Planning your retirement from Optometry
THE DECISION to retire or exit a career in optometry is a matter of choice. However, the necessity to plan and prepare for the financial, legal, and psychological issues that arise is not a choice. Retiring successfully from an established optometry practice is not a single event; it is a meticulously managed business optimisation project spanning a decade or more. For the seasoned South African practice owner, the focus must shift from merely running a profitable business to structuring a premium, saleable asset.
Investing the proceeds from the sale of the practice in financial markets like the JSE will not yield the same income as that enjoyed by a successful practice owner. The smart way to approach it is to create your successor and utilise my method, “The Give and Take strategy (Page 207 in my book, Navigating the Business of Optometry) *. I’ll get to that towards the end of this article. An exit plan should not only be considered when one feels the urge to retire. It should be a consideration right from the start of your professional career. For example, an optometrist in a solo practice specialising in binocular vision would find it much harder to find a buyer with a similar interest, compared to an optometrist who owns a larger practice with two employed optometrists.
Investment Portfolio Strategy
Planning an exit from a professional career often goes hand in hand with planning and constructing an investment portfolio. Clearly, this article is not investment advice, but just an overview. When it comes to investing your life’s savings, caution should be the mantra. It would be wise to place one’s portfolio in the hands of a reputable financial advisor, as each individual’s needs and circumstances are unique. Any investment that looks too good to be true, probably is. Most importantly, an investment strategy should be long-term, and one should avoid reacting to every market fluctuation. A significant factor influencing the capital appreciation of an investment in the market is the investor's ability to refrain from drawing from it over a specified period, such as five years. If the return on the investment is reinvested, the investment has the potential to grow substantially over a five-year period. Beyond that, it will provide a much better monthly income to the investor. It would therefore be a very good strategy if, after selling the practice, the optometrist could earn an income from another source. A job as a locum optometrist may be a good option. At the same time, proceeds from the sale remain safely invested for a five-year period. An additional source of income, such as property rental, would be very welcome.
How much will be enough?
Exactly how much money will be enough to retire depends on how long the retiree will live, making it not an exact science. Investment markets do not deliver a constant rate of return and can be volatile, as shown in Tables 1 and 2 below. Moreover, inflation remains a material variable. It will also depend on the retiree's age, lifestyle, and the area chosen for living. One thing is certain: Current debt must not be part of the equation when it comes to retirement. In any career path, the goal should be to become debt-free as soon as possible. Ideally, one should be free of instalments on the house and motor vehicles.
This is how to calculate the capital requirement. Let’s say the income required is R1 000 000 per annum. A conservative annual draw of 4% is chosen. Divide the desired annual income by the chosen withdrawal rate. R1 000 000 /,04 = R25 000 000. That is the investment value required. The key to the long-term success of your investment is to ensure that you never draw more than the ROI, as doing so will deplete your investment value.
How to provide for inflation: Whatever amount you draw in the first year, you adjust that amount for inflation in subsequent years. For example, if you withdraw R400,000 in year one and inflation is 5%, you would withdraw R420,000 in year two to maintain the same purchasing power. In other words, in practical terms, you will increase your monthly withdrawal by the rate of inflation year on year. It would be unwise to propose a formula that can be applied across the board because every retiree’s position will be unique, with several possible variables at play. That is why it cannot be stressed enough that professional guidance is essential.
An optometric practice, if run well and appropriately geared, can achieve 20% net profit. It should be clear from Table 1 that an investment in the JSE currently will return nowhere near that, although in Table 2, over the period 2003 -2013, it would have come close. For example, a practice with an annual turnover of R5 million should aim to post a net profit of R1 million. Using my valuation formula of Net Profit before tax X 3,5 (not cast in stone), the value could be deemed to be R3,5 million. With the JSE Balanced Funds performing at 13% this year so far, and assuming this trend continues, the investment will earn R455 000 for the year. Once again, this is not an exact science, since markets can be volatile. However, judging by the past ten years, it proves the point that an optometric business should perform better.
Professional team
Setting up a professional team to plan the exit would be highly recommended. A chartered accountant, an attorney, and a reputable financial advisor will provide the required expertise. The issues in play, such as capital gains tax, income tax, estate duties, investment options, and the setting up of a Trust, are all important and require expert advice.
Owning the premises
Owning the building where the practice is located can offer significant benefits for an exit plan at the end of a career. It should be noted that investing in and owning premises too early in a career carries the risk that the location and area could become undesirable over a period of, say, 30 years. A common problem in malls is that at some point, the rent escalates at a faster rate than the relative increase in turnover. In fact, most mature practices will find that turnover growth flattens out. Rent and salaries then become killers in a mall location. However, once a practice has been established and is doing well, the location becomes secondary to the goodwill that has been realised. Relocation from a mall then becomes an option and in some cases a necessity. Rent is a significant expense, and when calculated over a 30-year career, it can be quite a revelation. For example, a rent of R48,000 per month, with an annual escalation of 8 percent, paid over a 30-year period, would amount to R65,251,129. Yes, that is over sixty-five million Rand, and this calculation does not even take levies into account. Viewing rent in this light could inspire one to find a way to invest in a building and pay rent to oneself. In the context of planning your retirement, owning your premises can become a significant factor in savings and a source of passive rental income.
Unit Trusts
Unit trusts are pooled investments of thousands of investors who entrust their funds to an investment management company. Blue-chip shares, which are shares of highly rated companies, can be out of reach of the modest investor. The management company uses the pooled resources to buy shares on the Johannesburg Stock Exchange or access offshore markets on behalf of the investors. The shares are not issued to individual investors in a portfolio. The Fund then divides the portfolio into many equal “units”. The investor receives a specified number of units in return for their investment. It boils down to the smaller investor being able to make quality investments and minimise risk. The longer the investment period, the lower the investment risk, as the fund manager can then take advantage of both downturns and upturns. The Johannesburg Stock Exchange represents the main sectors of the economy. Unit Trust Funds can therefore provide access to sectors like financials, retail, real estate and resources, including mining. It also provides access to different asset classes like bonds, cash, equities, and listed property. Unit Trust portfolios can be constructed to accommodate conservative as well as aggressive investors, depending on their needs.
Retirement Annuity
Contributions to the RA are tax-deductible. This is limited to 27,5 percent of taxable income, to a maximum contribution of R350 000 per tax year.
Contributions, which did not previously qualify as a deduction, are carried forward to the next tax assessment. One does not lose the tax deduction. This deduction can also be utilised for lump sum withdrawals or in the event of death. Investment growth in the RA vehicle is tax-free. There is no tax on income or tax on capital gains in an RA fund. Foreign dividends, which are normally taxable for residents, are also tax-free. A further benefit is that retirement funds will continue to be exempt
from the dividend withholding tax. This was introduced on 1 April 2012, making it a very attractive investment vehicle. The dividend tax is a withholding tax that should be withheld from dividend distributions and paid to SARS by the company paying the dividend, or, where the company uses a regulated intermediary, by the latter. The person liable for the dividends tax retains the ultimate responsibility to pay the tax should any of the withholding agents fail to withhold.
The RA becomes accessible at age 55. A once-off lump sum withdrawal can be made, but this is limited to one-third of the total investment amount. The balance can be transferred to a Life Annuity insurer. Withdrawals from a Living Annuity can range from 2.5 percent to 17.5 percent per year. The once-off lump sum drawing is limited to one-third of the total investment. A further benefit is the reduction in estate duty of 20 percent of the contributions, because the full RA amount does not form part of the estate. Creditors who have a claim against the investor cannot claim against the RA. Lastly, there are no executor fees.
When investing money in an RA, investors are essentially “locking in” the benefit until the age of 55, whereupon it can be accessed. There is no age restriction on opening a new RA, nor is there an obligation to start drawing immediately at age 55. The RA is a long-term investment from which the investor will only draw once retired. The goal of investing in an RA is to make use of the material tax benefit on the growth within the RA, as well as the reduction in tax payable each year.
Audited accounts
Although the business owner has choices regarding financial reporting, as laid down by SARS, it is wise to remember that when selling a business or taking on an associate, audited accounts become very important. Up-to-date management accounts confirm a well-run business, and if records demonstrate an upward trend in net profit, it will carry significant weight in terms of the sales price. Undeclared turnover will affect the gross profit percentage, which will immediately raise a red flag.
Time frame
Deciding on a time frame for an exit strategy is the logical starting point. One might think that five years is a minimum requirement; however, early career decisions should already consider the exit plan. The bottom line is that strategic planning is not a domain reserved for the elderly.
Value of the practice
Fair market value is the maximum price a buyer will pay and the minimum price the seller will accept when all the facts are known and neither party is under pressure due to unfavourable circumstances. It is about a willing seller and a willing buyer, as well as any intuitive component (such as a divorce) that may influence the sales price. This holds true irrespective of third-party opinions. The truth is that funders will always tend to lower the valuation to mitigate risk.
As the seller, it is essential to be realistic about the business's value; otherwise, a prolonged period on the market may result in no sale. Exiting a career is not only about selling the business; it is also about what happens afterward. Plans could be jeopardised by being in a selling mode for too long. If one were to ask for advice on valuing your business, one would likely receive several different formulae. In my opinion, unless the formula is based on net profit, it lacks merit. There is a chapter in my book devoted to this: The question of practice valuation, on Page 180*.
At the end of the day, a number of issues must pan out correctly:
- The seller must accept a price that makes the deal feasible in terms of servicing the financing.
- The monthly payments to the Funder must be within the capacity of the cash flow.
- The practice must be financially strong enough to justify the funding.
- The buyer must be able to survive on drawings that the business can afford, after paying the Funder every month, for a period of five or seven years.
Psychological Challenges
For many optometrists, their professional title is a core part of their identity. They are not just someone who knows about eyes; they are the person friends, family, and patients turn to for advice and care. This identity is built on years of education, continuous learning, and the trust they have cultivated within their community. Upon retirement, this clearly defined role disappears. This can lead to a feeling of being less important or valued. The life of an optometrist is highly structured. Days are often planned to the minute with patient appointments, staff management, and administrative tasks. This routine provides a sense of purpose and predictability. For a professional accustomed to a high-demand schedule, the shift to a slower pace can be jarring. Optometrists are problem-solvers. They diagnose and treat eye conditions, helping people maintain and improve their vision. This work provides a strong sense of purpose. Probably the biggest challenge is the lack of purpose and finding a replacement for it. Possibilities do not have to be restricted to employment in the optometric fraternity. A pastime can be turned into an income-earning opportunity. To achieve this, skills must be developed over time. This again points to the importance of long-term planning when it comes to an exit strategy.
How to get the best price for your practice
Give-and-take method (creating a win-win situation) (
In today’s business climate, the major obstacle to buying or selling a business remains funding. This system has been devised by the writer in order to create a win-win situation for seller and buyer alike. The scenario that best suits this method is as follows: a willing seller who wants to retire and a willing buyer who lacks the means to raise the asking price. The seller has employed the potential buyer for some years, and they are well acquainted. The hypothetical practice makes an annual net profit of one million Rand before tax. Based on the writer’s formula of net profit before tax multiplied by 3.5, the equity value is R3 500 000 (not cast in stone). The business has a net profit of 20 percent (R1 000 000). The buyer is able to raise funding for 10% of the shares (this is to demonstrate commitment, but not essential).
The seller retires and agrees to give away 7,5% of the value of R3 500 000 each year for five years. After five years, the buyer will own 47.5% of the business. The seller has sacrificed 37.5% but has also enjoyed a profit of R4 500 000 (90%) over the five years. To simplify matters, we assume that the net profit remains the same, which is unlikely. This is more than an outright sale would have yielded five years earlier, and he still owns 62,5%% of the equity. Variations to this strategy have many possibilities.
The agreement would read like this:
- The buyer buys 10 percent of the business for cash.
- The buyer will manage and grow the business for a market-related salary.
- The buyer will enjoy shareholder status for the 10 percent and receive a dividend.
- The seller has retired and no longer works in the practice.
- The buyer will only take transfer of the free shares after five years.
- The buyer will only start to share in the profits of the pledged shares after five years.
- Should the buyer decide to leave, she will forfeit all the shares promised, except the 10 percent she owns.
- Should the seller sell after, say, three years, the buyer will be paid out pro rata: 22,5% of the sales price, plus the 10 percent she owns.
- After five years, the buyer has the option to buy more shares based on the abovementioned formula or an outright sale.
It is clear that there are considerable benefits to both parties. The seller steps into retirement while the buyer steps into equity for free, in exchange for hard work. The seller will receive much greater financial gain than from an outright sale, and the buyer will be in a much stronger position to raise funding at this point. The seller will benefit further if the business shows growth, improves net profit, and increases in total value. This benefits both parties, and it would be shortsighted for the buyer to claim that, should she grow the business, she would effectively have to pay more for it in the future. The seller still owns the business and can draw a monthly income, but this should be done responsibly with the well-being of the business at heart. There can be different applications of this method, depending on the merits of each case. Lastly, the key to engaging in this option is long-term planning.
Final word
Contemplating retirement and exit plans at a young age is not normally part of one’s mindset. At this point, life is about embracing opportunities, building a business, raising a family, improving one’s lifestyle, and accumulating wealth. Understandably, at this time, there is conflict between striving to improve one’s lifestyle and saving for the twilight years. This is a reality. However, it is also very true that early career decisions can be detrimental to a successful exit from a professional career. The key to a successful exit strategy is long-term planning and making use of experts.
*Navigating the Business of Optometry is available in eBook format – download it here.