Physicians who are retiring from their own medical practice are some of the last to leave the profession, for many reasons. These include the cost and time it takes to invest in your own practice, the identity you’ve built around being not only a physician but also a business owner, concerns about your patients or the process of selling your practice, or the inability to find a physician to replace you.
So when can doctors retire? When they have the right plans in place! While there is a lot to think about when winding down your practice for retirement, there are plenty of ways to do so that will help you not only be well off financially, but also leave your practice in good hands.
1. Having a Flexible Time Frame is Essential
While there are solutions if you need to leave your practice suddenly, for example, in the case of illness or the need to care for a family member, most physicians who are retiring from their own practice do so after a number of years of preparation. This is especially important when you are selling your practice, which requires cleanup and careful reconciliation of your financial items, assets, and patient records. When doctors can retire depends on how they’ve prepared for the wind down of their business in the years leading up to them leaving.
Selling any business takes time, and selling a highly specialized business like a medical practice requires additional preparation. It likely took you a few years before your practice was fully up and running, and the same is true for winding down. There are some administrative items that will take time – for example, if you have paper based records and want to sell your practice, it would be worthwhile for you to switch to an EMR system so that the records on file can be handed off to a new owner.
In addition, it’s important to find a good replacement doctor so that your existing patients are not ‘orphaned’ in the medical system. For this reason especially, it’s a good idea to look around for:
- an additional doctor to begin transitioning your patients to,
- consider operating as part of a group practice, or
- notify your patients of your intention to retire.
With enough time and preparation, your patients should ideally be taken care of, with plenty of options for you to profit from the sale of your business and the office space you rent or own.
2. You’ll Need a Clear Valuation
Just like any business up for sale, the value of the offering is determined by the price the buyer is willing to pay for the business’ assets, reputation, and future earnings potential. There are quite a few items that will impact your ability to sell your practice, like the business’ location, the strength and tenure of your administrative team (and how many of them you will retain after you leave), the procedures and technology in place at your practice, any special perks for patients that draw in newcomers, and your network of referrals from other practitioners and clinics.
All of these add up to make up the value of the business. The challenge comes in when you try to add in the value of you – as a physician. If you’re operating out of a solo practice, even if the practice is large, thriving, and offers a wide variety of services, there’s a good chance that these patients are there for one thing: you! You’ve likely cultivated this goodwill over decades of practice, and that has been what was able to keep your business thriving for so long. However, unless you’re planning to remain part time, the doctor taking over for you is very similar in style and offering, or the patients are happy to see another doctor for the same services, the likelihood that the physician taking over your practice will see a drop off in clients is high.
If this is true, when can doctors retire? Solo practitioners need to be careful in the years prior to retirement. If you cannot transition your practice for sale or retain your patients and referral network after you retire, you might not get a high valuation on your business.
You could consider training your own locum for the role or transitioning your operations to a group practice in order to add more value. Other options include selling only the assets of your business – for example, the medical equipment and office space – and letting a new owner come in and do the rest, or transitioning your practice to bring in more patients on a year over year basis in the period leading up to retirement. Sending out a doctor retiring letter gives your patients some notice that the change is coming.
3. You Need to Prepare for a Sale
Not every medical practice is a good candidate for a sale – for example, a physician with a solo practice who uses only paper records would have a hard time selling their stake. If this is a part of your retirement nest egg, you’ll need to start preparing as much as five years in advance of your ideal retirement date in order to get the best deal and ensure a smooth transition. Some areas to think about include record keeping – paper based medical practices are difficult to sell, so you’ll need to transition your patient files to an EMR system, a process that can take up to a year. In addition, solo practitioners might have a more difficult time selling their practices to a doctor who wants to take over. For this reason, if you do own a solo practice, it might be a good idea to prepare your patients for the sale by transitioning your practice to a group practice or changing to a more desirable location.
While it might seem counterintuitive to spend more money on your business in the years leading up to your retirement, it might be a good idea to move your office to a more desirable location, implement strong technology and administrative policies, and hire great staff to carry on operations once you’ve finished working. Sending out a doctor retiring letter letting patients know about these changes is a great way to keep your patients in the loop. All of these factors will contribute to your business’ valuation and help you sell quickly!
4. There are Tax Implications
You might have spoken with your financial advisor prior to the sale of your practice with some plans for your retirement – getting a good idea of how much you can expect to sell for will help you to get a handle on what you have in your nest egg. However, how you handle the sale will also affect the amount of tax you have to pay.
Generally, there are two broad categories of assets that will make up the business you have for sale – physical assets like your office space, equipment, and tools will be transferred directly to the new owner, and intangible assets – like your goodwill, your patient book, or your network of physicians who refer patients to you. These two asset categories will be taxed differently – if you sell the physical assets for more than you paid (after taking into account the CCA deductions made every year), you will be taxed at the capital gains rate, which means you will need to include only 50% in your income. There are proposed rules that treat intangible assets the same way, where any amount greater than the original amount will require you to pay half tax at the investment rate.
Fortunately, many retiring medical practitioners can use the Lifetime
Capital Gains exemption for the sale of their practice in order to reduce the tax that they’ll pay. This will involve some planning, since you’ll need to be careful to follow the CRA’s rules. While this benefit shields the sale of your business from tax up to $866,912 (for 2019), there are a couple hurdles to physicians using it. First of all, you will need to have incorporated the business – operating as a partnership or sole proprietorship will make you ineligible for the benefit. Second of all, you will need to sell the shares of your business, not the assets, and there are some restrictions in the type of assets and certain holding periods you will need to follow.
It’s worth working with a tax professional in the years leading up to your retirement to take advantage of these exemptions prior to your sale.
5. You Need to Give Patients Notice
Whether you’re selling your practice or turning it over to a new practitioner, you’ll need to notify patients of the changes you’re making and of your intent to retire. While most patients will be happy for you, they might feel nervous about what to do when you are no longer available, especially if you’re highly specialized in your operations. For this reason, it’s a good idea to send out a doctor retiring letter to all of your patients announcing your intention to retire and your timeframe for doing so. Let patients know whether you’ll be staying on part time until you leave, taking on a new locum to fill the role, selling the practice, or moving somewhere new. Be compassionate to their needs and make sure to provide options for patients who might have to change physicians or practices based on your decision, and prepare your staff with answers to any of their questions.
Whether you’ll be selling your practice, welcoming in new doctors, or closing up shop, when doctors can retire will depend on how much planning and preparation they’ve put into the winding down of their practice. You’ve likely spent most of your adult years building up your medical business, so take your time letting it go in the most beneficial way possible. Your patients will thank you!
This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by RBC Ventures Inc. or its affiliates.