The Professional Advisory November/2005

The Importance of Being Earnestly Diligent (With Apologies to Oscar Wilde) What is Wealth Management?

Health Care Benefits: What Are Your Options?

Managing the Rent Cost/Production Relationship (Part 2) Dental Partnership: A Much Maligned Solution A Potpourri of Money Saving Ideas Location Improvements Throughout Your Career

The

Professional

Advisory For Healthcare Professionals

The Importance of Being Earnestly Diligent (With Apologies to Oscar Wilde) BARRY A. SPIEGEL LL.M., Q.C 2 What is Wealth Management? BARRY R. McNULTY CFP, RFP, CIM, FCSI 1

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Health Care Benefits: What Are Your Options?

Dr. IAN WEXLER

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Managing the Rent Cost/Production Relationship (Part 2) IAN TOMS B.Sc. (Hons)

Dental Partnership: A Much Maligned Solution DR. RON WEINTRAUB 6 A Potpourri of Money Saving Ideas DAVID CHONG YEN CFP, CA 7 Location Improvements Throughout Your Career GRAHAM R. TUCK H.B.A. C.A. 5

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The Importance of Being Earnestly Diligent (With Apologies to Oscar Wilde) BARRY A. SPIEGEL

LL.M., Q.C

This article will provide you with some tips to reduce your lawyer’s fees. Now that I have your attention, this article may be particularly relevant to you if you are buying a practice. If you do a little homework - BEFORE your lawyer spends time and your money on a formal agreement with the seller - you can cut your legal expenses and reduce your stress level.

Grappling with the issues early will preclude your lawyer from having to rethink and extensively redraft the offer, and since lawyers charge fees based on time spent, your money will stay in your pocket instead of your lawyer’s.

Some of the following problems, although obvious, occur frequently. Others are more obscure, but there are simple and valuable lessons to be learned from them all.

1. Do you know the seller? A simple telephone call to the College may elicit some surprising results. I am presently representing a dentist/purchaser for whom, happily, I did not act on the purchase. After the closing, the purchaser found that many years ago, the seller had been suspended for numerous deceitful and incompetent acts.

It should have been no surprise to find that this course of conduct continued over the years but the misconduct was not discovered, and as a result, the purchaser now faces bankruptcy and the seller a major lawsuit. Preventable?

Easily.

2. Who owns the practice? Is it an individual, a professional corporation (PC) or even, and possibly improperly, a business corporation? I am constantly

amazed at the way in which some dental practices are incorrectly structured. Does the owner own all the assets required to operate the practice? Sometimes an important asset, such as the computer server, is not included. Is there a cost sharing dentist who owns a half interest in some of the assets?

3. If there are agreements; are they signed? In a current file, four dentists (one of them my client) had a written partnership agreement. A few years ago, the arrangement was converted to a cost sharing relationship among four PCs. The partnership clearly ended but the formal cost sharing agreement was never signed by the PCs. The lease with the partnership ended but, one dentist, personally and without authority, extended the lease for 15 years. The unexpected result is that there is no longer a partnership, no formal cost sharing agreement and no lease. My client - because of the lack of his signature on the cost sharing agreement and on the lease - instead of having major obligations to the landlord and the other cost share associates, is free of almost all responsibilities.

4. Will you be using a PC as the buyer? Speak to your accountant before signing an offer.

5. Are there associates? If so, what prevents them from leaving and opening up next door?

6. Are you buying shares or assets? Typically an evaluation values assets, but if you are buying shares of a PC, there should be a reduction in the price due to income tax considerations. Your accountant should value this “tax

shield” before you sign an offer and the seller gets fixated on the price. In addition, often a seller, after an offer has been prepared, decides to incorporate a PC and sell shares instead of assets but does not understand that the price must be reduced. Numerous time-consuming changes to the offer will be required.

Therefore, get the seller to commit to what it is he/she is selling before you have the offer drawn.

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Conclusions: Seeking full details before signing an offer will save you time and money. Being Earnestly Diligent at the beginning of a transaction may prevent some Wilde results.

Barry Spiegel is a senior lawyer 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) 8650330; or fax to (416) 363-8451; or e-mail to barry@spieglaw.com.

What is Wealth Management?

BARRY R. McNULTY

CFP, RFP, CIM, FCSI

Recently, a newly referred client asked, “What exactly is wealth management?” A good question because there is considerable confusion in the market place when it comes to such terms. This confusion also applies to the many occupational titles in the financial services field.

Think for a moment of some the terms in general use today - investment advisor, financial planner, wealth manager, financial advisor, investment executive, insurance advisor and so on.

Wealth management is a process that bundles together services suitable for a more affluent clientele whose needs are more complex than average. Dentists are a good example. Generally you have a larger income than most of the population, you have a practice to manage and ideally, you will eventually sell it. And there’s no pension to take care of you in your retirement years. Wealth management is much like financial planning but on a more advanced level. An accredited wealth manager can provide sophisticated input into your practice, your money management, estate planning, portfolio management, tax strategies and advice on how to accomplish your goals for your financial security.

In other words, wealth management is a consultative support service for successful individuals that focuses their finite resources on the most efficient, cost-effective way to accomplish their most important objectives.

It is important to understand, when defining wealth management, that it is a holistic - all-inclusive - approach to managing your finances. In describing it to clients, I often relate hiring a wealth manager to hiring your own personal vice-president of finances. It is not uncommon for dentists to have a number of advisors. To name just

a few: there are investment advisors, accountants, insurance salespeople, bankers and lawyers. The problem that may arise in circumstances such as this is that all these professionals may not communicate with each other enough. They may not get together and work out the most effective way to coordinate their advice, products and services. In some cases, there may even be some rivalry going on between them. Someone has to act as a team coach. Of course you can do it yourself, but many dentists I meet just don’t have the time after a busy day at chairside to be their own financial quarterback. If that’s the case in your situation, you may want to investigate wealth management.

Wealth management seems to have become something of a buzzword over the last few years. Unfortunately, not everyone who calls themselves a wealth manager actually offers wealth management. If you think wealth management is for you, I would strongly recommend that you invest some time to make sure you are making the right choice. Ask a lot of questions about their process. In particular, ask how they monitor, adjust and update your wealth management plan. What are their qualifications, their experience, and so on? Working with a good wealth manager is an in-depth, long-term relationship. It’s important to make the right choice the first time. 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 905-4706222ext 216 or barry.mcnulty@raymondjames.ca.

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Healthcare Benefits: What Are Your Options?

DR. IAN WEXLER It is no secret that health care costs are spiraling upward, surgery waiting times are getting longer, and private health

care is on the horizon. Many feel our public health system is eroding and that the quality of care offered leaves

us searching for better alternatives. We are therefore faced with the dilemma of finding optimal solutions to fund - in the best and least costly fashion - procedures and services not covered by OHIP. A general list of healthcare expenses not covered by the provincial health care plan includes • Care provided by such practitioners as podiatrists, chiropractors, nurses, optometrists, physiotherapists, psychologists, and speech therapists; • Facility care such as a nursing home, private or semiprivate hospital room, and care in special schools or institutions; • Devices and supplies such as prescription drugs, eye glasses, orthopaedic shoes, braces, heart monitoring equipment, crutches, and hearing aids; • Other expenses including dental care, massage therapy, ambulance fees, out of province/country medical expenses, home modification, and certain diagnostic lab and medical procedures.

The following are the options that are available to a dentist to fund healthcare costs not covered by the provincial health care plan.

Self Funding Many dentists, especially those who are new graduates and are in excellent health, feel that the optimal way to fund health care expenses is to pay for them directly. As long as costs are relatively minor, this method can be the least costly. Over the long term however, as medical costs escalate with age, funding health care benefits with “after tax dollars” is not very efficient from a cost or benefit perspective. This includes consideration of the provincial government’s medical non-refundable tax credit and deductibility of expenses over a certain income level.

Individual and Association Health Care Insurance A dentist, as well as his or her family in Ontario, has the option of purchasing this coverage through either The Ontario Dental Association, through a private plan, or by belonging to an organization such as the local Chamber of Commerce. All of these offer a number of different options for coverage at varying costs. Plans may differ in the following ways: • Benefits offered • Flexibility • Association membership • Cost • Service

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• Deductibles and co-payments Group Insurance Dentists who own their practice may choose to purchase group health care benefits for themselves and their staff. This has a number of benefits including: • A lower individual cost to the dentist for his/her coverage; • Greater employee satisfaction and retention; • Greater enticement for a potential employee; • A higher degree of plan flexibility; • The owner-dentist can have a different level of coverage than the staff; • Additional benefit options including life and long-term disability insurance.

It is not unusual for practice owners to give yearly pay raises, bonuses, and other incentives to office staff. In lieu of - or in combination with these - offering group insurance to office staff is an excellent, cost efficient, and tax-deductible way to provide benefits, while at the same time providing health care coverage to the ownerdentist and his/her family.

The Health and Welfare Trust Establishing a Health and Welfare Trust (HWT) for the practice is an excellent tax efficient way to fund health care costs for the dentist and staff not covered by either OHIP or the dentist and staff’s other health care benefits plans. A HWT basically enables all health care expenses (as allowable by Canada Customs and Revenue Agency) to become 100 per cent deductible, plus: • The cost to set up is nominal; • There is no minimum participation; • It can be used in conjunction with other health care plans currently in effect especially because a HWT will not protect against a catastrophic claim, e.g. expensive medication; • A broader range of medical/dental services are covered (e.g., cosmetic surgery); • It requires little or no administrative costs; • There are no medicals required and no deductibles; • The actual dollar amounts put into the HWT can be chosen by the dentist for him/herself, as well as for individual staff members.

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) 391-3764 or drwex@protect-ins.com

Managing the Rent Cost/ Production Relationship (Part 2) IAN TOMS

B.Sc. (Hons)

In the previous volume of The Professional Advisory, I not be greater than seven per cent of your monthly indicated that your monthly office rent payment should production, and ideally should be less than five per cent.

That article explored three primary opportunities to reduce your monthly rental payment in order to achieve your rent/production relationship goal.

This article explores four primary opportunities to use lease facilities to increase production in order to adjust rent/production relationship.

Many clients report production increases greater than 20 per cent by making minor and cost effective adjustments to their operation involving lease obligations.

For example, a 20 per cent production increase for a $600,000 a year practice results in $120,000 increase in annual gross income!

The challenge, when using lease facilities to increase production, is to differentiate what is not there rather than identifying an existing obstacle. For example, how much would your production increase if: 1) your premises were to be renovated? 2) you were to improve the visibility of your practice? 3) you were to improve patient parking? 4) you arranged to sell chair time to another health care provider?

1. Consider refurbishing your premises. Never assume that renovation is a cost. Consider renovation as an investment. Handled correctly - between personal return on investment, depreciation and tax opportunities, and the landlord’s participation - the cost of renovating may actually be zero, and will likely result in a very significant rate of return coupled with increased profitability through increased production.

2. Use the landlord’s property to increase premises visibility. Maintain “Top of Mind Awareness” - the concept that people usually buy from the first place that comes to mind - to encourage new and existing patients to use your services. Speak to the landlord about

moving your pylon signage from a middle position to the bottom or the top of the sign. Consider adding your own module to the pylon sign. Change your signage colour(s) to be remarkable. Add an additional sign to the front or side of the building. Buy another tenant’s signage position. Install signage in the windows of your practice. Paint and/or illuminate the exterior of the building to use the building as signage.

3. Use the landlord’s property to improve access to your practice. Imagine increasing your practice volume by 20 per cent simply by providing your patients with dedicated parking spaces that are always available at the front door of your practice! Approach your landlord with a rational proposal to identify certain parking spaces as “Patient Care” spaces and roll out the red carpet.

4. Share or sublet a portion of your premises with a non-competing health care provider. As a caution, most leases contain very specific provisions related to sharing or subletting your space with others. Review your lease, and if required, approach your landlord prior to committing to an arrangement with another health care provider.

In summary, I encourage you to visit other practices and talk to patients and staff. Ask yourself what you can do to cost effectively grow your practice through lease facilities.

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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Dental Partnership: A Much Maligned Solution DR. RON WEINTRAUB To some business advisors, the concept of forming dental partnerships is problematic. Having observed failed partnerships, they develop a mindset that doesn’t allow them to see successful partnerships. The negative effects of unsuccessful unions influence them and they see only the trauma, costs, and negative public relations.

Entering into a dental partnership, however, is an option deserving of consideration.

Before entering into a dental partnership, you need to do your homework. Here are some questions for you to mull over. Why do I want a partnership? What are the advantages of having a partnership? What should I look for in a partnership? How should I set up the structure of our partnership?

Why do I want a partnership?

Many reasons for wanting a partnership exist. If my practice plateaus, I might want to bring in another practitioner with a viable patient base to rationalize the cost of practice.

Another reason for a partnership is if I were getting into a transition mode and I wanted a guaranteed purchaser for my future retirement. That presupposes bringing in a younger partner and properly structuring for the future buy-out.

Finally, in order to retain a long-term associate, I might offer equity in the practice.

Whether I seek a cost sharing or a profit-sharing partnership, I would seek someone who could bring a patient-base into

the facility to maximize human resources (the largest single cost of operating a dental office). In addition, as partners we would share the fixed costs and expand the hours of practice.

What are the advantages of a partnership?

Both cost and profit sharing partnerships can benefit from joining two smaller practices to form one viable entity. Having a partnership is particularly useful for strengthening two marginal operations, much like splinting teeth, resulting in a significantly stronger entity.

Another advantage of partnerships is the potential of a more carefree lifestyle partners can enjoy.

When professional development opportunities or an extended vacation is possible, one partner leaves the office with a decision maker on site.

Moreover, collegiality between partners allows for the possibility of sharing responsibilities for business and clinical decisions.

What should I look for in a partner?

Establishing criteria for choosing a partner for a successful union demands careful planning. Some guidelines to consider when selecting a potential partner are finding someone who 1. Would be willing to spend time getting to know you

with the result of liking and respecting each other; 2. Would share a common practice philosophy, similar work ethic, and values with you; and 3. Would be prepared to define clearly h/his position for the timeline of active involvement in the practice.

How should I set up the structure of our partnership?

Structuring your new partnership requires professional advice. Success depends on the expertise of accountants, lawyers, and financial planners who have many examples of successful dental partnerships in their practices. Should you have difficulty in identifying those with the specific expertise you require, I can provide a number of choices in each area for you to contact.

Since the trend to a multiple provider group practice is accelerating, considering partnerships within the practice is prudent.

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 (905) 470-6222 Ext. 221 or drronips@rogers.com.

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A Potpourri of Money Saving Ideas DAVID CHONG YEN CFP, CA No risk = Loss Some people are more comfortable with money sitting in a two per cent GIC account. Did you know that while you are protected from the crazy swings in the capital markets, you might in fact be in a loss position? Why? See this example: Principal (Beginning of year) - $50,000 Plus: Annual Interest (2%) - $1,000 Less: Income tax (46%) - $460 Less: Inflation (2%) - $1,000 * Net cash at end of year - $49,540 * (50,000 x 2%) CDIC Insurance Effective February 23, 2005 the amount of deposit insurance coverage in Canada Deposit Insurance Corporation (CDIC) member institutions has risen to $100,000 (formerly $60,000). However, CDIC insurance does not cover stocks, corporate or government bonds, foreign currency deposits or mutual funds. Hence, in many cases your GIC or term deposit is covered to the tune of $100,000 if the bank goes bankrupt.

Strong Canadian dollar = Cross Border Shopping On July 5, 2004, the Canadian US exchange rate was

1.3256 and on September 26, 2005, the rate was 1.1724.

With the strong dollar, you could benefit by purchasing and importing major capital items, for example, expensive cars and equipment from the U.S. In addition to paying duty, Goods and Services Tax and Ontario Sales Tax when you import the item, you might also have to modify the car to meet the Canadian safety standards. Despite all these expenses, you could still save approximately $10,000 if you purchase a brand new Porsche Carrera from the U.S. ($115,650 from a Canadian dealer vs $106,000 from the U.S.). Ensure that equipment warranty extends to Canada on your equipment purchases.

Payroll Service If you have been performing the payroll function in house, you realize how much time and effort is involved. Consider engaging an outside payroll service company e.g., Ceridian and ADP to perform these functions. The cost for the payroll service is roughly $50 - $70 per month and it will likely save you or your staff approximately 1.5 - 2.0 hours per month. Instead of doing the payroll yourself, have an outsider to do it and focus your attention on providing dental services. You should be able to generate $5,400 - $7,200 per year based on $300 per hour chairside compared with the small savings of $600 - $840 per year.

Salaries paid in kind A court case in 2005 concluded that salaries ($7,000) paid to each of the taxpayer’s sons could be in kind (in this case, motorcycles and snowmobiles) as well as in money. Despite this court case, the best defensive measure is to provide proper documentation i.e., cancelled cheques and T4.

Surge protectors to protect your wallet Consider buying surge protectors for all expensive equipment and other equipment which serves as the lifeline to your practice including: 1) telephone answering system 2) computers

3) alarm monitoring system The need is further increased due to recent power outages.

Sewer backup Ensure that your property insurance covers sewer backup and theft including that perpetrated by your employees. Review deductibles.

David Chong Yen, CFP, CA with an international firm background and more than twenty-five years of experience, advises healthcare professionals and owner-managers. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, web, www.dcy.ca 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.

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Location Improvements Throughout Your Career GRAHAM R. TUCK

H.B.A. C.A

I write this article at a time when three of our clients are currently in different stages of transition of location.

Their experience helps me focus on the importance of location improvement throughout your career.

1) New practice set-up Rent usually costs from five to seven per cent of your gross income, which is generally similar to dental supplies and laboratory bills. The latter two are variable expenses and can be controlled on an ongoing basis but rent is a fixed expense and you have to live with your decisions well into the future. In order to control costs, it is advantageous to limit the amount of square footage especially when setting up your practice as a new venture.

Find a great location with reasonable, affordable rent that at the same time is visible to potential patients and if possible, is expandable as you move into the middle of your career. After the first couple of years as your billings increase, your rent should begin to fall into the seven to nine per cent range. By the time you have been in your practice for five years your rent should be in line with the acceptable five to seven per cent range.

Landlords always increase your rent but with time your practice billings also increase. If your rent is increasing faster than your billings you are falling behind in your ability to control expenses. You should consider moving your practice if the opportunity comes along. The amortization of new leasehold is affordable if your new location increases your production. This could also be your opportunity to expand.

2) Ten to thirty year old established practice This phase of your career is critical. These are the money making years. Is your location limiting your billings? Many practices move to larger facilities in this period. Without moving or expanding you will sell your practice in its original location that is 30 to 40 years

old. Generally, purchasers find these facilities visibly old, too small and with no ability to expand and grow because you have not done so in the past 30 to 40 years. I have had dentists tell me that it takes three moves to get the facility you would like. Certainly, it is additional capital investment to move but in the long run you will find it stimulating and rewarding. Now is the time to have larger operatories, staff rooms, a private office and a more visibly appealing practice for your patients. Moving to a better location is an investment in your practice. This is also an opportunity to adjust your location to better relate to where your patient base is now located as was addressed in a recent article. (Article 19) 3) Thirty to forty year old established Practice If you have correctly completed Section 2), as outlined above, then this phase is easy. You have a contemporary facility that is spacious, well located, eye appealing and in demand. The concept of spending money on leaseholds in order to sell your practice is not necessary. Your practice should present itself well and be a turnkey sale. If you did not achieve Section 2) then your practice is apt to be sold to a larger practice for the patient base. In this case make sure you have a short lease that will permit the practice to be moved. Typically, the purchaser would like you to move with your patients to the new facility for a twoyear transition. Generally speaking, if your rent and wages are under control then your total costs are under control. Remember, the percentage for rent is a ratio of your gross rent as a percentage of your billings.

Typically higher costs per square foot relates to the location’s ability to attract patients. Higher rent per square foot can be overcome with higher gross billings.

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

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 I understand that the laws have been changed, and that members of the immediate family of a dentist can now own shares in a Professional Corporation. Is that correct?

A No that is not true - yet. The Government in the last budget stated its intention to permit members of the immediate family to own equity shares, but that has not yet been passed into law. There are a number of problems yet to be resolved. The Government is under pressure from other professions to include them in the new laws, and, if it does so, there will be a large loss of tax revenue, since the new permitted shareholders will likely be in a lower tax bracket than the professional member of the family. I suspect that the Government will limit the percentage of shares of the Professional Corporation that can be issued to the family to, possibly, 25%. They will have to be non-voting shares. We have no idea what, if any, further restrictions will be placed on the issuance of the shares. In the new Professional Corporations that we are incorporating currently, we are creating a class of non-voting participating shares which I hope will meet the standards required by the new laws. This may save the dentist from having to go back to the Government to obtain amendments to the corporation’s charter documents when (if?) the new laws are passed. I doubt that the new laws will be in place before sometime early in the year 2006.

Q I currently have all of my basic term life insurance through the association plan. Is this really the best and lowest cost option for me?

A There is a good chance that the association plan is not the best and lowest cost option for you. Private plans also offer the following: • A broader rate scale that includes extremely low rates for those who are healthy; • No GST or PST; • “Face to face” broker services to personally assist you in determining the right type, amount, and structure of coverage; • Premium guarantees; • Plan convertibility; • A greater number of options available with regards to the types of life insurance offered; • No membership requirements; • Benefits do not reduce after age 70; • Higher coverage limits.

Therefore, it would be highly recommended that you have a life insurance analysis performed by an independent life insurance broker to determine the best amount, structure, type of plan, and the lowest cost for your individual needs, as well as to compare it to your current plan.

Q What is the most misunderstood aspect of the commercial lease?

A Insurance. In the past few years, insurance requirements have become more and more rigorous. Most tenants, and indeed most landlords, simply ignore the insurance sections of their leases, which often contain commitments by tenant to landlord, and landlord to tenant that are impossible to fulfill. Often there are provisions by which the tenant makes promises on behalf of their insurance provider who isn’t even a party to the lease. If your insurance is not adequate, YOU personally may be liable for the obligation!

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”.