By Craig Toberman, Guest WriterRetirement is a significant milestone for any physician, and it presents distinct challenges and considerations for those who own a private practice. As a fee-only financial advisor in St. Louis, I know that physician owners can ensure a smooth transition with thoughtful planning and risk management, preserving their professional legacy and financial security.
With the additional expertise of MEDPLI Insurance Services CEO Max Schloemann, a leading independent medical malpractice insurance broker, this guest post offers essential exit strategies for private practice physicians. We highlight key strategies that minimize financial, medical, and tax liabilities throughout the transition process so you can retire stress-free.
Step #1: Start Planning Early
Physicians who develop their exit strategy several years in advance are better positioned to optimize the valuation of their practice and manage complex issues thoughtfully. Delaying this process can lead to rushed decisions, overlooked details, and added stress.
Ask yourself these questions to evaluate your readiness 2-3 years before retirement:
#1 How Well Would the Practice Run Without You?
Ensuring the administrative aspects of practice operate smoothly without your direct involvement is crucial for attracting buyers and maximizing value. Streamlined operations, efficient systems, and a strong foundation contribute to a higher sale price and smoother transition.
Proactive Measures for Practice Sustainability
- Streamline operations: Simplify processes so day-to-day activities no longer rely on your direct management, allowing the practice to function independently.
- Document and automate: Implement thorough documentation protocols and automation where possible to reduce dependence on your oversight.
- Prepare your team: Ensure your staff is adequately trained and that operational redundancies are in place so that the departure of a critical administrative team member will be manageable for the transaction in its final stages.
- Update technology: If you haven’t already, upgrade to an Electronic Health Record (EHR) system to improve communication, maintain care standards, and meet evolving cybersecurity requirements.
These changes will increase the value of your practice while giving you peace of mind, knowing your professional legacy is well-established.
#2 Can You Maintain Your Lifestyle Without Income from the Practice?
Before setting a retirement timeline, assess how your overall financial plan and investment portfolio can support your ideal lifestyle after your transition. Ensuring your retirement plan is robust and sustainable is necessary for a smooth transition into your golden years.
Key Financial Considerations
- Evaluate your portfolio: Review and adjust your investments as needed. Use market-related tools to validate your portfolio’s risk-reward balance and projected cash flow, offering peace of mind and guiding your overall asset allocation decisions.
- Plan for healthcare expenses: In retirement, your role as provider likely shifts from provider to patient, often leading to unexpected and significant financial obligations. Factor these ever-inflating costs into your retirement plan.
- Maximize workplace retirement savings: Maxing out contributions to your 401(k), SEP-IRA, or other workplace retirement plan while you have the opportunity can significantly boost your savings and better prepare you for the retirement you envision.
- Decide when to collect Social Security: Often, because Social Security payments vary based on age, delaying your Social Security benefits as long as possible will maximize your monthly payouts and improve your long-term financial stability.
- Retiring early? Consider your income sources: While some exceptions apply, tax-advantaged employer retirement plans and IRAs typically do not allow penalty-free distributions until age 59 ½. Therefore, plan for adequate cash flow from after-tax sources to fund your lifestyle during early retirement before approaching your 60s. In some cases, home equity can supplement your cash flow during this interim period through tools like a home equity line of credit or a cash-out refinancing.
These steps help ensure your lifestyle is maintained and your overall retirement plan is robust.
#3 Have You Budgeted for Tail Insurance?
Tail insurance protects against medical malpractice claims filed after your policy expires, covering incidents during your active coverage period. However, this coverage comes at a significantly high cost, often around 200% of your annual premium—commonly requiring a one-time, six-figure payment. A proactive strategy is crucial.
Funding Tips for Tail Insurance Using Safe, Liquid Investments
- Invest in a money market account: Saving funds in a money market account or a high-yield savings account preserves capital with a competitive interest rate and allows easy access when payments are due.
- Invest in Treasury bills: Consider investing in T-bills by matching the investment’s maturity date to the tail insurance funding date. Treasury investments allow you to lock in a set interest rate guaranteed by the US government with no penalties for early liquidation—an advantage over CDs. Treasury investments are also generally free from state income tax.
Planning and saving wisely will cover your tail insurance obligation without disrupting your retirement goals.
More information here:
Thinking About Selling Your Medical Practice? Here’s What I Learned
Selling Your Medical Practice for an Early Retirement
Step #2: Optimize Your Practice for a High-Value Sale
As you search for buyers, focus on strategies that minimize risk and boost the sale price.
#1 Organize Financial Records to Showcase Profitability
Clear, well-documented income statements, tax documents, and financial records demonstrate the practice’s value and provide transparency. Potential buyers will scrutinize these during due diligence, and disorganized records can deter them or lower your valuation. Meticulous records and performance indicators inspire confidence in the ongoing sustainability of your practice and support a higher sale price.
#2 Engage Professional Advisors
Navigating the legal and financial complexities of selling a practice without expert guidance can lead to costly errors. Build a support team of trusted professionals who can help you prepare for the acquisition.
Your core team should include:
#3 Secure Medical Malpractice Tail Coverage
After years of planning and preparing for your transition, it’s time to finalize your tail insurance policy purchase. As discussed in Step #1, proper budgeting for tail coverage will enable you to more easily secure a policy before negotiations begin. This signals strong due diligence and adds value to your practice, making it more appealing and credible to buyers.
Tail coverage is crucial because it transfers liability to the insurer, protecting you and your retirement assets from future malpractice claims. Most buyers, especially sophisticated entities like private equity groups, will require proof of this coverage before finalizing an acquisition.
Tips for Tail Coverage
- Shop early: Pricing and availability fluctuate with the market, so start the search 2-3 months in advance to avoid last-minute surprises.
- Compare quotes: Request tail insurance quotes from multiple carriers to secure the most competitive rate. Avoid automatically accepting your current carrier’s offer without evaluating options from other providers.
Step #3: Structure the Sale to Your Advantage
#1 Resolve Open Malpractice Claims
Unresolved malpractice claims can deter potential buyers, complicate sales, limit coverage options, and increase insurance premiums. To make your practice more attractive to buyers, aim to settle any open litigation before listing your practice for sale.
#2 Protect Your Retirement Portfolio
While certain assets, like 401(k)s and personal residences, have protections against malpractice claims, comprehensive tail coverage helps eliminate vulnerability to personal liability, ensuring that future surprises won’t impact your finances in retirement.
#3 Meet Legal Requirements
Work with your attorney to identify relevant state and federal regulatory obligations and draft sale documents that protect your interests at every transaction stage.
More information here:
How to Minimize Taxes When You Sell Your Medical Practice
How to Retire Early as a Doctor
A New Chapter
Transitioning ownership of your private medical practice is a monumental professional and personal decision. By preparing early and proactively managing operational, financial, and medical liabilities, you can maximize your practice’s value and step confidently into retirement, proud of your legacy and ready for the future.
Have you sold a practice en route to retirement? What strategies worked well for you? How far in advance did you begin preparing?
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