Planning for Unexpected Events and An Overview of Transition … · 2019-04-30 · Planning for...

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.