporation eligible? You can get answers to these questions from your accountant.
4. How much income tax will I have to pay on the practice sale? Even if you can claim the capital gains exemption, there may still be taxes owing on the sale.
5. How will I invest the proceeds of my practice to fund my lifestyle?
For the purposes of this article, I will focus on the first and last questions.
If I sell, will I be able to fund my lifestyle costs without the income from the practice?
The only way to answer this question is to run scenarios specific to you. For discussion purposes, my team put together the chart below. It is difficult to speak in general terms about how much one can afford to spend in retirement without accounting for the income taxes owing on RRSPs and money inside of a corporation. Most of the dentists we work with have more than $3 million saved in tax-deferred accounts. The fact that they will have to pay income taxes on this money when they withdraw it has a big impact on the projections.
The table below is a matrix to show how much one can afford to spend in retirement based on varying amounts of tax-deferred and tax-paid savings.
Retirement Savings Need
If you have enough money to retire, perhaps it is time to consider selling your practice.
If you had $3.6 million (including the sale of your practice) and half of it was in tax-deferred savings, you could afford to spend $150,000 per year, after-tax and indexed for inflation. (Note: It is strongly recommended that you work with a professional to run your own projections. These figures are for discussion purposes only.)
For your nest egg to outpace inflation, you’ll need exposure to the stock market. Other types of investments such as bonds, GICs, and annuities are simply paying too little to keep pace with inflation.
I have learned two valuable lessons while managing money for dentists over the past twenty years.
1. Investing at this stage is not about getting the best return, it’s about getting the most consistent return.
2. The greatest risk you face isn’t that the stock market will decline. Rather, it’s that the stock market will decline, and you’ll need to sell to fund your retirement.
One way to mitigate the riskiness of the stock market is a solution we came up with at McNulty Group called the Four-Year Rolling Reserve. We looked at the rolling annual returns of various stock markets since 1950. We found that while there were many corrections and crashes in this period, the various stock markets remained in a negative position for more than four years for only a small percentage of time.
What does this mean? If you set aside sufficient money for four years of spending in low-risk liquid assets, you can lessen the risk you’ll be forced to sell at an inopportune time.
In conclusion, if you have enough money to retire, perhaps it is time to consider selling your practice. While owning a dental practice is a great investment, it also requires a great deal of your time and energy. Given that practice values are near all-time highs, it might be worth investigating your options.
Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The views are those of the author, Mark McNulty, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.
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Mark McNulty is a Senior Wealth Manager with McNulty Group of Raymond James Ltd., a firm responsible for managing $500 million of retirement savings for Ontario dentists. In addition to writing two books on retirement planning for dentists, Mark is the creator of the new video series, “How smart dentists sell their practices and win in retirement”. In 2021 Mark was recognized by The Globe and Mail as one of Canada’s top wealth managers. For more information, visit www.mcnultygroup.ca