The End Game. Part 1: What's the question?
It started with a “normal” practice visit. The principal is 40 years old and I’ve worked with him a few times over the years, although we haven’t spoken in detail for about 5 years. He has steadily built a private practice and turned it into one of those “million pound units of dental business” that I keep talking about. He generates about £3000 a day of productivity. His associate generates about £1500 a day. His hygienist about £750 a day of S&P plus whitening. Practice turnover is close to a million and the net profit before tax is £300,000. A good life with plenty of “balance”, a great clinical team, lovely premises, nice branding – and all of that without me or any other consultants – how annoying! So, you might ask, what was I doing there, in response to call for a meeting with him and his practice manager? As always, our conversation starts with me asking “how can I help?’ And the answer is: “I need a strategy.” I resist the temptation to respond with “waddayamean you need a strategy, you have a fabulous business? Most of the people I work with want to be where you are NOW!” And ask: “Tell me more?” It quickly becomes apparent that I am NOT in the company of a serial entrepreneur – he has loved the building of his business – but now its built and he is getting bored with “just making £300,000 a year”. The serial entrepreneurs are sometimes the most dangerous of all – because when they get bored they are prone to self-destruct – often so that they can have the challenge of re-building. Likely actions (in decreasing order of effectiveness), include:
they expand the practice, take on more clinical and support people – and get increasingly miserable as these “other people” screw up the business
they open additional locations – and get frustrated because they cannot control more than one site – because when “Elvis” leaves the building it all goes to pot
they buy a dress/hairdressing/interior design shop for their spouse or girlfriend – and watch it lose money hand over fist
they lend money to a friend who has a great business idea – and watch the business fail then lose a friend
they start pouring money into expensive hobbies and collections – boats, racing cars, horses, watches
they develop a series of compulsive addictive disorders – alcohol, social drugs, sex, cars, retail therapy
I know because I’ve seen it all over the years. The only saving grace for most of these strategies is that they end in a tax write-off, with the exception of the last, which usually ends in a newspaper article. So, if we now go back to the client in question (and thank goodness that he is a level-headed individual who is unlikely to partake in any of the above aberrations), I ask, “what is your end game?” and he replies, “what’s an end game?” So now we have a question – and we can start the coaching….. What is your end game? Robert Kiyosaki, author of Rich Dad, Poor Dad, speaks eloquently about “getting out of the rat race” – and he describes that as the moment when your inflation resistant, secure income from investments and assets is equal to your desired lifestyle – so that YOU DON’T HAVE TO GO TO WORK ANY MORE. I didn’t suggest that you don’t go to work – I’ll be speaking, coaching and writing until I drop, Tommy Cooper-like, from a workshop stage – but I’ll be doing it because I WANT TO and not because I HAVE TO. Dentists are somewhat different from consultants, trainers and coaches, because its reasonable to expect that your hand-eye co-ordination will, at some stage, deteriorate – and so there is a natural limit to your ability to deliver – but its no plan to suggest that you will keep doing the dentistry until your faculties fail you. So – the “end game” is the date on which: YOUR INFLATION-RESISTANT, SECURE INCOME FROM INVESTMENTS AND ASSETS IS EQUAL TO YOUR LIFESTYLE REQUIREMENT – AND YOU DONT HAVE TO GO TO WORK ANY MORE and my simple question to you (and to my client on the day) is – what date would you like that to be? As I said, he is 40 – he thought for a moment and answered – “age 55 or maybe 60” And I said – “no good – be specific” “OK – 55.” Now we have a target. Next question…. “In today’s terms (ignore inflation), at age 55, what inflation-resistant, secure income from investments and assets do you want to enjoy?” ‘I’d like £150,000 a year before tax.” So now I can do my job. Before we move to the next stage – let me quickly remind you that I am not a financial planner and not licensed to give investment advice – there are some very good people around (often mentioned in these dispatches) who can do that for dentists. However, I have opinions, based on my 26 years in financial planning (up to 1996), my 30 years of working with and observing business owners, of which, 15 years with dentists. My opinion is that you have to plan for a long-term rate of return on your investments of 5%. I’m not trying to sell you anything – so I’m not looking for feedback. What that means is that you have to multiply your desired lifestyle by a factor of 20 – to calculate that investment and asset base required to get out of YOUR rate race. So – £150,000 a year for life = £3m. Target for this chap. £3m at age 55. Next stage. Where is the £3m going to come from? Start by excluding domestic residence – you are living in it – there is no income – and very few people really downsize when the kids are gone – they relocate but don’t downsize – its a myth. Even the few who do downsize put the equity into non-income producing assets like boats and/or children. Next place to look is the capital value of the goodwill in your dental practice. In this case, a private practice. Goodwill values up to 5 years ago – 35% of gross. Goodwill values up to July 2008 – 100% of gross (and then a banking crisis and credit crunch) Good will values right now – maybe 65% of gross (my opinion – nobody else) Long term likely values – maybe 50% of gross (my opinion again – I can wax lyrical about that another time if you want to). So, on the assumption that my client has the good sense NOT to massively expand or open new locations – maybe a goodwill value of £500,000 for his practice. At the moment, this client has about £250,000 in various pension plans, investments and a small holiday property overseas – all a bit bitty but it still counts. His practice premises are another of his freehold assets and, when the mortgage is paid off (before 55) will add another £500,000 to the pile. So – we are about £1.75m short. Where is that going to come from in the next 15 years? Answer = “super-profit”. So what, then is “super-profit?” Let me explain that for the small private dental practice: PROFIT = the excess of business income over expenditure with which you finance your CURRENT LIFESTYLE. And the overwhelming majority of dental principals (and other professionals) create PROFIT in their business – and then spend it on their lifestyle. So it should be – but…. SUPER-PROFIT = the excess of business income over expenditure with which you finance GETTING OUT OF THE RAT RACE AT THE AGE YOU HAVE CHOSEN. The very big questions:
are you generating any SUPER-PROFIT?
will it be enough?
Which is where the financial planners (preferably fee-based) come in, to calculate exactly how much SUPER-PROFIT you will need to generate to escape. As a non-financial planner – let me share my fondness for the classic Woody Allen statement that “a stockbroker is someone who manages your money until its all gone.” I am no great lover of investment markets – and the events and scandals of the last few years have done nothing to change my view – thankfully Bernie and the banks haven’t “made off” with any of my cash. I have worked with individuals (including dentists) over the years who have escaped from the rat race – and they do seem to have a common characteristic – investment property. Now that’s another “horses for courses” subject – and I don’t want to get into the debate about the relative virtues of:
There are other people who can advise – and it will be down to your personal preferences as to whether your tenants are businesses, holidaymakers, students or social security beneficiaries. However, in the case of my client, there was a clear preference for UK commercial in his mind. So we created a series of challenges:
how do I create an additional £1.75 of commercial investment property, all paid for, by my age 55 as well as making sure that all my other debts are cleared – house mortgage, practice mortgage – the lot
what SUPER-PROFIT will my business need to generate to finance that portfolio and
given that I don’t want to open additional practices AND I don’t want lots of extra people in my business, what business model do I need to evolve to finance the above?
That was the result of the first half or our day’s coaching – figuring out exactly what the question is. Pause for an enjoyable lunch – and in the afternoon we begin the process of designing the dental practice that will get him there. Want to know how? Tune in for the next blog post tomorrow… * This article was first published in the Confidence Club ezine on 16 April 2010