The Professional Advisory September/2011

The

51 Professional

Advisory For Dental Professionals

IN THIS ISSUE Real estate VeRsus the stock maRket Mark McNulty BA, CFP, CIM

two minutes to addRess most majoR insuRance issues Dr. Ian Wexler

what is the tenant Ian Toms B.Sc. (Hons)

BuYing YouR PRactice David Chong Yen CFP, CA

the 100 PeR cent of gRoss mYth David Lind

associate agReement fRom the associate’s PeRsPectiVe David E. Rosenthal BA., LL.B.

unlocking the hidden Value within YouR PRactice Dr. Ron Weintraub

plus the futuRe dePends on what we do in the PResent notes fRom the editoR

Vol. 51 : SepTember 2011

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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 field. 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.

The Future Depends On What We Do in the Present RALPH CRAWFORD BA., DMD In some recent readings on the life of Mahatma Gandhi I was reminded and once again tremendously impressed with the contributions he made in helping free the Indian people from British rule through nonviolent resistance. Born in 1869 he studied law in London, England and was called to the bar in 1891.

And I didn’t know he joined the ambulance corps in the Boer War. Gandhi believed it honourable to go to jail for a just cause. He was arrested many times by the British and altogether he spent seven years in jail. He held no office, pursued no career, accumulated no wealth nor did he desire fame - yet his non-violent tactics were a major force leading to India’s independence in 1947. He was assassinated by a fanatic in 1948.

And in reading through the many quotations attributed to Gandhi it is easy, in reviewing only a few, to see the inner workings of an individual dedicated to making this a better world. Just to quote a few: You must be the change you want to see in the world and An eye for an eye makes the whole world blind gives us just a glimmer of his inner soul. But the quotation that particularly caught my attention, and we can only imagine was perhaps a favourite of Gandhi’s, was The future depends on what we do in the present. Indeed, as we contemplate the future of our individual lives, the well being of our families and where our dental practices are headed, doesn’t it come down to our future depending on what we do today.

As we read through the articles in this particular issue of The Professional Advisory it isn’t difficult to understand that each author is unknowingly encouraging 1

readers to follow Gandhi’s advice. David Rosenthal makes it very clear that a successful future depends to a great extent on understanding an associate agreement from the associate’s perspective. Buying a practice to ensure a successful future? David Chong Yen lays it all out in Buying Your Practice. Understanding the buying process will make an enriching experience. How about Unlocking the Hidden Value Within Your Practice?

Ron Weintraub uses the dentist’s tried and trusted examination, diagnosis and treatment plan regimen to ensure your practice’s future value. Is the value of your practice today and in the future The 100 per cent of Gross Myth? David Lind tells us it may well be, but first consider the factors that contribute to the future practice value: the staff, the lease, equipment and other factors. In our stress ridden world Ian Wexler leads us to understand that in the event of a disaster just Two Minutes to Address Major Insurance Issues today will simplify major insurance issues in the future.

Mark McNulty in his review of Real Estate versus the Stock Market shows how over the period of different periods of years that decisions of the present can markedly affect the future percentages and dollar values of various investments. What is the Tenant? asks Ian Toms. And he follows his own query with emphasis on the fact that whatever the decision today affects tomorrow. “The correct choice of “tenant” depends on unpredictable circumstances which may or not occur at a time many years in the future”. Upon review and reflection it is no sheer accident that each contributor has a profound vision that our actions today - without any doubt - affect tomorrow’s well-being.

The world has much to be grateful for the achievements and leadership of Mahatma Gandhi as he strove to practice non-violence and truth in all situations. And may we be forever mindful that our own future depends on what we do today. pA crawford@dccnet.com

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Real Estate Versus The Stock Market MARK McNULTY BA, CFP, CIM www.yournumber.ca

Over the past few years we have seen a very volatile stock market along with record setting prices in real estate. I thought it might be a good idea to examine this trend a little more deeply…

Since March 1996 (the month the housing market started to recover after the 1989 crash) until March 2011, Canadian homes appreciated by 5.33% annually.

Inflation was just over 2% over the same period so in real terms if you bought your house at the very bottom after the largest crash in modern Canadian history, you would have made just over 3.3% per year after inflation. The above data represents by far the best period for home owners in history.

However, this is not the end of the story because for that period there are a few other factors that must be considered.

First to consider is the annual maintenance costs. I like to use 3% of a home’s purchase price as an estimate for what it will cost annually to maintain a home. Thus, if we take a 3.3% annual price appreciation less the 3% annual maintenance cost, your growth is pretty much nil.

Also, keep in mind that the above home price appreciation is overstated because houses have gotten bigger over time. For example, if the average house in 1996 was about 1,500 square feet and today it is somewhere around 2,000 square feet, some of the housing price appreciation is just because people are buying bigger houses. Today if you go and buy a 1,500 square foot house for $300,000 and then your neighbour sells their 2,000 square foot house a week

later for $330,000, your house isn’t now worth $30,000 more because the houses are not comparable. The same is true for housing price appreciation stats over time.

Again, keep in mind that the last 15 years or so, since the market bottom in March of 1996, is about as good as it is going to get for home price appreciation. If you had invested in the TSX over the same period, you would be up over 5% plus dividends - which is up about 7% a year in real terms.

If you bought a $100,000 home in Toronto at the very bottom of the market crash in March of 1996, it would be worth $158,081 today in 1996 dollars. Again this number doesn’t account for annual maintenance costs and the fact that the average home size is increasing.

In contrast, your $100,000 stock investment would be worth about $276,000 today in 1996 dollars.

I also found some data on inflation adjusted housing price appreciation from 1953 to 2010, and the average annual inflation adjusted increase is about 2.75%. Also note that the size of the average home has doubled in the last 50 years. So, if we adjust for that, the average real return is somewhere in the 1% to 1.5% range. We then still need to deduct annual maintenance costs.

In Conclusion It is easy to feel positive about any investment when you don’t compare it to the opportunity cost. As mentioned above, if you invested $100,000 in a property in 1996 it would be worth $158,081 today.

On its own, that seems like a good return. It is only when you look at what you could have made in an alternate investment that you see how you really did.

I am not giving an opinion here, just citing numbers.

When it comes to real estate, every deal/property is different. For example, one investment which I think has great potential is commercial real estate for offsite storage. But that’s another article. pA

Mr. Mark McNulty BA, CFP, CIM, is a financial advisor with Raymond James Ltd., Independent Financial Services - Member Canadian Investor Protection Fund. This article is for information only. Its opinions are those of the author, not necessarily those of Raymond James Ltd. He may be contacted at 905-470-6222ext 209 or mark.mcnulty@raymondjames.ca.

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Two Minutes to Address Most Major Insurance Issues DR. IAN WEXLER www.protect-ins.com

Assuming you are the typical dentist, you have little or no extra time to deal with a number of issues… especially insurance. In our “crackberry” stress ridden world, most of you simply want to know that in the event of a disaster, your family, your practice, and your financial well being will be OK. The following article will attempt to simplify major insurance issues in less than two minutes. Implementing the right solutions however may take substantially longer.

1. General insurance protection for your home, auto, practice, cottage, etc.

• Do not do it yourself simply to save a few dollars.

• Broker expertise and services vary immensely, choose the best, and someone who focuses exclusively in this area.

• Review regularly.

2. Life insurance • Most dentists in their early years need only “Term” life.

• Make sure that for any life coverage, other than for “debt repayment”, that you undergo a comprehensive insurance needs analysis.

• Chances are you need “several types” of life insurance, e.g., a combination of various term and permanent coverage.

• Very high likelihood you have been pitched expensive “overfunded” permanent Universal or Whole Life coverage you are not a qualified candidate for. If you already bought some, there is a very high likelihood, you do not fully understand how it works or the inherent risks. ALWAYS get a second opinion from a life insurance specialist in conjunction with your accountant (who must be knowledgeable in this area) before purchasing any of these plans with a “savings, tax reducing, leveraging, retirement planning” component.

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• Make sure you consider your Professional Corporation for life planning if you have one.

• Consider “joint last to die” coverage later on in life.

• You can save a lot of money by purchasing creditor life insurance privately versus with the bank. Also, creditor life insurance, unlike other life insurance, is tax deductible.

• If you want to take the simple route, purchase inexpensive and flexible “ Term” life that can be converted to other types of Term or Permanent coverage later on without a medical.

• Do not rush into buying life insurance!

3. Disability insurance (long term disability, business overhead expense, and critical illness) • Long term disability coverage is, without a question, the cornerstone of your entire insurance and financial portfolio!

• Most of you are underinsured for long term disability coverage • The vast majority of you need the most long term disability coverage you can get….so be sure to review it and update it annually, especially if you can do so without new medical proof. If you need more, but do not qualify for additional conventional long term disability coverage, be sure to explore a new type of this coverage that specifically pays off debt.

• Most of you with your own practice have the wrong amount and structure of business overhead expense coverage.

• Business overhead expense coverage is very complicated, with claims even more so. Your advisor must have broad experience in dealing with this coverage and managing claims.

• Critical illness coverage is NOT a replacement for long term disability insurance….the first is tied to a qualifying diagnosis while the second is tied to your limitations from practicing.

• Critical illness coverage is discretionary for most individuals.

• Most insurance advisors have never handled a claim or if they have, do very little for you at claim time. Find an advisor who will assist you with your claim from start to finish and has handled many successful claims. This is more important than the contract itself in determining

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young, healthy, and insurable. whether you will have a successful claim!

• Critical illness insurance may be tax-deductible if 5. Other types of coverage and insurance advice • Most dentists should consider long term care at structured properly. some point after age forty.

• Consider a “return of premium rider” on any critical • If you have a partnership agreement, make sure it illness coverage purchase if you can afford it. contains provisions for both death and disability • Purchase any disability coverage at the earliest age buy-out. possible to save on costs and to qualify health-wise.

• Make sure you understand how your advisor is • Most exclusions are not a big deal. There are too compensated, both for new plans sold and for many things that can cause a claim, most of which servicing. will not involve the exclusion.

• Understand that your insurance advisor will not be • Annual reviews are imperative! around forever. Discuss this issue with them, but 4. Health Care Benefits DO NOT use it as a reason to become a client.

• Consider a Health Savings Account. It is not insurance and will help you deduct a good portion • Make sure your advisor represents ALL major insurance companies and is truly independent of health care costs. (recommends them all equally).

• Group health care benefits are important for • Always purchase guaranteed coverage in terms of catastrophic health care costs such as drugs. the contract and premiums. pA • Obtain coverage for your family when you are

Dr. Ian Wexler is a leading authority on insurance issues for dentists. He is the founder and President of 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 800 dentists across Ontario for the past 17 years. He can be reached for questions or other enquiries at (416) 3913764 or drwex@protect-ins.com.

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What is the Tenant?

IAN D. TOMS B.Sc. (Hons) www. iantoms.com

Shakespeare wrote “A rose by any other name would smell as sweet” meaning that the name of something doesn’t matter, what matters is what that something is. In a lease, the name of the “tenant” doesn’t matter.

What’s important is what the tenant is.

The “tenant” named in a lease must be real, competent and aware of the obligations it is assuming by entering into the lease. The tenant could be a company or companies, a person or persons, or combination of them, as in a partnership. The problem is that the “tenant” must be chosen before the lease is signed, but the correct choice of “tenant” depends on unpredictable circumstances which may or not occur at a time many years into the future. Therefore, in order to choose what the “tenant” is wisely, it’s important to consider what the tenant is, what its responsibilities are, and what the tenant is likely to encounter over the course of the tenancy.

First, understand what the “tenant” really means.

Not so easy. Although the tenant is clearly named on the first page of the lease, often the definition of the “tenant” includes “the directors, officers, servants, employees, contractors, agents, invitees and licencees of the tenant and all other persons over whom the tenant may reasonably be expected to exercise control and is in law responsible for”. Wow! Note that the tenant’s obligations are also shared by “heirs, successors, assigns, administrators, and executors.” So the “tenant” may actually include staff, patients, and family, including your children! Will the executor of your will be bound by the terms of the lease?

Secondly, understand the rights, privileges and obligations of the tenant under the lease. What is insured? What can use the premises? What can assign the lease? What is responsible for rent payments?

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Third, what the tenant is may not matter depending on who is a guarantor or indemnitor.

Know clearly that when you sign a lease, you are agreeing on behalf of the “What” to comply with all the lease terms and conditions for many years under many circumstances.

Consider the following tenancy history.

At 25, a dentist eagerly opens his new practice.

Confidently, the lease is signed with him and his wife as the “tenant”. Congratulations!

At 30 his accountant recommends that he assign the lease to his professional corporation. He finds out that the assignment clause in the lease actually adds his professional corporation to the “tenant” which now becomes an aggregate of himself, his wife, and the corporation instead of replacing himself and wife. At least his paperwork is in order!

At 35 he changes his marital partner. The”tenant” now becomes himself and his soon to be former wife.

When he arrives at his practice one morning he finds that his wife’s contractor built a brick wall exactly down the middle of their practice overnight!

At 40, his practice is flooded triggering a significant insurance claim, but the actual insured “tenant” is himself and his now former wife. The matter is resolved after years of expensive litigation.

At 45, in order to compensate for the financial losses accumulated to date - and without checking the lease - he decides to bring on an associate to increase practice volume. Unfortunately, the lease says that the “tenant” may not share or sublet the premises to another without landlord’s consent. As it turns out the landlord, who dislikes the operator for cultural reasons, uses the unapproved sharing of the premises to claim the option to renew the lease term is null and void. In order to continue to practice in the space tenant agrees to pay a rent premium to persuade landlord to renew the lease term.

Now 55 years old and completely disillusioned, he finally decides to sell his practice, only to learn that tenants ability to

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First, understand what the “tenant” really means. Not so easy. Although the tenant is clearly named on the first page of the lease, often the definition of the “tenant” includes “the directors, officers, servants, employees, contractors, agents, invitees and licencees of the tenant and all other persons over whom the tenant may reasonably be expected to exercise control and is in law responsible for”.

assign the lease is impaired. A purchase offer conditional on assumption of the lease triggers landlord to use a lease facility to threaten to terminate the lease as an alternative to assignment, unless the purchaser’s rent is increased significantly (which reduced the sale price), and the seller remains liable for lease obligations after the sale.

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Before you sign, know clearly that you have a significant chance of encountering each of the examples above.

Take time to stop and smell the roses before you sign.

Consult a capable professional to provide you with your best “what”, and clearly understand the “whats” rights, privileges and obligations. pA

Mr. Toms has been creating and preserving realty leasehold value since 1986 and can be reached at (705) 743-1220, by e-mail at iantoms@pipcom.com, or through his web site at: www.iantoms.com.

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Unlocking the Hidden Value Within Your Practice DR. RON WEINTRAUB www.innovativepracticesolutions.ca

The growth of a dental practice benefits from an organized observation of the current status of your operational procedures with the same dedication and care you provide your patients. Realizing that there may be room for improvement in your practice, envisioning greater success could be a motivator to engage in the process. One successful strategy might include an outside observation (not peer review) because an objective third party is trained to scrutinize as well as to identify remedial opportunities. Such a procedure is referred to as a Practice Opportunity Analysis from which most practices would benefit.

In much the same way as we inform our patients of the value to their general health of a complete oral exam, examining your operation has similar advantages. Using the examination, diagnosis, and treatment plan strategy metaphorically, a review of our best practices and an open mind to any possible perceived shortcomings could move our practice to a higher level.

Examination Phase Among the modalities employed in the examination process is a computer analysis of data to give a clear perspective of clinical and administrative effectiveness.

Following the analysis of the business aspect, we address patients. With patients’ identity carefully protected, a confidential chart audit is conducted.

Since patients’ clinical and financial records are areas where production potential is secreted, potential opportunity lies in the diagnosed treatment, recare appointments that are not followed-up, or patients deemed erroneously lost to the practice.

Once an understanding of the business and clinical aspects are clear based on the accumulated data, anecdotal discussions and interviews with the team 7

add to a clearer view of possible opportunities. Finally, observing operatory communication contributes to a global view of the office-patient interface.

After a careful observation, the information derived can be compiled and analysed to suggest practice enhancement opportunities. On the financial side, one readily accessible source of enhancing practice professionalism and profitability is the unattained value silently hiding in the charts. The potential increased profitability can go a long way to acquire worthwhile professional modalities and to be able to implement practice building strategies.

Diagnosis Phase After having reconciled the objective and subjective data gathered in the examination phase, the specific areas that are impeding the acquisition of the suppressed opportunities in the practice are pinpointed. It is important to narrow the focus through a proper diagnosis in order to deal promptly with the “acute” issues that impede the practice from reaching greater heights of success.

In the diagnostic phase, with candid objectivity, observers completely identify the factors that allow any deficiencies to exist. For example, they might identify a poorly motivated or trained team or inadequately controlled recare systems. Another common observation is the lack of treatment coordination within the office. Thorough examination could have revealed a hygiene department operating below optimal levels because of lack of structure and/or training. Further observation could have revealed the skill set currently in place in the office to be unable to satisfy patients’ desires to be significantly treated in house. Oftentimes, the team suffers from the “don’t want to rock the boat syndrome” articulated by some long standing staff members who were never trained in newer modalities and techniques.

Inadequate protocols to enhance existing skill levels need addressing.

Marketing also plays a role in growth of a practice.

Part of the potential success is the ability to market the office internally (most effective) and, if necessary,

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One successful strategy might include an outside observation (not peer review) because an objective third party is trained to scrutinize as well as to identify remedial opportunities.

externally. Included in the diagnosis is an assessment of the effectiveness of the customer/patient service component.

Other considerations include how the office understands patients’ needs. Are appropriate availability times offered? Does the office reflect contemporary expectations or does it suffer from “my parents’ dental office syndrome?” And certainly not the least important, are there chronic time management issues contributing to a negative patient experience?

Treatment Plan Phase A comprehensive treatment plan should be a blueprint for action to remediate the pathology brought to light by thorough diagnostic procedures. This phase deals with each identified area of downside with a cogent remedy, easily implemented, that addresses the issues impeding practice performance as well as an outline of

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the resources necessary for the remediation.

Team deficiency issues are dealt with by training, if possible, rather than by replacing personnel, which should be done only as a last resort. A blueprint should be provided to navigate through all the areas that require adjusting by clearly defining what needs attention and by providing the “how to” for remediation.

A Practice Opportunities Analysis is a particularly effective tool to maximize the saleability of the practice after tapping into existing previously hidden sources of profitability. Current owners should be proactive and realize the “real value” of their asset on an ongoing basis to gain the benefit of a more professionally and financially satisfying career. Practitioners at each stage of their practice development could benefit from a Practice Opportunities Analysis. pA

Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-five 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 benefited from his insight. As owner of Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buy-ins, and business mergers. Dr.Weintraub can be contacted at (905) 470-6222 Ext. 221 or drronips@rogers.com.

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Buying Your Practice DAVID CHONG YEN CFP, CA www. dcy.ca

• Provide an opinion on the dental practice i.e., buy or pass, given your goal?

• Structure the deal in the most tax efficient manner • Recommend if a professional corporation should be set up and possibly consider also the setup of a hygiene/technical services corporation and/or holding corporation • Liaise with your lawyer or any other advisors • Review and provide comments on the purchase agreement or any other applicable agreements including the non competition and non solicitation clause • Perform due diligence, including chart count • Attend/explain/summarize your chart count.

Patient charts are key to any dental practice • Assist in obtaining financing at the most favorable terms and interest rate; this includes preparation of banker presentation and financial forecast • Provide/discuss with you the transition and marketing opportunity

Your career path may lead you to owning your own dental practice. Searching for a practice which suits you could take a few months to a year depending on the location you are considering. Consider the following before you buy a practice: • Are you clinically ready?

• Are you ready to take on the management role? If not, do you have a team who can assist?

• Will you purchase the practice yourself or with someone else? If you are purchasing with someone else, do you know the advantages and disadvantages of such a venture?

• Have you registered with the various brokers so you are aware of practices for sale?

• Is the principal you are working with ready to sell his/her practice?

In certain instances, you may • Did you sign a non competition/non solicitation associate agreement? This may restrict the area have to “overpay” - especially you could practice and hence also the area in which you could purchase. Remember the distance when there are competing offers is measured in a straight line rather than the driving distance. If you did not sign an associate for the same dental practice. agreement, you may be free of any constraints.

Consult your lawyer.

You have to repay the loan after • Do you have a team of advisors to assist in the the novelty of purchasing the purchase (lawyer, accountant, banker and insurance agent)? Your advisors may be aware of practices practice has worn off. for sale which are not listed with the brokers. Also speak with your dental representative to see if they are aware of any practices for sale.

Likely you will ask your accountant/advisor “How What to expect from your accountant during the much should I pay for this practice?” Often, the search or acquisition process: vendor will have a third party prepare appraisals for the practice and/or building. Your offer price depends • Review your 3/5/10 year plan with your accountant so he/she knows when you are ready to on, but not limited to, the location of the practice, demographics of patients, number of active patients, purchase a practice. average billing per active patients, vendor/purchaser’s When you have located a practice, your accountant market, untapped revenues and whether the vendor will: is selling shares or assets. Your offer price may be • Review the appraisal of the vendor influenced by competing bids/buyers.

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Your bank will normally finance 100 per cent of the • Professional fees for lawyer and accountant to close appraised value. If you offer much more than the the deal and annual maintenance appraised value, you will have to make sure you have a • Security deposit for rent, telephone or other sufficient line of credit or personal funds to close the applicable contracts deal as well as to operate the practice.

• Mailing costs for letter of introduction and new stationary In certain instances, you may have to “overpay” • Bank charges and interest especially when there are competing offers for the • Costs for new sign(s) same dental practice. You have to repay the loan after the novelty of purchasing the practice has worn off. • Office overhead and property insurance Hence, your accountant should provide a cash flow • Dental supplies and laboratory expenses analysis showing how much money will be available • Office salaries and benefits (Canada Pension Plan, Employment Insurance and Employer Health Tax) after you repay the bank loan and all practice expenses.

• Premise rent If you are successful in acquiring a practice, here are • Utilities/telephone the costs of acquiring/running a dental practice: • Marketing/advertising • Purchase price (shares or assets) • Professional development courses plus travelling • Harmonized Sales Tax (HST) @13 per cent if you costs involved for yourself and your staff acquire assets rather than shares. The assets may • Upgrades to equipment and/or replacement include leasehold or real property. You might be of equipment. able to avoid the HST on the real property if you have a separate corporation owing it. Any HST Having a basic understanding of the buying process paid may or may not be recoverable, depending on and a good team of advisors will make this an enriching experience. pA the structure.

David Chong Yen, CFP, CA of DCY Professional Corporation Chartered Accountants is a tax specialist 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.This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.

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The 100 Per Cent of Gross Myth people you can find? Are they trained and motivated to do their best? Will they stay after you are gone? Do you have employment contracts with them? If you have the extra “floater” person, consider right-sizing before you sell. Associates DAVID LIND and hygienists are also a factor and their impact www. ppsales.com on your practice will be examined in detail in a future article.

Many practices sell for 100 per cent of the last year’s 2. The Premises Lease. You should have at least gross revenue. That is an undeniable fact but it does seven years remaining between the existing term not mean that all practices sell for 100 per cent of gross and renewal options. The rental amount should be revenue and it does not mean that your practice or the at current market rates and the size of your suite practice you are looking at buying is worth 100 per cent should be appropriate for the size of your practice. of gross revenue. It may be worth more or it may be It is acceptable to have a little extra room for future worth less than that. Sometimes much more or less. growth but not double the space you actually need.

Your rent should equal about 6.5 per cent of your We get asked regularly, by buyers, sellers and dentists gross. If you own you own building, it should carry that are just curious about what their practice might for about the same percentage. be worth to explain what their practice or the practice they are considering purchasing is worth and why.

Regular readers of The Professional Advisory will remember that Patients and Profit create value. It is obvious that the higher your active patient count the more you will get for your practice but there is more to it than that. We use the example that a practice that generates $1 million of gross revenue with 2,000 active patients is worth much more than a practice that generates $1 million of gross revenue with 1,000 patients. Patient factors that buyers consider are; billings per patient, new patient flow, age demographic, socio-economic status, ethnicity, insurance coverage and dental I.Q. Practices that have all of these factors in balance will sell for a premium compared to those practices that have one or more of these factors out of balance. Similarly, practices that have higher profit margins will sell for a premium compared to less 3. Physical Plant and Equipment. Your practice is a profitable practices. Using our sample $1 million reflection of you and buyers will draw conclusions dollar grossing practice, a profit margin of $200,000, about the practice from the state of the office and after deducting an owner “salary” of forty per cent of equipment. It does not have to be brand new or professional billings will be worth much more that all high tech but it should be clean, functional and the same practice that generates $100,000 of profit. fresh. The combined market value of equipment The other factors that contribute to value are; and leasehold improvements should be 25 per 1. Staff. Think about your staff as a buyer would. cent of your billings. Many people fail to take They are going to be an important link to your this into consideration when thinking about what patients after you are gone. Are they all the best their practice is worth.

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It is obvious that the higher your active patient count the more you will get for your practice but there is more to it than that.

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4. Other factors. Cost-share or partnership interests will sell for less than solo practices. Practices with strong hygiene programs will get a premium compared to those practices with weaker hygiene production or dentists that do their own hygiene.

Invisible locations sell for less than main floor locations with good signage and visibility. Big city practices are in higher demand so they will get a premium to smaller town practices. Smaller practices will sell for less (relative to their gross) than larger practices. Dentists with multi-locations

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in the same area will receive less than single owner operated practices. Retiring dentists will get a premium to those who are serial buyer/sellers.

In summary, the 100 per cent myth is just that, a myth.

You must consider all of the value drivers in a dental practice before you can determine the true value.

If your practice or the practice you are considering purchasing is well balanced and the factors I have mentioned above are understood and analyzed, the myth may become reality. pA

David Lind is a Principal in Professional Practice Sales Ltd. (www.ppsales.com), which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: david.lind@ppsales.com

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Associate Agreements From the Associate’s Perspective DAVID ROSENTHAL BA., LL.B. In previous volumes of The Professional Advisory I wrote about associate agreements from the principal’s perspective. This article focuses on associate agreements from the associate’s perspective.

An associate agreement is the legal contract detailing the arrangements between the dentist who owns the practice (Principal) and the associate dentist (Associate) hired to work at the practice. 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 and signing an associate agreement (Agreement).

Relationship - In most cases the Associate is an independent self-employed individual. The 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.

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 selfemployed. 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.

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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 patients of the dental practice for which payment has been received by the Principal, after deducting laboratory fees.

Note 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 - 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 nonsolicitation 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 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 enforceable if it is reasonable in the geographic area of noncompetition and to the amount of time the covenant will be in force. That might be only three kilometres in a densely urban practice or 15 kilometres or more in a rural setting.

The Professional Advisory

The amount of time the clause remains in effect is also important. A new Associate will be little or no threat to the Principal if the Associate left the practice within a trial period of 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 applies for a period of two years if the Associate leaves after one year.

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Termination of Agreement - When reviewing the Agreement consider the Associate’s right 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 must be able to terminate the arrangement after reasonable notice to the Principal.

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.

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The Professional Advisory

Vo l. 51 : Sep T ember 20 11

The

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Advisory For Dental Professionals

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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�.