The Professional Advisory November/2011

The

52 Professional

Advisory For Dental Professionals

IN THIS ISSUE Selling Your Practice? inSurance iSSueS You need to conSider Dr. Ian Wexler

What iS the PremiSeS? Ian Toms B.Sc. (Hons)

the Seven habitS of highlY effective...PractitionerS Dr. Ron Weintraub

haS Your Practice facilitY KePt uP With Your billingS? Graham Tuck H.B.A., C.A.

valuationS from a legal PerSPective David E. Rosenthal BA., LL.B.

can You truSt Your adviSor? Mark McNulty BA, CFP, CIM

Plan before You Sell David Chong Yen CFP, CA

plus truSt noteS from the editor

Vol. 52 : NoVember 2011

The Professional Advisory

Vo l. 52 : NoVember 2011

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.

Trust RALPH CRAWFORD BA., DMD I recently received a disturbing phone call from my bank. Someone, somehow, had made fraudulent charges against my credit card account. How the bank determines what is fraudulent on a credit card is beyond me but upon visiting my local bank branch I was more than impressed with their attention and efficiency. There were two charges – one from France and another from Germany - of which I had no knowledge. Fortunately, both were under a $100. All praise to my bank - they issued me a new card and are crediting my account.

The thought entered my mind. Who can you trust?

At this my mind turned to an old story from years back. A store keeper wanted to teach his four year old son the principles of business. While fixing some curtains in his living room the storekeeper asked his son to mount the ladder. While on the ladder the father then asked his son to jump into his arms. The son protested, “No, no Papa, it’s too far. You will drop me!” The father replied, “Not at all my son, I’m your Papa, I love you and will catch you - jump!” With some reluctance the son jumped off the ladder towards his father’s open arms. At that point the father stepped back and allowed his son to fall on the carpeted floor.

“Now my son, you have learned the first lesson in business. Don’t trust anyone!”

Certainly, any lesson in business doesn’t have to be that severe but my credit card experience got me thinking. Who can you trust? In scanning my library shelves and the internet there are literally hundreds of references, quotations and thoughts from down through the centuries and around the world, all relating to trust. Curiously, my mind turned to an 1

article I wrote in The PA a year ago. It made reference to Arthur Ashe the tennis player and I remembered in scanning his career that he quoted, “Trust has to be earned, and should come only after the passage of time.”

So here we are, 52 Volumes of The PA later, and each of its contributors over the past ten years has gone that extra mile to earn your trust. In reading the present issue, trust them still! Selling Your Practice?

Ian Wexler tells us, regardless of an ultimate plan, there are “Insurance Issues You Need to Consider”.

Mark McNulty puts it to us directly: Can You Trust Your Advisor? Then he gives insight that transparency is the key in any relationship where you are receiving financial advice. In What is the Premises? Ian Tom’s conclusion forewarns you can’t have blind trust: “You need to check that your lease clearly defines what your premises is.” Ron Weintraub takes us through Seven Habits of Highly Effective Practitioners and how “Outstanding customer service results from the agreement (trust!) of office staff as to the importance of prioritizing and clarifying the value of any office activity.” Graham Tuck asks the question, Has Your Practice Facility Kept Up With Your Billings? and then points out “A good indicator (a trustful sign!) suggests a change that would be a positive step is the percentage rent that you are paying”. Plan Before You Sell says David Chong Yen and you can almost hear him say “Trust me!” as he relates what it is you need to determine what you plan to do during your retirement. As David Rosenthal takes readers through Valuations From A Legal Perspective does he not allude to the “trust” word when he underlines “A purchaser cannot rely on the valuation without conducting his or her own due diligence investigation”.

Yes, after the passage of time our contributor/ authors have earned your trust. And yes, despite two fraudulent charges I will continue to trust my bank they have earned it over the passage of time. PA crawford@dccnet.com

The Professional Advisory

Vo l. 52 : NoV ember 2011

Selling Your Practice?

Insurance Issues You Need to Consider DR. IAN WEXLER www.protect-ins.com

At some point in time, you are going to think about slowing down or retiring. When this happens, there are going to be a number of important issues to consider including what to do with your practice. Some of you will consider an outright sale, while others may decide to sell their practice in portions over a defined period of time. Regardless of the ultimate plan, decisions will need to be made with regard to all of your insurance pertaining to the practice and whether you should even continue practicing dentistry. The following is a guide for your future planning.

Long Term Disability Keeping some or all of your coverage would depend on whether you continue practicing (or working in general), and the impact that this coverage will have on your financial well-being if you incurred a total or partial disability. Cost is also another factor as your long term disability plan, whether association or private, will be re-priced in the year you turn age 65. It is important to know that at age 63 most plans will only pay benefits for up to two years, unless they include a lifetime benefit rider. Options to consider include: 1. Keeping all of it in force.

This would depend on the plan benefits and cost and if you intend on practicing more than thirty or so hours per week. You should consider removing unnecessary riders, such as cost of living rider and own occupation, or even extending the elimination period to economize on the cost.

2. Keeping some of the coverage in force.

3. Eliminating the plan altogether.

4. Some plans, it should be noted, have a unique

feature that allows you to convert it to a “long term care plan.” This option should be explored with your insurance advisor.

Business Overhead Expense Coverage If you are selling the practice outright, it may make sense to cancel your plan. If, on the other hand, the purchase will take place over a period of years, it is important to keep this coverage and reduce it as the buyout is completed.

General Insurance Protection If you sell the practice outright, and rent the premises, yet remain in the practice during a transitional period, it is imperative that the new owner has adequate coverage in place for general liability, fire, theft, contents, business interruption, etc., while you cancel your coverage. Landlords will want to ensure that this is the case. You should ensure that this information is noted in any purchase agreement with regards to your remaining in the practice in some capacity, e.g., as a manager, associate, etc.

If you sell the practice yet own the building, land, etc., you will need to continue these important coverages.

Creditor Life Insurance Assuming you sell the practice outright and pay off the remaining balance on your loan(s), you have a few options pertaining to your creditor life insurance.

1. Get rid of it. Be sure however to get the assignment released from the bank.

2. Keep the coverage for personal use once the assignment is removed.

3. Keep and “convert the coverage”, which is most likely inexpensive Term coverage to permanent coverage. This presents some excellent planning opportunities for income and tax/estate planning in retirement.

4. Keep it in one of the forms noted above and reduce the face amount of the policy.

Finally, you may need to change the structure 4 2

The Professional Advisory

Vo l. 52 : NoVember 2011

of the plan in terms of the owner and beneficiary. the shares of your PC, it is imperative you obtain qualified professional advice from an accountant, Partnership or Cost Sharing Life and Disability Buy-out lawyer, as well as a life insurance specialist to Pertaining to the Disability buy-out, it is best to just determine how best to proceed. This includes: cancel your plan and advise your partner to do the • Any permanent life insurance plans with or same. For the life buy-out, you may wish to keep it for without cash values. personal use. If so, you will most likely need to change • Any critical illness plan with or without a return the owner and beneficiary of the plan. Options, as of premium feature with the creditor life, include keeping, changing or 3. When you are considering a practice sale, it is converting the plan. highly recommended that, you speak with an Extremely Important Insurance Issues insurance advisor experienced in this area to advise you on of all of your options.

1. Do not cancel your professional liability coverage if you intend on continuing to practice in any 4. Failure to consider all the above mentioned points and take appropriate action, sometimes well capacity 2. If you have any life insurance plans held within in advance of the sale, can result in significant your Professional Corporation and you are selling financial consequences. PA

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.

3

The Professional Advisory

Vo l. 52 : NoV ember 2011

What is the Premises? when landlord suddenly decides to “re-measure” the space to new standards and charge rent accordingly, in some cases after many years of tenancy!

IAN D. TOMS Generally tenants pay a share of property operating costs as additional rent. This share is also used to B.Sc. (Hons) define the share of common area referred to above. www. iantoms.com The share should be a fraction defined as the premises area divided by the total area in the development, What - exactly - are you leasing? all measured to the same standard. If this share is A premises can be a certain area of ground such as incorrect, you will pay the incorrect amount of both a farm, an oil and gas field, or developed land with a base and additional rent. For example, if a 40,000 building or buildings, parking lots and other facilities square foot tenant is left out of the share calculation such as a shopping mall, or an office tower complex. for a 120,000 rentable square foot plaza, a 1,200 Dental practice premises are generally a percent or two square foot tenant would pay approximately $850 per of a large retail or office development with associated month more in additional rent! use of parking and other common areas.

Regardless of location, the exact definition of the “premises” is critical since that definition, and Regardless of location, the exact the administration of the definition, defines how much rent is paid, and landlord and tenant areas definition of the “premises” is of responsibility to repair, maintain, insure and critical since that definition, and the use. Many leases have no premises definition, an incorrect definition, or the definition has never been administration of the definition, administered properly. defines how much rent is paid, Rent Payment Generally rent is payable on a per square foot per and landlord and tenant areas of annum basis. Therefore, measuring your premises properly for rent calculation is extremely important. responsibility to repair, maintain, You don’t want to pay rent for space you do not insure and use. actually have.

Effective area is the space measured from interior surfaces of perimeter walls. However for purposes of Areas of landlord and tenant responsibility rent calculation, rentable space is the effective area plus A premises is a cubic area which should be defined a fraction of the common areas within the building by the upper surface of the structural floor, inner such as hallways, washrooms, and stair wells. The surface of the perimeter walls, and lower surface exact standards defining how your premises space is of the structural roof, and the lease should indicate measured, and a mechanism to ensure actual “on site” that tenant is responsible for everything within that measurement and associated rent adjustment needs area, and landlord everything outside of that area, to be precise, understood, and administered properly. except signage. This description is very different from For example, space measured as 1,500 effective square the measurement criterion referred to above. But it’s feet can translate into 1,850 rentable square feet which extremely important, since all tenant and landlord at $35 per square foot results in a difference of over obligations with respect to repair, maintenance, $1,150 per month between the two measurement replacement, insurance and use refer to space inside procedures. Many existing tenants have been surprised or outside of the premises. 4

‘‘

‘‘

4

The Professional Advisory

For example a tenant was furious with me because his insurance premium increased significantly when I sent a copy of his lease to his insurance broker who adjusted the insurance coverage when he realized that the premises was not just the interior of a typical in-line retail space, but a free standing building. The tenant called a few years later to apologize and explained that the premises building had burned but because he was properly insured he had saved the replacement cost of the building which was $220,000.00.

Storage lockers, any external area for compressor or suction equipment, or parking stalls need to be defined as being part of a premises, or not, in order to define whether landlord or tenant is responsible for obligations to use, repair, maintain, replace and insure.

Use of areas not considered premises Your premises won’t work unless you also have free and

Vo l. 52 : NoVember 2011

permanent use of associated areas of the development such as parking areas, hallways, and stairwells, especially if the success of your practice depends on any of these features, even though they are associated and not directly considered part of the premises.

Woe to the tenant who leases space only to find that the exterior doors are locked and air conditioning is off during expected hours of operation, and to the tenant who loses free parking privileges - all because use of common areas was not properly described in the lease.

You need to check that your lease clearly defines what your premises is, how your premises space is measured for rent calculation, how it’s described for management purposes, and ensure that these definitions are being actively administered. 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.

5

The Professional Advisory

Vo l. 52 : NoV ember 2011

The Seven Habits of Highly Effective...Practitioners withstanding the expense and difficulties implicit in relocating an existing dental facility, being proactive would be beneficial immediately and, particularly, at “transition” time.

Ignoring problems is the antithesis of being proactive.

DR. RON WEINTRAUB Another example of ignoring a problem is realizing www.innovativepracticesolutions.ca that employees might be running the office to suit their needs and desires, but since they have been there Choosing an effective leadership strategy is helpful for many years, the principle is afraid “to rock the in reaching goals for our dental office. In addition boat.” Such words or thoughts would never cross the to using an effective leadership style and employing mind of a highly effective person. qualified people with requisite expertise as well as valuable interpersonal skills, we continually update our technical skills. We would be remiss if we neglected to establish principles upon which we could base the day-to-day operation of effective dental practices. Stephen R. Covey’s The 7 Habits of Highly Effective People reflect the behaviours of some leaders in the dental community.

Having been exposed to a variety of dental environments, some of which have met owners’ needs and others have even exceeded their expectations, I often hear many dentists say they are ready to reach for the next plateau. A prescriptive strategy, however, doesn’t allow the creativity that adapting proven habits would have to our practices. Some practitioners already reflect Covey’s description of characteristics of highly successful people. Using his paradigm could benefit our leadership.

Habit 1: Be Proactive Highly successful practitioners internalize the concept of their behaviour as being a function of their decisions rather than being a condition. Covey maintains we have the initiative and the responsibility Habit #2: Begin with the End in Mind to make things happen. In a dental context, for Using Covey’s words, our practices evolve by either example, realizing our facilities lack an elevator or design or default. Often highly effective dentists achieve a handicapped washroom, we should understand success not by living reactively to patients’ scripts, our large, rapidly maturing patient base would face associates, and other peoples’ agendas, but rather barriers to our office since it would no longer provide to the realization of what an ideal practice should easy access. Highly effective practitioners recognize be. Insight into long-term goals prompts dentists to the problem in advance and make the decision to apply appropriate, timely measures that lead to the upgrade to a new facility. They realize that not- personally optimized practice. 4 6

‘‘

The Professional Advisory

Vo l. 52 : NoVember 2011

I often hear many dentists say they are ready to reach for the next plateau. A prescriptive strategy, however, doesn’t allow the creativity that adapting proven habits would have to our practices.

These steps might include proper preparation for expansion such as professional development to get training in more sophisticated treatment modalities even though current demand for them is not evident.

Among those procedures are implant placement and restoration, TMD training, and advanced periodontal proficiencies. Once we are proficient in new modalities, our practice could grow quickly as demand for these services becomes apparent. Active involvement in achieving specified objectives could lead to the realization of desired goals for expansion.

Thus, being proactive leads to a practice we might desire as opposed to one that circumstances allow: design or default.

Habit 3: Put First Things First.

Putting first things first emanates from day-to-day practice applications. This habit arises from an agreement by the dental team as to the core values or brand of the office. For example, if a particular office hallmark is to provide patients with a minimally stressful, personal interactive visit, all activities that patients encounter should be designed with that goal in mind.

‘‘

A friendly receptionist should greet each patient by name and provide information as to length of wait.

Time needs to be scheduled for a clinical assistant to bring patients into the treatment area personally to provide reassurance regarding the protocols of the proposed treatment. Some might argue that such behaviour is inconsistent with effective time management. But time management is inconsistent with preserving and enhancing relationships in order to accomplish results based on core values.

Consequently, outstanding customer service results from the agreement of office staff as to the importance of prioritizing and clarifying the value of any office activity based on its relationship to the core values of the practice.

Leadership of dental practices adapts well to the first three of Covey’s Seven Habits of Highly Effective People.

In a future article, I’ll show the relationship of the remaining four habits of effective people to leadership within a dental environment. Basing our leadership style on these habits can lead to effective long term planning and success of our practices. 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.

7

The Professional Advisory

Vo l. 52 : NoV ember 2011

Plan Before You Sell DAVID CHONG YEN CFP, CA www. dcy.ca

sell shares but not assets. A $750,000 capital gains exemption equates to a tax saving of $174,000 for a top tax bracket Ontario resident. Your advisor will have to review the PC/H/TSC financial statements and the shareholder’s (i.e., you and your family members) tax history to determine if you and/or your family qualify for the exemption.

There are other advantages and disadvantages of selling assets and shares which you should also consider:

As always, an annual financial checkup with your financial planner, investment adviser and your accountant is essential to your financial health. One Asset Sale major retirement asset is the dental practice you own. Advantages: Did you include your dental practice as part of your • No extra legal and accounting fees in setting up a PC/H/TSC prior to the sale. annual financial checkup? Through planning, analysis of your practice and implementation of suggestions • If you have a PC/H/TSC, you may continue for practice improvement, you may be able to secure using it for investment purposes after the asset a higher price for your practice. Tax planning is sale and income split with your family over future essential if you wish to minimize the taxes upon the years; appropriate annual dividend may be paid. sale of your practice.

• If you have a PC/H/TSC, you, the shareholder, Except in an unforeseeable circumstance such as a may decide to sell assets and be entitled to receive sudden death, you should plan for the sale of your tax-free dividends from the PC/H/TSC as a practice three to five years in advance. Aside from result of the assets sold. financial reasons, you have to prepare yourself for the retirement days to come. Why? Because with a better • You can select which assets are to be sold especially if you own more than one dental practice or have understanding of what retirement means and careful other investment assets. planning, you will likely enjoy it more. You need to determine what you plan to do during your retirement Disadvantages: years - whether you will be working a couple of days • You are responsible and liable for collecting and a week, traveling, volunteering or taking up some new remitting any applicable HST due on the sale. hobbies. Of course, these decisions also affect how Canada Revenue Agency could assess you for any much money you will need to retire. unpaid taxes on the sale.

From a financial aspect, the income tax factor will be • If you have a PC/H/TSC, you may have to a big part of this process. Are you selling a portion of incur extra legal and accounting fees to dissolve the your practice gradually over time or are you selling it PC/H/TSC should you decide to discontinue/ all at once? Are you selling shares or assets? When wind up the corporation. If you continue using it selling your practice, which option works best for you as an investment corporation, there will be annual financially? What does it mean in terms of the after accounting and legal fees to maintain the corporation. tax dollars in your pocket?

• It could result in a higher tax bill You may sell assets if you operate your dental practice as a sole proprietorship or a professional corporation, Share Sale and possibly a hygiene/technical corporation. Advantages: However, you can only sell shares if you have or will • Any resulting capital gains may be sheltered by have a professional or a hygiene/technical services the lifetime capital gains exemption if certain corporation (PC/H/TSC). The life time capital gains conditions are met, thereby reducing your taxes exemption of $750,000 may be available only if you on the sale. 4 8

The Professional Advisory

• The life time capital gains exemption may be multiplied if you have other shareholders owning shares of PC/H/TSC and they qualify for the life time capital gains exemption. E.g., if your poor mom, dad and spouse are also shareholders of your PC, in addition to you, potential capital gains of $3 million generated on the sale of your practice could be virtually tax free.

Disadvantages: • You have to incur legal and accounting fees to set up the PC/H/TSC. • You have to plan ahead to make sure you and your family members qualify for the life time capital gains exemption. We suggest at least two years planning prior to the sale.

• Your selling price may have to be reduced to compensate the purchaser for reduced future tax deductions. This depends if it is a vendor’s or purchaser’s market. Normally, purchasers prefer to buy assets. In many markets where there is a shortage of practices for sale or there is a high demand for practices, the shares of a dental

Vo l. 52 : NoVember 2011

practice command a premium price or more than the appraised asset amount.

• Any inactive assets (for example, life insurance policy, cash or investments) must be paid out to you or other shareholders prior to the sale unless you are selling these as well. The distribution of these inactive assets could result in taxes in the recipients’ hands.

• If you operate more than one practice via a PC/H/ TSC, you might need a complex tax maneuver to separate the practices prior to the sale.

• Whether you are selling assets or shares of your dental practice, you should have an appraisal prepared by a qualified professional. It provides information purchasers will require including, but not limited to, the number of patients, your office hours, employment and salary history of your staff, your financial information and lease premises details. Consult with your tax and accounting advisor three to five years prior to selling your dental practice as this will save you taxes. PA

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.

9

The Professional Advisory

Vo l. 52 : NoV ember 2011

Has Your Practice Facility Kept Up With Your Billings?

GRAHAM TUCK H.B.A., C.A. www. ppsales.com

Back in November 2005 I wrote about this same topic and the rules have not changed. You may have started out with two operatories and grown to three or four but you may be in the same location. Neighborhoods change, have you? If your practice is now worth a million dollars does your practice look like a million dollars? One can get used to the same four walls but you should step back and critically look at your practice as others would see it. A valuation would do the same as if new eyes were looking at your practice.

Major renovations should generally take place after 20 years to modernize your practice’s appearance. This does not mean just changing the colour of the paint.

Today the reception area and the waiting room tend to be combined into a more open concept layout. No more sliding glass panels. A good indicator that suggests a change would be a positive step is the percentage rent you are paying. Rent is normally five to seven per cent of gross. If you are down at three per cent perhaps you should have more space or should move to a different, newer location. Another clue that a new facility would be a positive move is that your patients have migrated away from your current location.

Sometimes a move might be initiated by the opportunity of a nice new building with an available ground floor location or the space next door becomes available and you could expand and still control your costs. Lack of operatory room is also a good sign that you need more space. A rule of thumb is that you should have an operatory for every $300,000 in billings, with a minimum of two operatories. If your gross billings are $1,300,000 then you should have a minimum of five operatories.

Without moving or expanding, you will be trying to

sell your practice in its original location that is 30 to 40 years old. This is not what purchasers are looking for. The trick is to move soon enough to be able to write off the leasehold changes against your income by the time you sell your practice. The office space should still look good and contemporary for the purchaser and you will have paid it off. When you sell shares you would not have any recapture for tax purposes. Certainly, it is an 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, a staff room, a private office and a more visible, appealing practice for your patients. Moving is also an opportunity to invest in your practice. A good rule of thumb is that the tangible assets of the practice should have a value of about 25 per cent of your gross billings.

‘‘

Without moving or expanding, you will be trying to sell your practice in its original location that is 30 to 40 years old. This is not what purchasers are looking for. The trick is to move soon enough to be able to write off the leasehold changes against your income by the time you sell your practice.

‘‘

Typically, if the practice is not contemporary in its appearance then it gets merged into a larger practice and you move with the practice for a year or two to transfer the patients to the new practice. Thinking forward five to ten years is like having your practice “staged” as vendors do when selling their homes today.

I would guess that the opposite is also true if your practice has gone down in its production - then there is little need for you to move. Save your money and 4

10

The Professional Advisory

concentrate on enhancing your practice by attracting new patients. If the ethnicity of your community has changed and the neighborhood prefers a different nationality you may have to think of moving to a neighborhood that would feel more comfortable with you. Sometimes this can be accomplished by purchasing a practice in a desirable location rather than setting up a new practice facility.

One thing I have found is that a new or different

Vo l. 52 : NoVember 2011

facility is upbeat. Recently a practice that we had for sale, which was in one of those old second floor locations that would be hard to sell, we moved to an existing vacated practice at a cost of about $20,000 to move. He received an additional $80,000 over his value in his old location. Originally the vendor wanted to sell and leave shortly thereafter but with the new location he sold and will be staying on for two years. It gave him a new zest for dentistry. PA

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

11

The Professional Advisory

Vo l. 52 : NoV ember 2011

Valuations From a Legal Perspective valuator have a reputation for valuing conservatively or aggressively?

DAVID ROSENTHAL BA., LL.B. When dentists contact me regarding the sale or purchase of a dental practice, one of the first questions I ask is whether there is a valuation of the practice. In the vast majority of cases there is. Typically the seller will have his or her dental practice valued by a licensed valuator. The valuation is an excellent starting point to determine the price of the practice and an extremely helpful document to both sellers and purchasers.

The valuation is typically lengthy and contains all sorts of information about the practice. It will detail the value of the equipment, furnishings, leasehold improvements, inventory, supplies and the goodwill.

It should refer to the financial information including billings, the number of active recall patients, staff information, premises lease, and many other items.

Valuations are usually based on asset valuations.

However, many purchases and sales of dental practices are by way of share sale, not assets, for tax reasons. There are important differences between sales of shares versus sales of assets, including tax treatment for both sellers and purchasers. Therefore, whether selling or purchasing a dental practice, it is critical to speak with your tax advisors to determine the best approach to the transaction. The valuation is only a starting point. The valuation will allocate the value of the practice among the various assets.

In negotiating the purchase price of the practice a purchaser may wish to change that allocation to make the tax treatment more acceptable.

The seller should provide the valuation to the potential purchaser for review. The purchaser needs to consider the following questions: Is the valuation reasonably current? Did an experienced valuator of dental practices prepare the valuation? Does that

If a seller hires a valuator to prepare a valuation, then that valuation was prepared solely for the seller’s benefit. This is an important fact that purchasers may overlook. The valuator’s responsibility and legal liability is to the seller, not to the purchaser. A purchaser must review the valuation with caution, keeping in mind that it was prepared for the seller and was based primarily on information given to the valuator by the seller. Even though the valuator may know the valuation is being prepared in anticipation of a practice sale, the appraiser has no direct obligation to a purchaser. Therefore, a purchaser cannot rely on the valuation without conducting his or her own due diligence investigation of the dental practice, including a detailed patient chart review. 4 12

‘‘

The Professional Advisory

Vo l. 52 : NoVember 2011

There are important differences between sales of shares versus sales of assets, including tax treatment for both sellers and purchasers. Therefore, whether selling or purchasing a dental practice, it is critical to speak with your tax advisors to determine the best approach to the transaction.

The legally binding document between the seller and purchaser is the purchase and sale agreement. That agreement should provide for time for a purchaser (and the purchaser’s professional advisors) to conduct his or her due diligence examination of the practice, including a review and audit of the patient charts and fees, review of the financial information and to confirm the dental equipment, computer hardware and software and other assets work properly. It is essential the purchaser complete a thorough due diligence review early in the process. Purchasers who do not conduct proper due diligence of a practice are putting their investment in jeopardy. If there is important information to a purchaser in the valuation, that information must be included in the purchase

‘‘

and sale agreement, since any fact not specifically contained in that legal agreement is not legally binding on the seller.

What if there is no valuation of the practice? In my view both the seller and the purchaser are taking a big risk if they rely solely on their own view of the value of the practice. There are many items that a professional valuator will consider and provide in a valuation that may not even occur to a seller or purchaser. While I have reviewed many valuations, I do not provide clients with my view whether the values are appropriate are not.

I am not qualified to provide such advice, and I suspect most dentists are not either. The best advice is to retain independent professional advisors who are qualified to provide you with proper opinions as to valuations. 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 dentists. He can be reached at (416) 865-0736 or e-mail to david@drlaw.ca.

13

The Professional Advisory

Vo l. 52 : NoV ember 2011

Can You Trust Your Advisor?

MARK McNULTY BA, CFP, CIM www.yournumber.ca

Since Bernie Madoff came to light in 2008, we have heard from many dentists with the question, “How do I know the advice I am getting is trustworthy?” Cynics will say you never do, but that simply isn’t true. For the most part, your money is likely saved and/or invested with a firm that has multiple watchdogs. However, let me outline a few things you should watch out for.

The truth is there are unethical people both inside and outside the regulatory system. During more than a decade of working with dentists, it has become clear to me that dentists are the target for financial scams.

I don’t know if it happens more than with the regular population, but it feels that way.

Often, in my opinion, the scam operates outside of the regulatory environment.

1. In 2011, the Toronto Star reported that a group of Ontario dentists lost as much as $17,000,000 in a Ponzi Scheme.

2. Bernie Madoff stole between $20 and $50 billion from investors.

3. In Canada, Earl Jones was sentenced to 11 years in prison for stealing $50,000,000 from investors.

Care must also be taken in other situations. For example, I believe that if you invest or buy an investment product and end up with less money than you started out with, then you should take another look.

A recent Morningstar report entitled “Global Fund Investor Experience” says mutual fund fees in Canada are too high. The report compares total expenses of funds available to investors across 22 countries and finds that Canadian fees are the highest for equity funds. Canada received the lowest grade of all countries surveyed.

We have reviewed dozens of new clients’ portfolios over the past few years that are guaranteed to earn less than what they pay in management expense ratios.

One bond fund had an average yield of 2% but had

management fees over 2.25%!

What to do: Dentists are conscientious about avoiding conflicts of interest in their practices, but for some reason don’t insist on the same standard for their advisors.

Transparency is key in any relationship where you are receiving financial advice.

Be sure to work with someone who operates under a strict compliance umbrella. There are many, many regulations and regulatory bodies in place to protect investors and consumers. Confirm that your advisor works with one or all of them.

For example: The Investment Industry Regulatory Organization of Canada (IIROC) IIROC is the national self-regulatory organization which oversees all investment dealers and trading activity on debt and equity marketplaces in Canada.

Created in 2008 through the consolidation of the Investment Dealers Association of Canada and Market Regulation Services Inc., IIROC sets high quality regulatory and investment industry standards, protects investors, and strengthens market integrity while maintaining efficient and competitive capital markets. IIROC carries out its regulatory 4 14

‘‘

The Professional Advisory

Vo l. 52 : NoV ember 2011

Be sure to work with someone who operates under a strict compliance umbrella. There are many, many regulations and regulatory bodies in place to protect investors and consumers.

Confirm that your advisor works with one or all of them.

responsibilities through setting and enforcing rules regarding the proficiency, business and financial conduct of dealer firms and their registered employees and through setting and enforcing market integrity rules regarding trading activity on Canadian equity marketplaces.

The Canadian Investor Protection Fund (CIPF) The CIPF is a not-for profit corporation created by the Canadian investment industry in 1969 to protect investor assets in the event of a CIPF member’s bankruptcy. The CIPF is funded by CIPF members which consist of approximately 200 investment dealers

‘‘

in Canada. Clients’ accounts are protected by the Canadian Investor Protection Fund within specified limits. A brochure describing the nature and limits of the coverage is available from them upon request.

Keep it simple and don’t get greedy. You made your money practicing dentistry. You had to work hard for it. Money does not come easily, so don’t pursue strategies that sound too good to be true. The Ontario dentists who lost $17,000,000 were told they were guaranteed a 20% return. This is not realistic, so use common sense. If something seems too good to be true, it is! 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.

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”.