Now that we have some understanding of what an exit plan is and what its benefits are, let’s look at the steps involved in creating an exit plan. The steps are: 1) Establish your goals; 2) Consult with your advisors; 3) Formulate your exit plan; 4) Implementing your plan; and finally, 5) Reviewing your plan. I’m going to warn you now, while the steps are simple, they are not always easy to undertake. Proceed with care!
Step 1: Establish Exit Goals
The first step in exit planning is to establish your exit goals. To do this you need to answer to the five questions listed below These questions are interrelated and the answers to one will often influence the others. They are also each dependent on numerous individual factors unique to each practice and each owner. This step requires the gathering of a considerable amount of information as well as considerable contemplation. Take time to complete this first step; it lays the foundation for the rest of your exit plan.
Why do you plan to leave your practice?
There may be many reasons why you plan to, one day, leave your practice. The simplest of these is because no matter how hard we work to prevent it, we will all die. And, most of us do want, at some point, to be able to sit back and enjoy the fruits of our labor before that day comes. The question of why you are exiting is very much a personal reflection on what it is that will make you happy in NOT being a practice owner. To fully understand this, you may need to ask yourself several other questions. What are your business goals for your practice? What are your personal, professional goals? What are your goals in life and in retirement? The answers you come up with will help you determine under what conditions you can comfortably leave your practice.
When do you plan to leave your practice?
Once you have established personal and professional goals for yourself, you can then begin to determine when you want, or can, leave your practice. The primary concern of this question is whether you can afford to retire at the time you wish. Factors to consider include: desired age of retirement; projected yearly income required, and projected total saving required. If the numbers you come up with after considering the above questions don’t add up, you may need to re-evaluate your wants and needs.
Once you know when you wish to retire and how much money you need to do so, you must then determine whether your practice is ready for you to leave. The question you must ask yourself is whether your practice is profitable. Unfortunately far too many practice owners find out much too late that while their practice provides for a comfortable living it is not, in fact, profitable.. Practice profitability is best determined by a consultant (broker, accountant, etc.) experienced with the sale of veterinary practices, or other healthcare practices. There are subtle nuances involved in evaluating veterinary practices that will affect the outcome of their analysis. Many business consultant will not understand these nuances and may unknowingly give inaccurate advice. Determining the profitability of your practice early is vital as it can take five years or more for a practice that shows no profit simply for tax purposes to move into a financial position to be marketable for sale.
In order to maximize your after-sale profit, your practice must be transferable in addition to being profitable. Your practice is transferable if it can survive without you being present, not as a veterinarian, but as a supervisor. The test is to ask yourself would you be comfortable taking a leave of absence from the practice with no contact for one month or more. If not, then no matter how much profit your practice makes, it is worth less to a buyer.
But how do you know if you can leave for a month? First, you must have the right people in place. You must have management team members who can do their job without your direct supervision, if necessary. If you do not, you need to determine who those people are and how to get them into your practice. In addition to the right management team, you need to have the right procedures and systems in place so that if you need to replace staff members, someone can take over their responsibilities with the minimum amount of downtime and new staff can be trained in as short a time as possible. This includes systemized medical records, employment practices, training, checkout procedures, etc. Once your practice has these in place you will have a practice that can be transferred to a new owner with little change in production, increasing its desirability to buyers, and their lenders.
Only after reconciling the above issues can you set a timeline for your exit plan; starting today and ending when you finalize the sale of your practice.
Who do you want to take over your practice?
The next to consider is to whom would you like to sell your practice when you retire? The basic choices are simple: someone within the practice (i.e. partners, associates) or a new owner with no prior connections to your practice. Knowing your target market is important in determining how to develop your practice between now and the time of your exit. In order to maximize your earning potential you need to know who this market is.
How do you plan to exit your practice?
The next question to ask yourself is how you are going to exit your practice. While all of the questions above will factor into your decision, certain questions still remain. Are you going to sell the business or its assets? Are you selling all of your interest or are you going to keep some ownership? Asset sales are common when the entire practice is being sold, while stock sales are more common when the practice is owned by a corporation or group of veterinarians, when only one owner is leaving, or when an associate is buying into a practice.
Next you need to consider how you want to be paid for selling your practice. Do you want the purchase to be financed through a commercial loan, allowing you to take all the proceeds at once time, or are you willing to finance the sale (or at least a portion of it) yourself. There are benefits and liabilities to both methods. You should discuss the potential tax implication of selling your practice with your financial advisors and determine the best method for your needs.
What are you going to do if things go wrong?
Finally, every exit plan should include a backup plan in case of a “catastrophic event.” Because life is not alway perfect, you should allow for a certain amount of flexibility in your exit plan and take added precautions to cover those events for which you didn’t plan. Common aspects of these contingency plans include the purchase on life and/or disability insurance for each owner as well as buy-sell agreements among the owners.
Step 2: Consulting with independent advisors
Now that you have established your exit goals, it is time to develop a plan to achieve those goals. To do this you will most likely need some help. Therefore it is crucial at this point to sit down with independent, outside advisors to discuss how to make your plan work.
Why “independent, outside advisors”? You, your staff and your partners are too close to your practice. You will spend years growing your practice; you will have an intimate understanding of its nuances and personality. But this same intimacy may prevent you from being able to be objective about making the changes that need to be made to maximize the value of your practice. By soliciting the opinions of outside experts, you can be assured that you are getting unbiased advice.
What advisors you bring in will be an individual choice. However, at the very least, the following people should be involved, your accountant, attorney(s) (business and personal), and financial planner. When you bring this group together to discuss your exit plan, remember, they are experts, listen to their advice, it is what you are paying them for. You most likely want to include your spouse/partner in these discussions as well. After all, they are an expert on you and may have some wonderful insights relevant to this process. In the end however, the advice your consultants give you is only that, advice; the final decisions are yours to make.
Step 3: Formulating the Exit Plan
After you have consulted with your advisors and discussed your exit plan, it is time to formalize the process by creating an physical document describing your exit goals and your plans for achieving those goals. Parts of this may already be integrated into other business documents (bylaws, operating agreements, etc.) and parts may need to be created with the assistance of other professionals (buy-sell agreements, insurance policies, etc.). Your goal is to consolidate all of the components into a single document, similar, in some ways, to your business plan. Like a business plan an exit plan is a reflection of its creator and their practice, its format will be slightly different for each practice. Also like your business plan, your exit plan should be kept with your other business documents, so that it can be easily located when needed.
But why write out your exit plan. The plan may very well be fresh in your mind for some time after you have completed the first two steps, but it will soon be replaced by other more immediate issues. Over time you will lose sight of the plan and eventually totally abandon it. The act of putting your plan on paper gives it a formality that will help you follow the steps you have laid out. It also allows you to take the plan out and look it over from time to time to see just how well you are doing.
Step 4: Implementing your exit plan
While the prior steps in developing your exit plan were the most time consuming, and maybe the most eye-opening, this step is often the most challenging. Once you have placed your exit plan to paper, it is time to follow that plan. This often requires making changes to how you run your practice. Do not try to make all the changes at once. Implement them in a steady progression so that you can evaluate the effectiveness of each change. Give each step you take time to work before moving on the next step. Be patient, but be persistent.
Step 5: Reviewing your exit plan
As mentioned above, your exit plan shares several attributes with your business plan. One of these is that both are living documents. Life is an unpredictable series of events. A properly developed exit plan has contingencies built in for predictable “unexpected” events. But at times even the truly “unexpected” does occur and when that happens even the best laid plans will need modification.
Because your wants and needs will change over the lifetime of your exit plan, it must be reviewed and modified periodically. I recommend that you review your entire exit plan every one to two years. Reviewing your plan more often that every year may not give you enough time to allow the most recently implemented steps to fully develop. Waiting more than two years to review your plan may allow inadequate steps to impede to even completely derail your exit plan. In addition to these annual/biannual reviews, you should review your exit plan any time there is a major change in your circumstances. This may include the birth of a child, the death of a spouse or partner, a dramatic shift in the economy, etc. When these events take place, go back through the process of determining your exit goals. If your find changes need to be made, seek consultation with your advisors again and add the changes you formulate to your formal plan. By taking this two part approach you will have the flexibility to modify your exit plan when the need truly exists, but will also have the stability in your plan not to flounder about in the fickleness of life and the economy.
While the development of an exit plan is a business activity that can provide great stability and value to a company, it is activity not often undertaken. The time and effort put into developing and implementing an exit plan will more than be repaid when it comes time to leave your practice, both in monetary gain and reduced stress. In addition the process of reviewing your plan, once it has been formulated helps keep you focused on your long term goals in business, and life, when more pressing short term issues demand much of your attention. In the end the business, and business owners, with well developed exit plans are more profitable and enjoyable places, and people, with which to work.
If you have questions concerning exit planning, or need assistance in developing an exit plan, please feel free to contact us.