Issuu on Google+

The

37 Professional

Advisory For Dental Professionals

IN THIS ISSUE WHAT IF THE STOCK MARKET CRASHES AFTER I SELL MY PRACTICE? Mark McNulty BA, CFP, CIM

KEYS ON HOW BEST TO SURVIVE THE FINANCIAL CRISIS Dr. Ian Wexler

PROFESSIONAL CORPORATION : CASH PROBLEM? David Chong Yen CFP, CA

ORGANIZE YOUR DEBT IN ORDER TO SELL YOUR PRACTICE David Lind

AN OUNCE OF PREVENTION... LONG TERM HEALTH CARE FOR YOUR LEASE Ian Toms B.Sc. (Hons)

SO I BOUGHT THIS PRACTICE NOW WHAT? Dr. Ron Weintraub

ASSOCIATE AGREEMENTS FROM THE ASSOCIATE’S PERSPECTIVE David E. Rosenthal BA., LL.B.

plus GOOGLE DOESN’T HAVE ALL THE ANSWERS NOTES FROM THE EDITOR

VOL. 37 : NOVEMBER, 2008


The Professional Advisory

VO L. 37 : NOV EMBER 2 008

The Professional Advisory consists of a group of seven independent professionals who provide services to the dental profession, each of who specializes in a different eld. They have gathered to keep each other informed of the latest developments relating to the profession, and to produce this publication which is designed to provide expert information and advice solely for dentists and their advisors.

Google Doesn’t Have All the Answers RALPH CRAWFORD BA., DMD Recently, while driving through a quiet residential neighbourhood I was attracted to a readograph outside a church that read, All Questions Can’t Be Answered By Google. As one who often turns to Google for information, I was fascinated by the insight and depth of the church’s message. Undoubtedly, the intent was to inform its congregation and any passerby that the ultimate answers to life’s success, happiness and fulfillment are found in a Supreme Being and not at a keyboard accessing the Internet. As I continued the drive home my mind kept returning to the church’s message, concluding with obvious logic, “Isn’t it the truth; Google doesn’t have all the answers!” And that’s why we have The Professional Advisory. Never professing it has ALL the answers, the publication’s contributors are saying,“We have what Google can’t offer. When it comes to the business of dentistry, we’ve been there, we’ve done that, and we’re here to help!” The publication was founded by a group of professionals who over a period of years had accumulated an amazing body of knowledge and practical experience pertaining to the “business” of operating a dental practice - the elements of which are seldom, if ever, available in dental school. Through their common bond of day-to-day contact with dentists struggling in an unfamiliar financial arena, these professionals each an expert in their own particular field - recognized the advantage of unifying their individual talents and accomplishments to the benefit of all. And what makes The Professional Advisory truly unique is that there is no particular corporate structure, no head office building, no designated staff and most interesting of all, no financial affiliation. There is only the will and desire to bring

to the practising dentist - through the medium of the written word - advice and answers to questions that Google and most other avenues of communication can’t always provide. Those questions and answers and the sage advice related to the handling of hard-earned dental cash is a constant priority with our author/contributors, but at this particular point in time, with enormous financial upheaval all around us, the Q’s & A’s and advice take on added significance. Ian Wexler’s Keys on How Best to Survive the Financial Crisis and Mark McNulty’s What If the Stock Market Crashes After I Sell My Practice deal directly with the present day market crisis. And whether a crisis or a boom there’s always taxes. That’s why David Chong Yen poses the question and provides the answers on “What are the tax consequences, if any, of having a PC which has accumulated cash”. David Lind wants dentists to be sure to Organize Your Debt to Sell Your Practice and Ron Weintraub takes us through a full in-office examination and diagnosis process when you’ve finally signed the deal and bought the practice. On the other hand, if you are neither selling nor buying David Rosenthal outlines the issues to consider when becoming an associate dentist and signing an associate agreement. And if most of us think that An Ounce of Prevention and Long Term Health Care is only related to the oral cavity, think again. Ian Toms draws a great parallel on how to retain a healthy lease on your premises. Without any intent to pull down the value of Google or any other web search engine, and with full admission they don’t have ALL the answers to ALL the questions, The Professional Advisory contributors are confident in stating, “We are your neighbours, we are your friends, and we will do our utmost to provide the best answers possible that lead to a successful dental practice, a lifestyle that keeps you happy and a retirement your deserve.” PA

crawford@dccnet.com


The Professional Advisory

VO L. 37 : NOV EMBER 2008

What If the Stock Market Crashes After I Sell My Practice? MARK McNULTY BA, CFP, CIM

their ideal retirement we would need to distribute $110,000/year after-tax, indexed for inflation from their portfolio. Paramount to this plan was a dramatic reduction in risk within their investment portfolio.

As I have mentioned before in this publication, dentists often over-estimate the return they need to make www. mcnultycentre.com on their portfolio in order to fund their retirement. About four years ago a couple, let’s call them Brian In Brian and Laura’s case, we needed a component and Laura, were referred to me because they wanted to of equities to meet their long range retirement cash prepare for retirement. We began a four year process flow needs. However, the question we had to answer of putting all the pieces in place for an ideal practice and the question you have to answer - is exactly what transition and retirement. amount of exposure to equities do I need to take for The practice was sold for $700,000 in June of 2008. my retirement plan? Three months later the Toronto Stock Exchange was down over 22 per cent. The decline had no material impact on their retirement and here’s why: Laura and Brian came to see us relatively late in their lives; they were both 62 years old. Brian, the dentist, loved his work and never planned to retire early. Incidentally, the average retirement age of our clients is 58. Between the two of them they had $800,000 in RRSPs. As stated above, the practice sold for $700,000 and the practice building for $750,000. They still had a mortgage on their home for $480,000 and in addition, a practice debt of roughly $250,000. Brian could see himself starting to “burn out”. After Outlined below is how we minimized the risk of Brian all, he had been a dentist for over forty years. Laura and Laura’s retirement income being compromised worked in the practice and was beginning to feel the by a stock market crash. It’s a plan you may want to same way. They were both ready to retire. We took consider. all their information and quantified where they were 1. When we ran various scenarios in retirement financially and what their financial trajectory was. This projections, we determined that the most likely included an integrated projection of their practice, the rate of return we should count on from their hygiene company, personal cash flow and net worth. total portfolio was seven per cent. For this set of We then looked at where they wanted to go. Neither projections, that meant a four per cent spread over Laura nor Brian wanted to reduce lifestyle and why inflation. should they? They had worked hard over those forty 2. We determined which asset allocation would have years, raised three successful children, and wanted to achieved a seven percent return over the past forty enjoy their retirement. In fact, they wanted to increase years with the lowest level of exposure to the stock their travel budget by $20,000 per year. market. The answer was that we still had to invest just over 45 per cent in the stock market.  After a thorough review, we concluded that to meet


The Professional Advisory

3. We spread that 45 per cent over many stock markets and in each market we spread our exposure over hundreds of stocks. This level of diversification dramatically reduces risk. 4. We implemented this strategy of reorganizing their equity-heavy portfolio about one month after meeting Brian and Laura - well in advance of their retirement. Many people ask when they should be adopting a retirement portfolio. Our advice is at least five years before you start drawing on it. Otherwise, you run the risk of having to sell out of the stock market early in order to fund your retirement. 5. As well, on an annual basis we marry investment income with capital encroachment which reduces our reliance on the stock market 6. We also update their retirement cash flow projections

VO L. 37 : NOV EMBER 2 008

annually so that any major stock market decline is taken into account but spread over their lifetime so that there is no dramatic reduction in monthly spending. The result is that despite stock market declines of over 20 per cent, Brian and Laura are able to maintain a lifestyle of $110,000 after-tax, indexed for inflation for the rest of their lives (without ever touching the equity in their home). Needless to say they are very happy, and they deserve it! PA Mr. Mark McNulty BA, CFP, CIM, is a Financial Advisor with Raymond James Ltd., Independent Financial Services - Member CIPF. The opinions expressed by the author are not necessarily those of Raymond James Ltd. This article is for information only. He may be contacted at 905-4706222 ext 209 or mark.mcnulty@raymondjames.ca.

Keys on How Best to Survive the Financial Crisis DR. IAN WEXLER www.protect-ins.com

In my lifetime I have never recalled watching or hearing about impending financial devastation that could affect not only the US economy, but Canada’s and the rest of the world. I have never witnessed major financial institutions, including banks and brokerage firms that had been around for decades, practically disappearing overnight. The New York Times in an article from the week of September 22nd stated “The nation is gripped by the worst financial crisis since the Great Depression.” Another on Yahoo Finance by the Associated Press stated, “More people will lose their jobs, foreclosures will go up, paychecks will be strained and home values - people’s single biggest asset - will keep falling, experts predict.” Who would have thought any of this was possible in this day and age?! How will this potentially affect you, as a dentist? There are a number of ways: • It may be more difficult to obtain bank loans for purchasing, renovating or building a dental practice affecting both purchaser and vendor

• Qualifying for home, cottage or other loans may become more stringent • Credit card rates may increase • It may affect your patient base should unemployment rise • Patients may not have extra disposable income for elective or cosmetic procedures • Patients may defer non-essential treatments • Insurance companies may look more stringently at insurance claims • Dentists will have to focus more on the business of dentistry including containment of overhead expenses and revenue maximization • Dentists may work longer hours • Dentists may not be able to retire as planned The following are my recommendations and answers to specific questions and concerns for dentists on how to best deal with these volatile and unpredictable economic times. In reading my recommendations, I believe it is important for readers to know that I am neither a CA nor a Certified Financial Planner, and I lost a bundle (like many others) in the stock market “dot-com crash” in 2000-1. At the same time, I majored in economics in university, have been voraciously reading every article I can find pertaining to the current economic climate, and have a pretty good understanding of how financial institutions,


The Professional Advisory

VO L. 37 : NOV EMBER 2008

especially those that are insurance based, work. - especially in light of the current economic climate you revisit your savings programs, put a little extra 1. My life insurance is with AIG. Is my coverage aside each month and seriously reevaluate your safe? spending habits. Dentists are well advised to speak • From everything I have read including specific to their accountant, financial advisor, and insurance information disseminated from AIG Insurance advisor on their best options. This includes utilizing Canada, the answer is “Yes.” your Professional Corporation and/or other corporate entities for saving. 2. Should a dentist still consider AIG as one of the companies for their life insurance protection? • Consider safer and more conservative programs to save for the future • My goal, as an independent advisor, is to recommend and choose insurance companies based In addition to my comments above - for dentists that upon a number of variables including size, stability, have little to no non-deductible debt, who maximize ratings, product selection, service, and others. RRSP contributions, have a long term life insurance As such, my own opinion is for any individual need, a ten year plus time frame for retirement and considering life, critical illness, or other insurance are able to save money each month – they may wish products, to speak to their advisor about whether to consider life insurance related savings programs AIG fits all of the criteria necessary before purchasing that include Whole Life or Universal Life. Such plans a plan with them versus another company. My own properly structured could well provide the financial strategy also involves choosing large, well capitalized cornerstone for one’s retirement savings program. insurance companies with manageable exposure to 4. Is there anything else I can do to protect my family the US crisis.

3. In light of investor confidence being shattered to some degree, as well as stock market volatility, what are your thoughts on saving or investing for the future? I recommend the following: • Diversify your investment and retirement portfolios. • Save for a rainy day I have found dentists, in general, are poor savers. Many have not maximized their RRSPs or even make regular RRSP contributions; they have large amounts of non-deductible debt, and live beyond their financial means. As such, I highly recommend

during this financial crisis? • It is imperative you revisit all of your current life and disability insurance planning now! Should something unexpected happen to you, proper protection will be the only thing separating you, your family, and your practice from financial ruin! PA Dr. Ian Wexler is an authority on insurance issues for dentists. He is the President of Protect-a-dent and Protect Insurance Agencies Inc. in Toronto which provides specialized expertise in life, disability, critical illness, long term care, and other insurance products and services to over 700 dentists across Ontario. He can be reached for questions or other enquiries at (416) 391-3764 or drwex@protect-ins.com.


The Professional Advisory

VO L. 37 : NOV EMBER 2 008

An Ounce of Prevention... Long Term Health Care for Your Lease IAN D. TOMS B.Sc. (Hons) www. iantoms.com

Most readers will know at least one patient who has a long history of being very successful. This person is often very well dressed, drives a late model, high end car, has a successful home life, is athletic and trim, financially successful, well spoken and educated. But despite years of pleading, this person still attends to their oral health care only on an emergency basis, ignoring your chronic pleas for routine maintenance including daily brushing and flossing, periodic check ups and preventative treatments. Inevitably this patient ends up with serious, difficult and challenging oral health care issues which would have been easily prevented by routine maintenance. And now, they don’t understand why you can’t simply correct the problem in a single, immediate, simple, short and inexpensive visit. Perhaps this individual is even angry with you for their problem! Like dentists, I am constantly faced with tenant files where, despite my repeated warnings, the tenant did not regularly check and manage their lease health, and now have a serious emergency as a direct result of their neglect. And they want their problem corrected, properly and immediately, at minimal cost. Fundamentally, a lease is simply an agreement between two parties (landlord and tenant) to exchange value (rent) for the use of certain space (premises) for a certain period of time (term). The problem is that a lease is a static agreement used to govern a dynamic process. In fact, some leases continue subject to periodic amendment for decades, with only the parties, rent, and time periods changing as required. The longest active oral health care tenancy I have in my practice is 56 years. Your own practice lease will likely be in place, in one form or another, long after you, your staff, and

your patients are no longer involved. Based on the three lease fundamentals indicated above - parties, rent exchanged for premises, and term - the most common and expensive results of not managing lease obligations by dealing with issues before they become aggravated are: 1. Impaired assignment provisions which impair or prevent transition. Most tenants intend to sell their practice sometime in the future and in fact count on the proceeds to fund the next step in their life. The ability to transfer the lease must be a form that enables transfer of your operation to another - without undue interference by the landlord. If this facility is impaired, the transition may be subject to residual vendor liability. The landlord may have the ability to change lease terms and conditions (increasing the rent for example) thus reducing the value of your practice. In worst case, a landlord may be able to terminate the lease preventing sale of your practice. 2. The rent payable is inappropriate for the space. You must manage your rental payment. Lack of lease management will lead to overpayment of both base and additional rent which impairs ongoing financial performance on a year to year basis and eventually the selling price. 3. Impaired or missing term renewal options. Impaired lease term renewal options lead to renewal on unfavourable conditions. A typical impaired term renewal provision will cost $20,000 to $30,000 over a five year renewal term. Lack of term renewal options will lead to renewal on unfavourable conditions, or in worst case, leave you with no lease. And what do you do then? I wouldn’t be surprised if you are thinking “my lease is just fine, thank you”. Really? Let me ask you this. Are you really in a position to make that assessment? Do you really understand your lease and are you familiar with current market conditions? Do you regularly complete your lease check up? It’s as easy as one, two, three.


The Professional Advisory

1. Understand your lease. Each lease is different and complex. You are trained to operate your dental practice, not review leases. Even if you do understand your lease, you have a sample size of one; you will never know what could have been included in your lease. Retain a qualified professional to review, summarize and explain the significant points of your lease. Develop a management plan to manage key lease issues as time passes in the context of your long range plan. Diarize reminders identifying key lease dates. 2. Perform an annual check up. Take five minutes once a year to review your lease and long range plan. Allocate time and resources in the next year to address any needs.

VO L. 37 : NOV EMBER 2008

3. Respond to needs identified during your annual check up by retaining a competent professional to effectively deal with issues before they become serious problems. Proactively managing your lease affairs will save you significant time and money, just as periodic examinations and preventative maintenance will save your patients expensive emergency treatment. PA 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 licensed as a Real Estate Broker and can be reached at (705) 7431220, by e-mail at iantoms@pipcom.com, or through his web site at: www.iantoms.com

So I Bought This Practice Now What? DR. RON WEINTRAUB www.innovativepracticesolutions.ca

Congratulations! You bought a practice! Buying a practice is a thought provoking, although nerve wracking, wildly anticipated decision. The choice of your purchase has the longest-term effect on your career than any other choice you will ever have to make. After any faint pangs of buyer’s remorse dissipate, we should take the opportunity to use the period between signing the offer and walking in to see our first patient to sit down with our trusted advisors to formulate carefully an “action plan” for the transition. An effective approach to creating an organized action plan is by paralleling your four-step protocol when doing a complete oral evaluation: 1. Examination 2. Diagnosis 3. Treatment Plan 4. Implementation Step One: The Examination The most important information we need is an accurate

accounting of our patient base giving the number of current patients and the production even though there may have been a written evaluation of no more than two years ago. By conducting an in-depth information gathering, we can get a demographic breakdown and study the geographic profile of the patient base. This is not always found in practice evaluation data. Once we understand the demographics of the practice, we need to gather anecdotal information from existing staff, suppliers, and laboratory technicians regarding existing operations. We need to examine the systems presently in place and note their effectiveness in current patient experiences. By focusing on the effectiveness of present protocols for recare compliance and retention, we get an overview of the patients and the services practitioners provide. Understanding the patient base is the beginning of our examination. The next step is to investigate the perceived effectiveness of the existing administrative, hygiene, and clinical staff. Assessing their level of performance is helpful in determining areas where they may require professional development to upgrade their skills to conform to future written job descriptions. Finally, we complete the examination phase by studying the use and effectiveness of the present computer system. This information is often available from the computer company to determine the capacity of the system in comparison with its present use. By carefully observing and recording our impressions of 


The Professional Advisory

the existing office culture, we may be able to improve any existing roadblocks or possible barriers to the imminent changes. This examination of the practice assumes a co-operative vendor allows us to observe the office before the actual closing. The Agreement of Purchase and Sale can provide for this exposure. Step Two: The Diagnosis The second phase of the action plan involves assessing the previously gathered “real time data” to determine what works and what needs to be changed. In order to diagnose accurately, it is necessary to know what is normal or what falls within accepted guidelines and what is pathology and worthy of change. Does the data support the finding that the recare is effective or that it is time consuming, costly, and ineffective? If it is the latter, it could lead to a diagnosis of traumatic profitability disorder. Management also needs a diagnosis. If the examination indicates a top down hierarchy being micromanaged by their previous owner that prevents staff from applying the initiative of which they are capable, it results in a diagnosis of collective staff underachievement. Another area needing our analysis is the former owner’s approach to the currency of treatment and customer service. Is its standard of care up to date or is it an outdated approach? Another area to look at is an in-depth focus on appointment hours and days of office opening. It is important to view the office as “user friendly availability” to attract new patients as well as to service other family members from the patient base. A financial perspective of the practice is critical if we

VO L. 37 : NOV EMBER 2 008

want to experience success. Concluding a diagnosis of chronic insufficient cash flow exists that stems from ineffective financial arrangement protocols, we know we have a serious problem since newly purchased practices often require additional cash flow to service the debt incurred. Yet another consideration to round out our analysis is a careful evaluation of the physical plant. If we conclude the office has poor visibility because of a lack of exposure and signage, it could lead to a diagnosis of external profile deficit and we need to deal with it in the treatment-planning phase. A diagnosis of chronic under performance on the potential of the newly acquired practice is really a positive one because it leads to identifying its growth opportunities. With the help of your advisors, you can identify them and plan the next stages of your action plan. We formulate an accurate diagnosis of the relative health of the practice with careful gathering of data during the examination phase and we analyze it carefully. In the next phase, the Treatment Plan, we will develop strategies for overcoming any negative aspects of the practice and outline the Implementation Plan to remediate problem areas and reinforce its positive aspects. Watch for a subsequent article addressing these issues. PA Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-ve years of knowledge and experience in the practice of general dentistry to the Professional Advisory. Large companies such as Patterson Dental, Ash Temple Ltd, Henry Schein Arcona, & the former Canadian Dental Co. have beneted from his insight. As owner of Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buyins, and business mergers. Dr. Weintraub can be contacted at (905) 4706222 Ext. 221 or drronips@rogers.com.


The Professional Advisory

VO L. 37 : NOV EMBER 2008

Professional Corporation: Cash Problem? DAVID CHONG YEN CFP, CA www. dcy.ca

Many dentists opt to incorporate their dental practice for various tax and business reasons. Now that professional corporations (PC) have been around for several years, many PC’s have accumulated cash/investments. What are the tax consequences, if any, of having a PC which has accumulated cash? Capital Gains Exemption One of the reasons to incorporate is the opportunity to utilize the $750,000 lifetime Capital Gains Exemption to shelter the profit from the sale of the PC shares. A PC which has accumulated cash/investments could disqualify the PC shares from being eligible for the Capital Gains Exemption.

The tax legislation has rules as to when PC shares qualify for this exemption. Among others, throughout the two years prior to the date the PC’s shares are sold, the PC must have less than 50 per cent of its value in inactive (e.g., cash/other investment) assets. Let’s say your PC shares are worth $800,000 and a deal is closing on October 31, 2008. Your PC must have less than $400,000 ($800,000 x 50 per cent) in inactive assets, such as cash, since November 1, 2006. In addition, on closing date, the PC must have less than 10 per cent of its value in cash/inactive assets i.e., $80,000 ($800,000 x 10 per cent).

How does the above affect you? Determine how much idle cash you can have in your PC at least two years before selling your PC shares. Hence, you must plan a minimum of two years prior to selling your PC shares. There is a tax maneuver you may be able to do whereby you can get the tax benefits of the $750,000 Capital Gains Exemption while still retaining ownership of your PC shares. You can create a phantom sale, or as tax drones say, the Capital Gains Exemption is “crystallized”. After you do this maneuver, you can accumulate cash inside your PC. Lastly, instead of selling shares, you could considerselling assets and then convert your PC into an investment company. However, as there would t be no available exemption, the PC would pay tax on the sale of assets. One must compare the tax bill resulting from the PC paying out the excess cash with that arising from the sale of assets. Corporate Tax Rate In general, a PC enjoys its first $400,000 profit (revenue less expenses) at a tax rate of 16.5 per cent. This low tax rate only applies to profit generated from your dental business. It might not apply to the investment income including interest on your professional corporation’s GIC’s and term deposits. The investment income earned by your PC is subjected to a tax rate of close to 50 per cent. Yes, it is taxed slightly higher than if the investment income was earned in your personal hands. However, this disadvantage is partially offset by the fact that your PC had more money to invest in the first place than if the money was all paid to you. Dividend If your spouse or children under 18 years old are shareholders of the PC, you may have to receive a minimum dividend in order to avoid any negative tax consequences. Tax drones call this “corporate attribution”. To reduce cash inside your PC, you may extract money from your PC via one of the following: 1. Salary - pay yourself an annual salary to maximize your RRSP contribution of the following year 2. Dividends - pay dividends to yourself or family members who are shareholders and in lower tax brackets 3. Buy equipment/building for your practice 4. Individual Pension Plan (IPP) - is a structure 


The Professional Advisory

that allows a PC to make tax-deductible contributions on behalf of their key employees (including the dentist) to fund their retirement. Some benefits include: a. Income earned inside an IPP is not taxed until money is withdrawn from the IPP (similar to RRSP) b. PC gets a full deduction on the contribution and you are not taxed until you retire or withdraw money from the IPP c. Assets within the IPP will be protected from creditors d. The annual IPP maintenance fees paid by the PC are tax deductible, which is impossible with an RRSP e. Possibly a higher limit than your RRSP. 5. Retirement Compensation Arrangement (RCA) is another structure that allows PCs to make “supersized” tax deductible contributions on behalf of their key employees (including the dentist) to fund their

VO L. 37 : NOV EMBER 2 008

retirement. One major difference between an IPP and RCA is that an RCA typically provides for larger tax deductible contributions to be paid by the PC on the dentist’s behalf. Some of its benefits include: a. Possibly tax savings if you choose to retire outside Canada or other low tax jurisdiction in Canada b. Assets inside an RCA are creditor-protected c. RCA contributions escape the 1.95 per cent Ontario Employer Health Tax and probate fees. A PC is an effective tax saving tool. A PC also has advantages and disadvantages. Recognizing both the advantages and disadvantages inherent in a PC will help you to reduce your tax bill. PA David Chong Yen, CFP, CA. has completed the CICA In-Depth Tax Courses and has been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca. www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.

Organize Your Debt in Order to Sell Your Practice DAVID LIND www. ppsales.com

Introduction: I have been in the dental industry for over 20 years, the last 17 with CIT Financial, a large commercial finance company where I had overall accountability for the Healthcare Division. We were specialists in providing practice financing to dentists. I am now very pleased to be a partner with Graham Tuck at Professional Practice Sales, and look forward to being a regular contributor to The Professional Advisory. Organizing your Debt: When you’re getting ready to sell you need to organize your practice debt. This should be done when you arrange the debt as opposed to when the closing date is looming large. By then it is too late. The type of debt I’m referring to are the term loans and leases that are commonly used to buy assets – not the revolving debt that is used for your day to day cashflow. The latter is usually open for prepayment at any time.

The offer you receive for you practice will include a clause stating you will transfer the assets free of liens and encumbrances. This essentially means you must pay off all debts secured by practice assets, including goodwill, in order for the purchaser to close. What some people are not aware of is that there may be penalties owed to the bank or financial institution in order to retire your obligation. These penalties may be far larger than the “three months interest” that everybody believes is standard. Penalties vary by institution, and range from zero to the balance of payments due under the contract. A natural question at this point might be: Why don’t I just transfer the debt to the new owner of my practice and reduce the selling price by the remaining principal? While this is a possibility, it also complicates the deal for the following reasons: 1. Your lender will likely have a blanket security registration, meaning you would be forcing the purchaser to use the same lender. Purchasers normally have their own financing lined up. 2. Your guarantee may not be released on closing. So how do you organize your debt to avoid this problem? If you are more than five years away from selling your practice, set the term on the loan or lease to expire


The Professional Advisory

VO L. 37 : NOV EMBER 2008

course you would be exposed to the then current interest rates should your plans to sell change. If you are within two years of selling and you need to take on debt for some reason, I suggest you think very carefully before you do so. If you decide to proceed, expect to pay penalties to retire the debt on the sale of the practice. I look forward to sharing more practice strategies with you in the months and years to come. I welcome your six months before you think you will sell. This will feedback (positive or negative) on this, my first article, give you a little cushion for unforeseen circumstances. and encourage your suggestions for future topics that If you are less than five years from selling, or if this is would interest you. PA not possible for cash flow reasons, take a loan that has a shorter term than amortization. For instance you David Lind is a Partner in Professional Practice Sales (Ontario) Ltd. (www. could take a four year term with a seven year amor- ppsales.com), which specializes in the valuation and sales of dental practization. This would give you an opening at the four tices. He can be reached at (905) 472-6000 or 1-888-777-8825 or year point to pay off the balance with no penalty. Of e-mail at: david.lind@cogeco.ca

Why don’t I just transfer the debt to the new owner of my practice and reduce the selling price by the remaining principal?

Associate Agreements From the Associate’s Perspective DAVID ROSENTHAL BA., LL.B. For most new graduates, the associate agreement will be the first legal agreement they enter into as a practicing dentist. There are a number of issues to consider when becoming an associate dentist and signing an associate agreement. This article considers some of those issues from the associate’s perspective. Relationship - The owner of the dental practice is typically referred to as the Principal. In most cases, the associate dentist (Associate) who works at the dental practice is an independent self-employed individual under a contract for services with Principal, namely the associate agreement (Agreement). That Agreement governs the relationship between the Principal and Associate and details the terms on which the Associate agrees to provide his or her services to patients in the Principal’s office but as an independent practitioner. Principals and/or Associates can be either individual dentists or dentistry professional corporations. This article does not deal with professional corporations but it is always worthwhile to speak with your tax

advisors to determine if it is beneficial to use a dentistry professional corporation as the Associate. As an independent practitioner the Associate is operating his or her own separate business and is self employed. The Principal pays the Associate a gross amount and it is the Associate’s obligation to remit from that gross amount the required taxes to Canada Revenue Agency. As an independent practitioner the Associate is responsible to pay for his or her own license fees, continuing education requirements and insurance. Review the Agreement carefully to see what the Principal requires the Associate to pay for. The Agreement should detail all of the services and facilities the Principal will provide to the Associate, including the use of the premises, equipment, dental supplies and staff. If special equipment or specific staff is required (such as a designated operatory or designated chairside assistant or hygienist) this should be detailed in the Agreement. Often the Agreement outlines the Principal will provide the ‘standard’ equipment and ‘routine’ dental supplies and it is the Associate’s cost if the Associate requires further specialized items. Remuneration - The Associate is usually paid based on a percentage of the Associate’s collected billings. The definition of collected billings is very important. Collected billings typically means the gross billings for dental services rendered by the Associate to 


The Professional Advisory

patients of the dental practice for which payment has been received by the Principal, after deducting laboratory fees. Keep in mind the definition refers to collected billings. If a patient does not pay an account, then it is not included in the calculation of collected billings and the Associate is not paid his or her percentage until the invoice is actually paid by that patient. Non-Competition - Probably the most valuable asset a Principal owns is the patient list, and that asset is something the Principal will, understandably, want to protect. It is common for the Agreement to contain a non-solicitation covenant (whereby the Associate agrees not to solicit patients or staff of the practice) and a non-competition covenant whereby the Associate agrees not to compete with the Principal within a specified geographic radius for a specific time period time after the Associate ceases to work at the practice. The comments below are intended only for general practitioners since there are different rules that may apply for specialists. A non-compete covenant will only be enforced if it is reasonable both as to the area of non-competition and to the amount of time the covenant will be in force. That might be only two kilometres in a densely urban practice or 15 kilometres or more in a rural setting. The amount of time the clause remains in effect is also important. A new Associate will be little or no threat

VO L. 37 : NOV EMBER 2 008

to the Principal if he or she left the practice within a trial period of, say, three months, and generally only a minor threat if they leave within one year. From an Associate’s viewpoint, a “phased-in” non-competition clause is reasonable. It could provide that the noncompetition clause does not apply for the first three months of the association, applies for a period of one year after termination if the Associate departs within one year, and for a period of two years if the Associate leaves after one year. Termination of Agreement - When reviewing the Agreement consider the right of the Associate to terminate the Agreement upon one to three months notice. This is particularly important if the Agreement is for a specific time period, such as a one year contract. If the arrangement is not working for whatever reason, the Associate does not want to be stuck there for a full year. In summary, review the Agreement carefully and consult with your professional advisors to ensure you understand the Agreement and all rights and obligations before signing it. PA

David Rosenthal is a senior lawyer with Spiegel Rosenthal Professional Corporation 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) 203-8592; or e-mail to david@drlaw.ca.

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”.


The Professional Advisory November/2008