The importance of preparing your finances before you sell your practice

preparing your finances for retirementYou’ve worked hard as a dentist, you’ve decided to sell – now’s the time to make sure your money works hard for you. Thomas Dickson, chartered financial planner at Wealthwide shares his experience of working with dentists to help them prepare for when they sell their practice.

As financial planners who work exclusively with dentists, we’ve helped many principals prepare for one of the most important events in their career – selling their practice.

A common concern among dentists we speak to is ‘where is the money’s going to come from, once I stop earning?’

That’s completely understandable if you’re a principal who is used to grossing thousands every month.

It is quite daunting knowing you’re going to face a significant drop in earned income. And even more so if you’ve decided to sell before you reach your pension age.

The reality for most dentists is that it’s pretty likely they can look forward to a comfortable retirement.

With a combination of a reasonable NHS or private pension and the proceeds from selling their business, in addition to paying less income tax and no longer having to save into pensions and ISAs or pay for insurances, we’re able to reassure the majority of clients that they can afford to maintain their standard of living.

In fact, most principals we meet, have far more capital than they actually need to live the life they want to, without having to worry about running out of money.

What do you want to do with the rest of your life?

The first step I’d recommend, is to set aside some time to think about what you really want to do with the rest of your life between now (or the day you sell your practice) and the day you die.

Try to imagine yourself in your 80s or 90s. Look back on the last 20-30 years and what you’d like to have done or would regret if you hadn’t done.

The reason this is the first step is because it’s just not possible to create an investment solution without knowing what you need the money for and when you need it.

You can find out more about our financial planning services for dentists here.

Can you afford to sell?

The next step is to work out how much you need to sell your practice for. What amount do you need to give you the lifestyle you want throughout your retirement?

You could do this yourself and build a spreadsheet to add up all your pensions, savings and investments. Then deduct your mortgages and loans and likely expenses.

However, when you’re about to make the biggest decision in your career, I would argue it’s worth getting some help to crunch these numbers.

You need to ensure you’ve also taken into account the NHS and state pensions. As well as income and capital gains tax. Factor in investment growth and an inflation rate. Plus other one-off expenses such as helping any children with property deposits.

Although living costs tend to reduce in later retirement, it’s also important to make sure you have funds to provide for any long-term care needs.

To understand more about this process, watch here for an orthodontist’s experience of selling.

I suggest creating a cashflow plan as early as possible. Even if you’re in your early 40s.

I met some new clients last week who recently turned 50. Even though they weren’t thinking about selling their practice for several years, they were keen to start preparing and working out all the numbers.

They were delighted to learn that they were much more secure financially than they’d realised.

This doesn’t necessarily mean they’ll sell any sooner. But they’re definitely going to spend a little more time evaluating their lifestyle. And having a good think about what’s important to them at this stage in their lives and careers.

Things to consider before selling

There are a few key areas to consider in the years and months before completion:

How to reduce your capital gains tax

When you sell your practice, you will have to pay capital gains tax of 10% on the first £1 million and 20% thereafter.

It therefore makes sense to ensure that if you’re selling for more than £1 million, and have a limited company that you consider gifting 50% of the shares to a spouse. Either put them on the payroll or make them a director. Do this at least two years before completion.

This could potentially reduce your tax bill by up to £100,000.

The importance of negotiating well

Many buyers are keen to withhold a small amount of the purchase price (often between 20% to 30%). This is released, provided the practice meets various targets in the years after the sale.

The capital gains tax however, is payable on the full value of the practice. So you’ll need to make sure the money you actually get from the sale on day one, is enough to pay off your liabilities. As well as cover your tax bill and any other fun things you want to do with the money.

Knowing all these numbers upfront will make it easier for you to find the right buyer. Negotiate according to your needs and secure a deal that works for you in the short and long-term.

This is particularly relevant now. Many practices have taken on Bounce Back Loans or CBILS, as a result of the pandemic. This needs paying back on the sale of the practice.

We’ve also noticed an increasing number of principals selling sooner than expected. This is either because of frustration with the NHS, Covid, Brexit or difficulty in recruiting the right staff.

If you’re selling sooner than you originally anticipated, it’s important to factor into your calculations that your loans are likely to be higher than you originally anticipated.

Protecting your capital

When you finally complete, your solicitor will transfer a fairly significant sum to your bank account.

Whether you sell your practice for £300,000 or £3 million, the Financial Services Compensation Scheme will only guarantee the first £85,000 of savings in a UK bank account.

To guarantee your capital in the short-term, before you make any investment decisions, I would recommend setting up an account with NS&I. You can transfer the sale proceeds on the day of completion.

NS&I is the only provider that secures 100% of your savings, however much you invest.

You’ve then got some time before you decide what you’re actually going to do with the money,

To find out more about how we can help you at this stage in your career, click here. We help dentists see their full financial picture. Then they can make decisions with confidence and peace of mind.

Please be aware of the following investment risks:

  • The value of your investment can go down as well as up. And you may not get back the full amount invested
  • When investing your capital is at risk
  • Levels and bases of, and reliefs from taxation are subject to individual circumstances and may be subject to change
  • The Financial Conduct Authority does not regulate taxation and trust advice.
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