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Are you planning your exit?

All too often, when I broach the subject of retiring with some of my contemporaries, the standard answer is: “I’m not ready to retire”. That may be so, but one must realise, that planning an exit that will be to your full advantage, will take time and even demand sacrifices along the way.

Once you retire, it is unrealistic to expect the same income you enjoyed, while practicing full time. The step down, is inevitable. What you do want to avoid, is to find one day, like a marathon runner, you suddenly have lame legs and can go no further. The only realistic option to consider then, is to sell the practice. This is not always the smartest thing to do. Unfortunately, the life style it provides you, can never be equaled from the investment of the lump sum you get by selling it. The seller is always under pressure to find a buyer with money or one who has enough surety to give the bank. There never seem to be any of those around.

The big question is; how much do I need to retire? In the first instance, it depends how long you are going to live. It can therefore never be an exact science, but there are some simple guidelines at hand. These days, it is realistic to expect a 12% return on the money you invest with the help of professional investment advisers. If we allow 5% for inflation, we are left with 7%. How much money must I invest so that the 7% will provide the live style I desire? Let’s say, you are aiming for R50 000 per month or R600 000 per year before tax. You will need an investment of about R8,5 million, to provide the life style you are after. I am by no means an expert in this field, but the point is, this is the kind of thinking that should be employed.

By way of an example, if your practice is turning R3 million per annum, and you can post 20% net profit, you can probably make around R70 000 to R80 000 per month from your optom salary plus profits before tax. If we apply my tried and tested valuation formula of Net Profit before tax X 3,5, the value of your practice will be more or less R2 100 000, all things being equal. My numbers may well be challenged, but they only serve here, to illustrate that the step down will be substantial. The point is, this amount will only give you about R21 000 per month and that is without making provision for inflation.

In my opinion, the way to go is to create your own buyer, except, you then give the shares away over time. This is the “Give-and-take” system described in my book (Navigating the business of optometry pg. 207)

With a succession plan, a good big one is always better than a good small one as far as practices go. One should strive to grow the practice in the last few years of your career instead of letting it slide. A young colleague may bring a new dimension to the practice and attract patients who don’t relate to you. It may just be what is required to pull your practice out of the rut of stagnation.

Finding a new optometrist with whom you and your staff are compatible may be a challenge, but one must be equal to the task and keep trying until the right one is found. You may have to make an income sacrifice initially, but this should be seen against your after-tax profits. You must be clear about the ultimate goal, which is to hand the business over to a junior optometrist, who is well established in your practice. Your hand is strengthened tremendously by the fact that you are going to provide the opportunity to some younger optometrist to come into equity without having to pay a huge amount of capital. That is a strong bargaining chip.

Without going into the finer detail, which you can find in my book, the principle is as follows: You will give 5% per year away, so that after five years, you still own 75% of the shares. You have also enjoyed all the income and rewards from the business after paying the incumbent a market related salary for five years. It is also not unrealistic to expect, that after five years, the business would have shown some growth, increasing your asset value. Don’t lose sight of the fundamental principle; you have now stopped working, but still have an income. Of course, the options are open for you to design your own version of this concept.

An added benefit is, that all the savings you have accumulated and have on investment, will show nice growth over the five-year period, because you won’t have to draw against it, since you still have the income from the practice.

If you are only going to embark on your exit plan once you are “ready”, meaning, you feel tired and unmotivated to practice any longer, you have probably left it too late. It will take much longer than anticipated because you have to work together for a period, in order to get to know the candidate, before you can lodge into the “Give and take” system. To boot, you may have to go through more than one potential candidate. Bear in mind, both parties must feel comfortable with the idea of working together. If you are set in your ways, grumpy and unwilling to agree to different ways of doing things, you may be rejected before you can even think of rejecting the candidate.

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