The Optometry Money Podcast

Rewind: Financial Planning Considerations for Owners of Established Optometry Practices

• Evon Mendrin CFP®, CSLP® • Episode 141

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Enjoy this rewind of a popular episode! 

In Part 3 of a 3 part series, Evon dives into the many financial planning considerations optometrists need to think about when you own a more established, mature private optometry practice - both inside the business and in the household.

A few of the planning topics practice owners should think about are:

  • Maintaining your vision for the ideal practice and ownership life
  • Building guardrails around your practice based on your ideal lifestyle
  • Create a separation between your practice and personal finances
  • Create a framework for deciding how to best use the cash flow your practice creates
  • Getting the most from your practice retirement plans
  • Planning for financial independence and retirement
  • Balancing the growth of different parts of your net worth over time
  • Risk management, contingency planning in the practice, and estate planning
  • Keep an eye on the other financial goals in your life outside the practice
  • Keeping in close contact with your professionals. 

Have questions on anything discussed or want to have topics or questions featured on the show? Send Evon an email at evon@optometrywealth.com.

Check out www.optometrywealth.com to get to know more about Evon, his financial planning firm Optometry Wealth Advisors, and how he helps optometrists nationwide. From there, you can schedule a short Intro call to share what's on your mind and learn how Evon helps ODs master their cash flow and debt, build their net worth, and plan purposefully around their money and their practices. 

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The Optometry Money Podcast is dedicated to helping optometrists make better decisions around their money, careers, and practices. The show is hosted by Evon Mendrin, CFP


The Optometry Money Podcast is dedicated to helping optometrists make better decisions around their money, careers, and practices. The show is hosted by Evon Mendrin, CFP®, CSLP®, owner of Optometry Wealth Advisors, a financial planning firm just for optometrists nationwide.

70. Financial Planning for the Established Mature Practice Owner Podcast Audio

Evon: [00:00:00] Hey everybody. Welcome back to the Optometry Money Podcast where we're helping ODs all over the country make better and better decisions around their money, their careers, and their practices. I am your host, Evon Mendrin, Certified Financial Planner and owner of Optometry Wealth Advisors, an independent financial planning firm just for optometrists nationwide.

And thank you so much for listening. Really appreciate it. And if this is the first time listening to the podcast, welcome to the podcast. Hope you enjoy it. And today's episode is gonna be part three of a three-part series, all about financial planning considerations through the sort of life cycle of a practice owner we started out with, what are some things you need to think about as you prepare to get into practice ownership, uh, whether cold start or purchasing into, uh, last episode we talked about.

Some of the things you need to think about from doors open through the early years of owning a business. And it turns [00:01:00] out there's quite a bit that you need to think about as you, uh, just start owning and growing a a, a practice. And lastly, in today's conversation, we're gonna talk all about the financial planning considerations you need.

Think about as the owner of a more mature, established practice and of getting into the later parts of your career, and this is really where you see the fruit of all of your hard work and labor. Profitability's growing revenue's, growing. The cash flow that you're seeing from the practice is growing. Um, this is a a where a common question that I hear is my, my, my practice is, is growing.

I've got this extra cash flow. What is the best way to put it to use either in the practice outside of the practice? What should I be doing with this? Extra cashflow to get me to the, the goals that I have in mind. So that's a common question that I see is just what, what do I do with this cashflow that my practice is producing?

And, and one of the first things you should think about, and this isn't really [00:02:00] a financial topic, uh, but it's really more of a. Business and life planning conversation, and that's don't lose sight of the practice that you've wanted to build all along. Don't lose sight of the ideal practice ownership experience you've wanted all along.

Don't lose sight of your ideal lifestyle that you've, you've thought about all along when you've gotten into practice ownership. You probably had this vision of how you wanted to grow and manage the business, your ideal scope of care, how you wanted to provide that care for patients and, and how you wanted to spend your time in and outta the practice.

I. One of the most common reasons I hear for why optometrists get into private practice ownership is that time freedom and the freedom of building the business on your own terms. So don't lose sight of that vision that you've sort of had all along. What is your ideal ownership life? What are the roles and responsibilities that you want to [00:03:00] have in the practice?

Do you want to spend more time with patients in a clinical role? Is that really what gives you energy? Is that where you thrive? Do you wanna spend more time on the administrative and leadership parts of the business? You know, wearing that owner's cap, do you wanna spend more time there? Is that what gives you excitement and gives you energy?

How much time do you wanna spend in the practice versus outside of it with your, your family and your community? Are you intentionally building a certain type of practice, a solo od practice or something larger, a larger entity? Are you gonna be hiring associates? Um, are you trying to make yourself operationally irrelevant or operationally free?

Is maybe a better way to put that. Taking on maybe more of a CEO role in a CEO model, how are you gonna eventually exit the practice? Everyone will exit their businesses. You will? I will. So how ideally would that look like to you? What would it look like to leave your practice on your own terms? And this business that you've built [00:04:00] is going to, maybe you've seen this already.

It's gonna take all of the time and energy that you allow it to suck from you. So what are the, the guardrails, the, the limits that you're putting on that business that allows you to live the life? That you wanna live both in ownership, responsibilities and outside of the practice. And from all of my conversations and everything I've seen and heard, nothing creates burnout in practice ownership, uh, quite like loading up on tasks and responsibilities that are not only energy draining, are not the things that really excite you at all, but are not the highest and most valuable use of your time in the business.

So. You wanna think about what are the roles and responsibilities that bring you energy and are also the the highest and best use of your time in the practice? And what are the other things that are on the up opposite side of that that you can delegate? And if that ideal lifestyle is not something that your business can support yet financially, why not?

Is that a goal that you're [00:05:00] building into your business planning from a profitability standpoint, from a salary standpoint, from a collected revenue standpoint? Is that a business goal that you're, you're building into your business planning? So that's more of the business and life planning. Think about that ideal ownership life, that ideal lifestyle, both in and outside of the practice.

And is your practice supporting that right now? And if it's not, why isn't that? The next thing you wanna think about is work on. Creating the separation between your practice finances and your household finances, and. Let me explain what that means. Because the financial health of the practice and the household are intertwined, one is going to affect the other.

The cashflow needs of the household are going to impact the practice financially because the practice funds everything and the financial needs of the practice is ultimately going to impact the the cashflow needs of the household. So. They're going to impact one another from a cashflow standpoint, from a, uh, goals and planning standpoint, from a [00:06:00] tax standpoint, it's entirely intertwined and your practice is going to fuel everything.

It's going to be the fountain for much cashflow flows down to, to fund all of your other needs and goals. So let me explain what I mean by creating separation between. You practice finances and your household finances. Uh, one way to do that is by having a consistent way to pay yourself from the practice into your household so that you can fund your lifestyle.

And, and so your practice isn't just this sort of pile of cash that you can turn to when you need cash. Oh my goodness. We need some cash. I'm just gonna take a distribution. Uh, you wanna have a systematic, regular way to pay yourself from the business and to handle the cash flow of the business and make decisions.

Uh, you wanna have appropriate amounts of cash, both in the practice and in your household as a separate emergency fund. You don't wanna have your practice. Holding all of the cash in your life, all of the liquidity in your [00:07:00] life. You wanna make sure you can have enough liquidity in your household, independent of the business, and you want to try as much as possible.

And I, I know it's not always possible or I know it's not always desirable to, you wanna try to keep your personal household expenses outside of the business. You wanna keep your business books as clean as accurate as you can, so you know that. Uh, your business data, your business financial information is accurate and, and you can make as best decisions as you can, um, if needed.

And if needed, you can present it to a buyer and you don't have to make a whole bunch of adjustments to the p and l in order to come to a true profitability of the practice. So, um, um, try to create some working separation between the, the practice finances in. And the household finances. The other thing is just remember that cash flow journey of, of the practice.

So how does cash go into the practice and have a framework to decide what to do next? Cash comes into the practice through collected [00:08:00] revenue. Then you have all of your core operating expenses, your cost of goods sold, and inventory, uh, your occupancy costs, your uh, staff. Uh, non optometrist and optometrists, uh, compensation costs.

You've got your marketing costs, equipment costs, and your general administrative costs. So you've got collected revenue, you're gonna have all of your different operating expenses, and once your operating expenses are tackled, then you're gonna have four things that are gonna demand cash from your business.

And. Uh, Greg Crabtree in his book, Simple Numbers, Straight Talk, Big Profits. He calls these the four forces of cash flow in a business. Those four forces are, uh, number one, taxes. So the IRS and maybe your state government's gonna require dollars from your business through taxes. You need to make sure you're setting aside.

Enough cash to prepare for that. Uh, secondly, your lenders, you're gonna have to make your debt payments right, and that's often just gonna be a part of your normal expenses each month. Your practice itself is [00:09:00] gonna demand cash because you're going to need to make sure you have an appropriate cash buffer in the practice, as well as preparing for maybe the next practice investment.

And then lastly, you as the owner or or the shareholder, are gonna demand money from the practice, meaning that whatever's left over after those things are taken care of. You now sort of have the permission or the freedom to distribute out to yourself, if that makes sense to you, and if that's desirable to, and then you have some decisions to make on what to do with the extra cashflow that your practice is providing because your practice, your business, just like any publicly traded stock, is gonna have two sources of return for you.

It's going to be both an asset that is hopefully growing in value, an asset that you own and could potentially sell down the road, as well as creating cash flow through your salary as an employee, but also profit distributions. And it's gonna be that cash flow that's really driving the return of the practice over all these years.

[00:10:00] And so how do you make good decisions with the cash flow of the practice? How do you use that cash flow to continue to build your net worth to continue to build Wealth and fund your ideal lifestyle? And the formula for building Wealth for an Optometry practice owner? Doesn't need to be complicated. It can be if you want to, but it doesn't need to be.

And of course, you want to be looking for opportunities to grow your practice as everything will flow from that. You want to build a healthy, successful, ideal practice and then first reinvest into that. But then outside of that, you can't simply use some of the low hanging fruit, really common basic investment opportunities available to you as a practice owner.

You can fully utilize the 401k plan in your practice, both as an employee and as an employer from a match and a profit sharing perspective. Uh, for a more established practice owner, maybe you're looking at a cash balance pension plan. Um, you have Roth IRAs, you have health savings [00:11:00] account. I mean, you can't start to put a pretty substantial amount of money with just some of these accounts alone.

Then you can turn to a taxable investment account to Infinity and just these accounts can be used to. Prepare for a successful retirement to prepare for financial independence without having to add other more complicated investments that require a lot more due diligence and sometimes, or maybe often carry a lot more risk.

And I know that because I've seen retirees firsthand in practice retire successfully just using these different types of accounts. And also there can be plenty of complexity and activity in this big private equity investment you own called a private Optometry practice. So there are a lot of ways to build Wealth.

You can add on privately held real estate investments. You can add on the commercial real estate property for your practice. You can add on some of these other more complex. Spicier investment opportunities, but I would say you don't necessarily need to, you've got plenty of opportunity in front of you just [00:12:00] using some of these, uh, really common investment accounts and that are sort of boring and plain vanilla.

Uh, but it can work. Deciding and using your cash flow wisely to build Wealth towards your different goals that you have on your mind, and to also fund your ideal lifestyle. That's important. The next thing to consider is taking a look at the different retirement plans in your practice and make sure you're getting the most out of them.

Of course, you may have the 401k plan. Hopefully at this point you're, you've already started to move on. Beyond the simple IRA plan, I think there's definitely a point where your cash flow is gonna allow you to move beyond that. So most likely you have a 401k plan in the practice at this point. And in 2023 you can put well over $60,000 in the 401k plan through a combination of the employee layer.

So up to the, this year, 22,500. Uh, maximum that you're able to put in as an employee. If you're over 50, there's an additional amount you can put in, but then there's the amount you can put in as the business owner, [00:13:00] as the employer, through the match that you provide to employees, as well as the profit sharing contribution that you provide to the employees.

With those employee contributions, you are limited up to a certain percentage of the compensation in the practice. Backing on these different layers can help you to get potentially up to that full over $60,000 limit in, in 2023. If you're older with a more established practice, with a good chunk of available extra cash flow and you're expecting that, continue on for the reasonable, uh, near future, you might even consider a cash balance pension plan.

And depending on your age and the makeup of your team and and your compensation, you can potentially put over a hundred thousand dollars when you're adding these different retirement plans together and. These are not only important investment levers, uh, but also important tax planning levers as you're starting to head to what's likely the highest amounts of taxable income in your life, in your working career and at the highest tax rates throughout your career.

There can be a lot of [00:14:00] reasons where you turning to these pre-tax type retirement accounts can make sense. And there's also that window where. You're three to five years out of selling your practice and you might see a pretty sizable capital gain. Uh, plus potentially, uh, depending on how that sale is structured, even depreciation, recapture.

So getting the most outta these retirement accounts can be a really helpful tax planning lever and, uh, can help you catch up. I mean, if you spent a pretty good amount of the early part of your career. Building your Optometry practice and reinvesting back into the practice. And if you're feel like you're sort of behind on having saved enough for financial independence outside of the practice, getting the most outta these retirement accounts, especially as you get older, especially over 50, can really help you sort of catch up and really suck away.

Quite a, a pretty substantial amount later on in your career. Um, I had recently a, a conversation on the podcast with Matt Ruttenberg and I'll, I'll throw a links out in the show, but we talk all about [00:15:00] how to really layer and stack these different accounts and plans so that you can put in potentially, potentially over a hundred thousand dollars into these accounts in total.

So, um, go ahead and listen to that. I'll, I'll throw that in the show notes. Another thing you wanna think about is risk management and, and just thinking about the different what ifs in the practice and, and in your personal life. One of the things to think about are what happens to your practice and to your employees and your patients, and by extension, your family or your ownership shares if something happens to you, especially if you are the sole optometrist in the practice, what happens in that situation?

That contingency planning, planning for those worst case scenarios becomes really important in order to preserve the value of that practice. Um, if you are a co-owner in the practice and if you have a, a partner in the practice, well then you need to think about are there appropriate buy, sell provisions inside of the operating agreement or shareholders' agreement or whatever it [00:16:00] is in the practice, and are those different triggers, death, disability, divorce, the letting go or release of, of one of you from the practice are all of the different triggers, well thought out and, and well funded where it makes sense.

Another thing to think about is, of course, appropriate insurance planning, which we talked about last time. Making sure that you are appropriately insured for the risks in your life. Um, at this point, you really should be looking at making sure you have umbrella liability coverage that is appropriate for your net worth and income and, and your situation there.

And then you need to think about estate planning. And this really becomes important even as soon as you have a growing family. This is probably something I should have mentioned in the last episode. And there's a small part of estate planning that almost every optometrist needs to think about why. Well, almost everyone has some retirement account somewhere with a named beneficiary.

So there's at least something for every optometrist to glance at to [00:17:00] make sure that it's, it's up to date every once in a while. But as a practice owner, what do you want to have happen with all this Wealth that you're building? If you become incapacitated, if you pass away, what would you want to have happen if you were in a position where you couldn't make those decisions?

That's really the whole point of estate planning, is making sure that you're able to make all of these different decisions with what happens with your Wealth, what happens with minor children, what happens with decision making, um, if you got to a point where you couldn't make those decisions. That's really the point of estate planning in my mind.

Who should manage all the Wealth? What are the rules or guidelines that you wanna set for them? Who or what entity should all of this Wealth go to? Are there tax considerations you need to think about? Are there. Are there life insurance proceeds as a part of that? And, and how does that fit in with it if there are charities or nonprofits as a part of that?

Which type of [00:18:00] accounts make sense for them? Is it pre-tax retirement accounts? Is it other accounts? Is it other assets? Have you thought all these different things through, if you have minor kids, this is especially important for younger families. If you have minor kids, who would you want to be the guardians for them?

Who should take care of them if something happened to you? Do you have the estate planning documents that make sense for your situation and for your state that you live in? A good estate planning attorney I think is well worth the investment here for me. You know, I, this is something I definitely wanna talk about with, with my clients and making sure that when we're ready, we're bringing in that estate planning attorney and that the things that need to get done, get done and that it's reviewed over time.

It's sort of an ongoing process, and you want to make sure that all of these things, all of these wishes that you've put down into writing, most likely in some way. Or, or keeping up to date with your life and your, your changing desires as your life changes. Another thing you need to think about is planning for [00:19:00] financial independence.

You need to think through what does financial independence mean to you? And, and if you're married to your spouse, to your family, um, how are you ideally spending your time? Who are you spending it with? What's needed financially to make that happen? And are you on track? What adjustments need to be made.

One of the health metrics I track over time is, is there a balance in your net worth between the different types of accounts and the different types of assets between liquid type assets like taxable investment accounts, retirement type assets, pre-tax, Roth type, real estate, equity practice equity. Is there a good balance between all of these different types of, of assets in your net worth and.

That sort of informs us how we turn your net worth into income and how that fits into, uh, or how that fits with other sources of income, like social security [00:20:00] and how that fits into, uh, making sure that we've got enough assets so that you can live a sustainable retirement without running out of assets and making sure that we can plan for our taxes and different things like that.

That also tells us how much flexibility you has as you get closer to that point where you wanna be financial independent. Because if you are, if all of your assets are tied up in practice equity, well, you almost have to either stay on board and continue to be a part of that practice or sell that practice for a certain valuation.

You have to aim for a certain, uh, a certain value in order to make retirement feasible. So you sort of limit your options there. What about real estate? Same thing. If, if in the most extreme scenario, if all of your net worth is tied up in your personal residence, well there's sort of limited on options that you have to turn to the equity of that, of that, uh, of that real estate in order to make retirement feasible.

So, um, so that sort of balance that you have also sort of indicates to us how much. Flexibility, how much [00:21:00] optionality you have as you get closer to that point of, of being financially independent and thinking through retirement. Because financial independence and retirement can actually mean two separate things, can be two separate points in your life of having that optionality, meaning you don't have to work but you can if you want to.

And then finally deciding to step away from the practice and, and I think in general. What does that exit from the practice mean to you? How would you most ideally want to leave your practice? Because everyone will. And how are you, how are you preparing your business to, to get to that point? And this is something you should think about much earlier than, uh, than the points where you're actually gonna leave.

Because that's gonna inform your, your business decisions. Are you hiring and training associates to be that sort of, that next generation of practice owner are, are you planning for that internal succession or would you rather sell to. Private equity and really build this substantial [00:22:00] entity. You know how you most ideally want to exit that practice and that balance in your net worth is gonna inform a lot of your business business decisions as well.

And then lastly, keep an eye on the other financial goals in your life. Paying for college for your kids, weddings for your kids, uh, vacations, trips, life experiences, charitable goals or or their nonprofits, charities, organizations in your life that you want to provide for, donate to, um, volunteer at what are the other financial and life goals in your life that you want to plan for?

Is there a vacation home? Is that feasible? How does that fit into your, your, your plans for financial independence? So just think about those other things outside of the practice, unrelated to the business that your business may fund, but are not totally connected. What are those other things on your mind?

And there's a lot more we can get into, but I, I think, I think I'll wrap it up here and just sort of say there's, there's a lot and there's so much that [00:23:00] goes into owning a business. I mean, throughout this whole conversation, throughout the life cycle and getting that practice built up and learning what it means to be a business owner and a leader, and, and finding your ideal life as a, as an owner and, and learning to delegate and, and all of the financial and cash flow and tax consequences and, and planning opportunities, it's, there's so much on your plate.

One last thing I'll say is just lean on the professionals in your life. Make sure you have a, a really good professional team that you can lean on. Regularly, proactively, uh, from a good financial advisor that can help you navigate all of these different decisions and can work as that sort of central hub between you and all the other professionals in your life.

Someone that integrates both the practice, financial aspects of your life and, and the personal finances. Make sure you have a really good tax professional, whether it's a CPA or enrolled agent. Make sure you have a good bookkeeper, someone that knows Optometry really well, that can give you. Regular, [00:24:00] accurate, timely financial information so you can delegate the collection and organization of the financials in your practice so that you can focus on reviewing the financials, projecting things forward, and making decisions, because that's really where your strength should be.

And then having a good attorney in your life to help you with estate planning needs to help you with, with business legal needs. Having a good insurance broker, someone that can help you with property and casualty and liability insurance, and someone that can help you with the life and disability and other related insurance products.

Having this professional team that you can lean on, lean on to, to take a lot of this off of your shoulders, people you can collaborate with so that you can focus on. On growing and running your business. Living that ideal lifestyle and, and spending time with your family and your community. So with that really long-winded end of the episode, I just wanna say thank you for following along.

Uh, let me know if you have any questions. Evon, [00:25:00] evon@optometrywealth.Com is my email. Uh, you can check out all of the links and information I mentioned in this episode in the show notes, which you can find at the Education Hub at my website. www.optometrywealth.Com. And while you're there, feel free to schedule a no commitment introductory call.

Uh, we can talk about whatever is on your mind financially and how I help optometrists navigate all these different decisions going on in their lives, both in and out of the practice. And with that, we'll catch you on the next episode. I have a great conversation coming up with a CPA that talks about how to look at your practice through the eyes of a, uh, through the lens of A CFO.

So that'll be a fun conversation and plenty more coming up. So really appreciate your time. If you've enjoyed the podcast, please leave a review. That feedback is so helpful and it's, it's helpful to get this information in the hands and ears of, of more of your peers, and we'll catch you on the next episode.

In the meantime, take care, want more resources to help master your money? Check out the Education Hub on [00:26:00] Evon's website. Site at optometrywealth.Com. Evon Mendrin is a Certified Financial Planner and owner of Optometry Wealth Advisors, a California registered investment advisor. All opinions of Evon and his guests are their own.

This shows for informational purposes only and should not be reliant on for specific investment legal tax for either decisions. Clients of OWA May own securities mentioned on the show.

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