The Professional Advisory September/2005

Small Practice Valuations A Practice by Any Other Name (Part 2) Where’s Your Retirement “Paycheque” Coming From?

The Essence of Insurance Managing the Rent Cost/Production Relationship Selling Your Practice Strategies to Reduce Your Practice (Part 2)

The

Professional

Advisory For Healthcare Professionals

Small Practice Valuations GRAHAM R. TUCK H.B.A. C.A. 2 A Practice by Any Other Name (Part 2) DAVID ROSENTHAL 3 Where’s Your Retirement “Paycheque” Coming From?

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BARRY R. McNULTY

CFP, RFP, CIM, FCSI

The Essence of Insurance Dr. IAN WEXLER 5 Managing the Rent Cost/Production Relationship 4

Selling Your Practice DR. RON WEINTRAUB 7 Strategies to Reduce Your Practice (Part 2)

IAN TOMS B.Sc. (Hons)

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DAVID CHONG YEN

CFP, CA

Small Practice Valuations GRAHAM R. TUCK

H.B.A. C.A

We are often asked to value small and low billing practices. After the doctor’s remuneration is accounted for, it may initially appear as if the practice is not profitable.

Since we are looking for excess earning capacity, over and above remuneration for doing the dentistry, we have to take a different approach.

Most practices would like to have more patients. We, therefore, value the practice as if it were being sold and moved to another dentist in the area who would already have leaseholds and rent. They would purchase the practice and absorb the smaller practice into their own.

We remove the rent from the financial statements and we do not allocate any value to leasehold improvements.

The purchaser would look at the financial results as reasonable for his/her purchase. This becomes a win-win scenario.

Typically the “moving” practice would be structured as follows: Typically the “moving” practice would be structured as follows: 1. Lower value leaseholds. If it is a new facility and there is a high leasehold improvement value then this alternative may not be available unless the purchaser brings his/her existing practice to the vendor’s location.

In this scenario the sold practice facility would have to be large enough to support the incoming practice as well as its own.

2. Short time remaining on the lease. If the practice in question has a long lease that may be difficult to re-rent

then it may not be realistic to think of the practice as a “mover”. Ideally, if there is three months to one year lefton the lease, this would give the purchaser time to move the practice out of its current location.

3. Transition time with the vendor. If the vendor is willing to associate back in the practice at the new location for a minimum of one year, this would enhance the value of his/her practice. If the vendor is not or is unwilling to work in the new location then the purchaser would expect to lose more patients in the transition thus making the practice less valuable to the purchaser.

4. Matching requirements of the purchaser and what the vendor has to offer. The more efficient the merger is for the purchaser the more value he/she would gain.

For example, the purchased practice has one new dental chair and the purchaser has one old chair; this is a winwin situation. If the purchased practice has old equipment this could be of limited importance to the purchaser with no need of the vendor’s equipment. The purchaser can donate the unused assets and receive a charitable donation receipt for tax purposes.

5. Proximity. If the practices are less than two kilometres apart the transfer of patients to the new location would be very favourable. Practices can be further apart but this would mean that the vendor should stay on for a longer time frame such as two to five years to help retain the patients.

6. Staff transition. The relocation of staff is always a concern. An efficient and reliable receptionist is important for continuity with the patients. The chairside assistant is

into larger more modern facilities and both the Vendor and the Purchaser win.

essential for the vendor, as he/she will need a chairside even with the move. Ideally, the hygienist, if any, would be required in the new location as well. If termination is necessary, one must weigh the net proceeds of the sale to the vendor, when selling to that purchaser.

Graham Tuck, H.B.A., C.A., is the broker/owner of Professional Practice Sales (Ontario) Ltd., which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1 (888) 777-8825 or by e-mail at: grtuck@rogers.com

We have had great results with moving smaller practices

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A Practice by Any Other Name (Part 2) BARRY A. SPIEGEL

LL.M., Q.C

This article is written by Mr. Spiegel’s colleague, David Rosenthal.

In the last edition of The Professional Advisory, I discussed the use of practice names by dentists who carry on the practice of dentistry using a name other than their personal names. Before using such a ‘practice name’, that name must be registered at the Ontario Ministry of Consumer and Business Services (Consumer and Business Services) and approved by the Royal College of Dental Surgeons of Ontario (College).

The last edition dealt with the College. This article deals with practice names as they relate to Consumer and Business Services.

The Business Names Act (Act) is the governing statute in Ontario which deals with names under which individuals, corporations and partnerships can carry on business where such name is different than the name of the person or entity using the name. The Act deals with the content of and restrictions on such names, registrations and penalties for non-compliance with the Act. The fundamental requirement of the Act is straightforward. No individual shall carry on business or identify his or her business to the public other than his or her own name unless the name is registered under the Act. The same restriction applies to corporations.

Similarly, no persons associated in partnership shall carry on business or identify themselves to the public unless the firm name of the partnership is registered by all the partners. If the partnership wishes to use another name (other than the registered firm name of the partnership), then that other name must also be registered under the Act by all the partners.

Before registering a name under the Act, it is recommended you search the business names registry at Consumer and Business Services to determine if someone else has already registered the name. Assuming the name is available, the registration process is done by filing the applicable form under the Act and payment of the applicable fee. The registration is valid for five years and may be renewed for additional five-year terms.

It is important to note that the Act requires that a person carrying on business or identifying himself or herself to

the public under a name other than his or her individual name shall set out both the registered name and the person’s name on all cheques, business cards, letterhead, contracts, invoices, negotiable instruments and orders involving goods or services issued or made by the person. For example, a business card might read: Dr. David Rosenthal, operating as “Main Street Plaza Dental Centre”. Similar restrictions apply to corporations.

Registration of the name with Consumer and Business Services does not guarantee the exclusive rights to use that name or variations of that name. However, the Act provides that a person who suffers damages by reason of a name registration that is the same as or deceptively similar to another person’s registered name is entitled to recover compensation from the registrant for damages suffered because of the same or deceptively similar registration. A search of the business names registry to confirm the business name is not already registered should prevent this problem.

Even if a dentist registered a name at Consumer and Business Services, the College will not permit an identical or similar practice name for a dental practice if it is confusing with another existing practice name.

When purchasing a dental practice, typically the purchaser also acquires the rights to use the practice name associated with the practice. This involves filings at both Consumer and Business Services and the College.

What happens if you use a practice name for your dental practice but don’t register the name under the Act? The Act provides that you are not permitted to maintain a court proceeding in Ontario in connection with that business except with leave of the court. The best advice is often the simplest. Register your practice name at both Consumer and Business Services and the College.

David Rosenthal is a lawyer practising in association with Barry Spiegel whose practice is devoted to corporate, commercial and business law, with special emphasis on advising and consulting for the dental profession. He can be reached at (416) 865-0736; or fax to (416) 3638451; or e-mail to david@spieglaw.com.

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Where’s Your Retirement “Paycheque” Coming From?

BARRY R. McNULTY

CFP, RFP, CIM, FCSI

A critical stage of the transition planning process that in my view does not receive enough attention is the posttransition stage. That’s a shame as it is as important as pre-transition planning and the transition itself. As life expectancy rates continue to advance in Canada, many of us will be looking at golden decades not golden years of retirement. It is vital that your funds last at least as long as you do. However, there are many complexities in properly managing your financial affairs during retirement.

Think of your investment portfolio as a pension in the broad sense of the word with the preservation of capital and cash-flow generation as its driving forces. When you are retired you can’t afford to take too many risks.

To learn more about managing risk in general you may want to read George Hartman’s book Risk is Still a Four Letter Word.

To generate the cash flow to meet your retirement lifestyle spending, keep in mind the following essential points.

1. Have a good understanding of your real living expenses and the breakdown between regular monthly costs and periodic expenses. Make allowances for such things as car replacement and unexpected contingencies.

2. Establish sound tax planning so that your cash flow is high but your taxable income is low. This helps to

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preserve your retirement capital and, if done properly, should allow you to enjoy the Old Age Security pension without it being clawed back - at least for a reasonable period. In my experience it is possible to organize most practitioners so that their average retirement tax rates are in the 20 to 25 percent range for many years.

3. Coordinating your various sources of retirement capital is important. How you mix funds, including planned capital encroachment, from your RRSPs, non-registered capital, corporate funds, if you have any, and government benefits will be critically important.

4. Update your spending plans at least annually taking into account changes in taxes, investment returns, inflation, last year’s spending, and so on.

5. The mechanics of how you actually acquire funds are an important part of the process. You will be living on a fixed amount. Work with your advisors so that a specific sum is deposited every month into your bank accounts (your Retirement Paycheque).

In summary, I strongly recommend you plan your transition properly including an effective post-transition strategy.

Good Luck!

Mr. Barry R. McNulty CFP, FMA, CIM, FCSI is an investment advisor with Raymond James Ltd., Independent Financial Services. Member CIPF. The opinions expressed by the author are not necessarily those of Raymond James Ltd. He may be contacted at 905-470-6222ext 216 or barry.mcnulty@raymondjames.ca.

The Essence of Insurance DR. IAN WEXLER

My sister-in-law is dying of cancer. By the time you read this article she will already be gone. Early forties… mother of three young kids… never smoked or drank more than an occasional glass of wine. Gastric cancer. It’s not supposed to happen like this. Unbelievable.

Too often, I meet individuals, both clients and not, who tell me how and why they need insurance. What never ceases to amaze me is when these individuals tell me how they envision becoming disabled or dying: If I become disabled it’s only going to be from an accident.

I’m too healthy otherwise to become disabled from being sick. I’ve got longevity in my genes. My grandparents are both 90 and 95 and buying life insurance for me is essentially a waste of money.

I don’t mind stating that I always look at these people a little strangely. Not too many of you reading this would

react positively to a new patient who says, “If I ever have a dental problem it’s only going to be a small cavity, so there is really no reason to brush my teeth everyday.”

The essence of buying insurance is not to make you rich if something bad happens. What it really is meant to do for you and your family is provide financial peace of mind that everything will be “OK” if something bad and unexpected impacts your life. It is not meant to be a panacea. No matter what I say, or any other broker for that matter, any insurance purchasing decision comes down to a matter of risk tolerance. Invariably, some people will always choose to live in a glass bubble. That’s fine. I also do not deny that it is also about weighing the risk with the cost of coverage.

Here is the bottom line. I know only too well, how intensely many of you dislike shelling out hard earned dollars each

month on insurance premiums. Insurance is not something you can see or touch or enjoy. It is something however, that can impact your life “when you need it” in ways you cannot imagine. My greatest pleasure or sense of worth as an insurance advisor is handing over a cheque to an individual or family at claim time. Often it is the only ray of sunlight during a devastatingly dark time.

• Don’t let work stress you out… use the openings or slow times you have to plan, relax, and enjoy; • Make time for yourself to do the things you really like to do; • Realize that there is way more to life than just making the most money you can, and finally: • Give blood… there’s a lot of people out there who really need it.

That said, going through the pain that my family is enduring at this time, I cannot help but close with a final few words on what really should be important to all of us at the end of the day.

• Spend more time with your kids, spouse, and family… working those few extra hours each week just aren’t worth it;

Dr. Ian Wexler is Canada’s leading authority on insurance issues for dentists. He is the President of Protect-a-dent and Protect Insurance Agencies Inc. in Toronto which provides life, disability, critical illness, and healthcare insurance products and services to professionals, executives, and business owners across Ontario. He can be reached at (416) 3913764 or drwex@protect-ins.com

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Managing the Rent Cost/ Production Relationship IAN TOMS

B.Sc. (Hons)

Your monthly office rent payment should not be greater than seven per cent of your monthly production. I recommend that rent be equal to or less than five per cent of production.

To determine what your monthly production ought to be compared to your current rent, divide the monthly rent by five per cent. For example, if your monthly rent cheque is $3,000.00, divide that number by five per cent, which results in a monthly production goal of $60,000.00.

If you are not achieving these numbers, you can adjust your rent/production relationship by increasing production, reducing rent, or implementing a combination thereof, which requires actively managing lease obligations.

There are three primary rent cost reduction opportunities.

1. Reduce your rental payments by auditing your lease obligations. Recall that your monthly rent payments are the sum of base rent which is a fixed dollar amount per square foot per annum, and additional rent that generally includes an annually adjusted share of realty taxes, maintenance and insurance, plus GST. a. Easily 30 per cent of additional rent statements I review indicate additional rent overpayment, often amounting to thousands of rent dollars, because landlords know tenants don’t understand additional rent components or how additional rent is administered.

Most tenants never review or challenge additional rent payments. Ask a professional to review your additional statements in the context of your lease. b. Occasionally tenants pay more base rent than agreed to in the lease by misinterpreting the lease and paying more per square foot than originally agreed upon. Confirm that you are only paying the rate per square foot you agreed to pay. c. Many leased area representations are incorrect.

For a 3000 square foot practice at $30.00 per square foot,

a 10 per cent misrepresentation translates to a $750 per month overpayment, or at five per cent, $15,000 in monthly production. Hire a professional to determine how the area leased is calculated and then confirm the measurement. Be careful to measure the space first before talking to your landlord; you don’t want to admit you have been underpaying.

2. Reduce your additional and/or base rent per square foot payment by negotiating a better deal. Understand that both base and additional rental payments are negotiable. a. Occasionally landlords are receptive to renegotiating during a term but be prepared to make a reciprocal concession. b. Although the primary opportunity for rent negotiation is during the original offer to lease negotiation, the secondary but relatively powerful opportunity is during properly handled term renewal negotiations. Make sure you administer your renewal option properly. Approach the landlord well in advance of the expiry date, and plan and implement a realistic term renewal negotiation.

3. Relocate the practice. When the preceding opportunities are exhausted without success, consider moving. Determine the monthly amount of rental overpayment at your current location, and add that to the potential rental savings achieved at a new location, and multiply the sum by 10 years (120 months) to determine a rough idea of the break even cost to move.

There are many increased production opportunities related to lease obligations, which will be considered in the next issue of the Professional Advisory.

Based on more than 20 years business experience Mr. Toms, B.Sc. (Hons) acts as a tenant advocate on behalf of select retail and professional tenant clients primarily in the Greater Toronto Area. Mr. Toms is a real estate sales representative representing Professional Practice Sales (Ontario) Ltd. and can be reached toll free at (877) 216-1013, or by e-mail at iantoms@pipcom.com.

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Selling Your Practice DR. RON WEINTRAUB

Once you decide to sell your dental practice, planning for success is demanding and time consuming but can be a rewarding decision. Points for you to consider are How Should I Prepare for the Sale? Should I Attempt To Sell Internally? Should I Approach The General Dental Marketplace?

Steps To Take in Selling A Practice • Update equipment and office furniture. Making an investment in some new equipment, furnishings, and practice is not as onerous as you might think. The fixed asset portion of the evaluation price will reflect your expenditure, therefore, minimizing your capital costs.

• Get professional appraisal of your practice. In seeking an appropriate appraiser, include a yearly update at minimal cost until you sell.

• Contact an accountant and lawyer who focus significantly on dental practices since different dynamics exist than with other commercial sales.

• Vet the appraised value to assure inclusion of physical assets, past profitability, value of location, and potential of practice. Although some would say the price of the practice shouldn’t reflect its potential, only its history, in many areas, location and demographics should positively affect appraisal value. Sale price and appraisal value do not have to coincide. For example,

practice appraisal of $650K might have a sale of $710K when subjective goodwill is considered.

• Conduct an up-to-date chart count of active patients who have been in the recall system within the past eighteen months. It’s helpful to have a typical day sheet for a bird’s eye view of your practice, too.

Selling Your Practice Internally One way to find an appropriate buyer is by taking in an associate with a guarantee of buy-in within an agreed time frame, for example, 2-5 years. Associates bring a patient base and new, different skill sets adding value to your practice. Selling internally has distinct advantages. Your associate is familiar with the patient base, staff, and method of operation. Transition of your practice to your associate minimizes disturbance to patients and staff; therefore, this type of sale has maximum value to associate as opposed to an outside purchaser. This should produce a higher price for the practice.

Approaching the General Dental Marketplace Another way to sell your practice is by putting the word out, confidentially, to dental companies that you are looking for a buyer. Full service dental companies are excellent sources of potential purchasers. Advertising discreetly in dental journals provides additional venues to attract potential buyers when not using a broker.

Commonalities Whether selling your practice internally or externally, effective systems of office administration appeal to the purchaser for a potentially smooth transition.

As an important strategy, retaining key staff and patients during this process enhances the value of your practice. A competent practice management consultant can assist you with the organization of an effective management system and style.

Whether selling your practice with or without the assistance of a broker, pursue the sale outside of office hours in the best interest of maintaining office relations. Using your home e-mail or fax helps you maintain privacy.

In considering the sale of your practice, last issue we discussed If you should sell and When to sell.

Once you choose to sell, take steps to achieve your goals successfully: Invest in your practice, appraise it, contact professionals, recognize its full potential, and prepare paperwork. Selling your practice is demanding but profitable when you plan carefully and seek appropriate advice where required.

Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings to the Professional Advisory, over thirty years of knowledge and experience in the practice of general dentistry. Large companies such as Patterson Dental, Ash Temple Ltd. & the former Canadian Dental Co. have all

offer insight in the areas of practice enhancement. As a consultant to Innovative Practice Solutions, Ron can be found advising dentists on practice purchases, sales, location evaluations, associate buyins, and practice mergers. Dr. Weintraub can be contacted at (416) 224-1775 or admin@bvdental.com.

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Strategies to Reduce Your Practice (Part 2) DAVID CHONG YEN CFP, CA In Part I readers were introduced to four practical taxsaving ideas. Continue on below with an additional five ideas - all aimed at saving you many hard-earned dollars.

5. TechnicalService/Hygiene Services Corporation (T/HSC) A Technical Service Corporation/Hygiene Service Corporation (T/HSC) is an entity that operates the hygiene or technical service component of a dental or specialty practice, for example, orthodontic. Such corporations are separate businesses from one’s dental or specialty practice and therefore the T/HSC employs its own hygienists and pays its fair share of rent, dental supplies, telephone, receptionist and other business expenditures. The Royal College of Dental Surgeons of Ontario (RCDSO) issued their position on the subject of TSCs in the form of a Practice Advisory in May 2000. T/HSC like a Professional Corporation (PC) also enjoys the low rate of tax of 18.62%.

In addition to the tax deferral benefits as described under a PC, the T/HSC also facilitates income splitting, as shareholders of the T/HSC may include nondentists such as spouses, children, parents, etc., who may be in a lower tax bracket. Hence, tax savings can be achieved because individuals 18 years or older may receive approximately $31,000 in dividends and pay virtually no taxes, assuming they have no other income.

To illustrate note the following example: Taxable Income Corporate income taxes Individual Income taxes Total taxes

No T/HSC

With a T/HSC

$100,000

$100,000

N/A

($18,620)

$100,000

$ 81,380

($30,500)

(900)*

$69,500 $30,500

$80,480 $19,520

*Assumes dividends of $81,380 are paid to three or more individuals who have no other source of income

i.e., each individual receives $27,127 in dividends.

6. Timing of your major purchases Buy equipment, computers, and software or renovate your office before the end of your fiscal year. Ensure that your supplier invoices you and installs or delivers the above items before the end of your fiscal year.

7. Timing of revenue recognition Defer placing implants for your patients until next fiscal year. This will shift income from this year into next year.

8. A six-month recall Instead of seeing your accountant on a yearly basis, perhaps you should have a recall every six months.

Why? Your accountant will have more accurate information to provide you with a tax estimate well ahead of April. No more surprises and you will have enough time to save/plan for your tax payment.

9. Deduct all eligible expenses Remember that six meals are 100 per cent deductible (not subject to the 50 per cent deduction rule) provided you invited all your staff to these meals.

Where the total cost of such gifts and awards is $500 (inclusive of applicable taxes) or less, the employer may give and receive tax deductions for up to two noncash gifts per year per employee (including family members who are employees) for special occasions including Christmas, Birthday, and Hanukkah etc. In addition, the employer may give two non-cash awards per year and receive deductions for such awards.

These awards are in recognition of service rendered.

For example, the employee of the month, long service award or suggestion award. The employee receives these gifts and awards tax-free.

Conclusion: Saving taxes requires planning. The nine strategies presented in Parts I and II should add to your arsenal and on-going quest to reduce taxes.

David Chong Yen, CFP, CA with an international firm background and more than twenty-four years of experience, advises healthcare professionals and owner-managers. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or E-mail david@dcy.ca. This article is intended to present tax saving and tax planning ideas and is not intended to replace professional advice.

Q A &

Please address your questions to: The Professional Advisory for Healthcare Professionals 308-7050 Woodbine Avenue, Markham, Ontario L3R 4G3 T. (905) 470-6222 F. (905) 475-4082 info@theprofessionaladvisory.com

Q How is financial planning different for Dentists versus the general population?

A There are four broad areas that make planning for professionals in the dental field different: 1. There are no systems in place to build a pension.

2. There is a business to run.

3. There is a business to sell.

4. A higher relative income provides greater complexity in managing cash flow and income taxes.

As a result professionals have more responsibility and complexity than their employed counterparts, but with that come greater opportunity.

5. You have no idea if she is truly an “independent” broker equally representing all the major insurance companies; 6. She hasn’t sold very many plans if any and is therefore lacking in underwriting skills and experience which could have a significant impact on you if you apply for new coverage with her.

The bottom line is that you’d be potentially entrusting your and your family’s financial future to someone who has no experience. I would be upfront and frank with her and tell her that although you realize that she is just starting out, you’d like to keep things just the way they are.

Q What is the single most important aspect of realty lease management?

A You must understand and administer the term renewal option. Know the term renewal option and the current term expiration date. Understand how to administer the option, or retain a qualified professional to administer the option for you.

Q A good friend of mine who just got her insurance license asked me to switch all of my insurance coverage over to her. She also wants me to buy some new insurance. Currently, I’m pretty happy with my current insurance advisor who offers more services, expertise, and years of experience. How should I handle this?

A There are a number of potential major pitfalls and risks that you would undertake if you switch: 1. Your friend would essentially learn about your entire financial situation; 2. She has no experience in everything from analyzing the needs of clients, to how different plans work, to claims; 3. You have no idea as to the type of service you would receive on an ongoing basis; 4. There is a high likelihood of a lack of understanding of your unique insurance needs “as a dentist”;

The views expressed in any article are those of the author alone. They should not be acted upon without the advice of your “professional advisors”.