Issuu on Google+

The

56 Professional

Advisory For Dental Professionals

IN THIS ISSUE There is Life OuTside The GTA David Lind

seven LeAse invesTMenT TiPs Ian Toms B.Sc. (Hons)

LeGAL MATTers When PurchAsinG A denTAL PrAcTice David E. Rosenthal BA., LL.B.

Be An invesTMenT fArMer Mark McNulty BA, CFP, CIM

fifTy shAdes Of reALiTy Dr. Ian Wexler

TrAnsiTiOninG The successfuL sPeciALTy PrAcTice: A chALLenGe Dr. Ron Weintraub

TrAPs TO AvOid When BuyinG A denTAL PrAcTice David Chong Yen CFP, CA

plus An effecTive GOAL nOTes frOM The ediTOr

Vol. 56 : SepTember 2012


The Professional Advisory

Vo l. 56 : Sep t ember 2 012

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.

An Effective Goal RALPH CRAWFORD BA., DMD Guess what? I just won the lottery! OK, I’m just kidding. But like countless millions of other Canadians I’m naive (stupid?) enough keep on buying tickets at those ultra fantastic odds just hoping that “it’s my turn” to cash in on something like 10, 20, 50 million dollars. But only a short while ago I really did win a prize that in its own way turned out to be quite valuable. We were at a dinner/social event of 40 or 50 people who work together in a community volunteer program and were privileged to have Lydia Johnson as the guest speaker. Lydia, a British Columbia resident, has more than 30 years of experience in the financial services sector and is an outstanding business leader, trainer, coach and speaker. Her after dinner talk was truly inspiring. As part of the evening’s program there was a “draw from a hat” and guess what? For once in my life, I really did win something. The prize was Lydia Johnson’s latest book, The Halapeno Handshake, and although not worth lottery millions, it has its own intrinsic value. Written mainly for business and sales people the entire book is an inspiration for any reader building business and personal relationships. One chapter that particularly caught my attention referred to the acronym STAMP as applied to achieving an Effective Goal with STAMP referring to Specific, Time Frame, Achievable, Measurable, Priority. I hadn’t heard the STAMP acronym before and the more I thought about it the more I was moved to understand that’s essentially what the contributors of The Professional Advisory are striving to accomplish with every publication. Each article in its own way has an Effective Goal of leading its readers in the right direction - STAMP - as they strive towards what’s 1

best in the business of dentistry and life itself. Take Legal Matters When Purchasing a Dental Practice. David Rosenthal clearly lists 11 important points to help purchasers develop an Effective Goal and make informed decisions about the nature of their purchase. And Ron Weintraub sets Effective Goals for taking the purchase of a dental practice one step further when he deals with the Challenge of Transitioning the Successful Specialty Practice. Ian Toms tells us that everyday he speaks to dentists who are overwhelmed by what they don’t know about their lease. His Seven Lease Investment Tips helps set Effective Lease Goals. Again we are talking about practice transitions when David Chong Yen addresses Traps to Avoid when Buying a Dental Practice and the ten points he outlines certainly leads purchasers in the right STAMP direction. When Ian Wexler deals with Fifty Shades of Reality he makes it clear that “It is my role and duty to help guide my clients or prospective clients to make proper insurance purchasing decisions.” Isn’t this establishing Effective Goal setting? In tackling the matter of where to practice, and applying the principles of an Effective Goal, David Lind makes it clear that There is Life Outside the GTA. Why not Be an Investment Farmer? asks Mark McNulty. Mark takes the matter of envisioning what you need, planting dollars in the best fields and tending your fields in good and bad times as Effective Goals in order to reap what you sow. Although I’ll continue to try and win the multimillion lotteries I’m still grateful for my “draw from a hat” win of the Halapeno Handshake. Thankfully, it - and each of The Professional Advisory authors - reminds me of the great importance of establishing an Effective Goal and the application of the STAMP formula. pA

crawford@dccnet.com


The Professional Advisory

Vo l. 56 : Sep t ember 2012

There is Life Outside the GTA DAVID LIND www. ppsales.com

Please send comments to david.lind@ppsales.com. The dental practice sales market has been extremely robust for the last several years. There is more demand than supply which has put upward pressure on prices. It is not unusual in this market to receive multiple offers on practices and in some cases achieve a sale for far more than the appraised value. This is true for good practices, with good balanced metrics, and, most importantly, in a good location in or near the GTA (Greater Toronto Area). For illustrative purposes, I suggest “near” means within 1 to 1.5 hours. For readers outside Ontario, the same can be said for most large urban centres, particularly in Alberta and British Columbia. The reasons for this have been covered in other issues of the Professional Advisory but to summarize, in large urban centres: • There are too many dentists • Dentists are working longer by choice

• Dental school admittance is based on academic achievement • Mature foreign-trained dentists, after obtaining their Canadian license, wish to buy a practice immediately • Investing dentists are buying multiple practices If this is the case, would it not follow that practices a little further from the GTA, for instance, 2 - 4 hours away, would also enjoy the same kind of market but with slightly lower values? Unfortunately the answer is no, particularly in smaller, more remote centres that are not near the 401 corridor. The reasons can be summarized as follows; • Lack of geographic appeal. (already a shortage of dentists in many areas) • Dentists work longer because they have to, or their patients will not be treated • Dental school admittance requirements do not take into consideration the need for dentists in remote communities (as they once did many years ago) • Foreign trained dentists in general wish to locate in large urban centres • Investing dentists avoid remote communities due to the difficulty in getting associates We have recently been involved in a sale in Northern Ontario that I will use for illustrative purposes with a comparable to a very similar practice we sold just west of the GTA.

 

Gross Sale Price Sale Price as a % of Gross Active Patients Asset Value Adjusted after tax net Income Coverage Ratio

Northern Ontario $2,060,000 $1,300,000 63 4,300 $298,000 $577,000 2.36

West of GTA $2,078,000 $2,030,000 98 4,200 $368,000 $454,000 4.77

4

2


‘‘

The Professional Advisory

Vo l. 56 : Sep t ember 2012

‘‘

It is not unusual in this market to receive multiple offers on practices and in some cases achieve a sale for far more than the appraised value.

In the example above you will notice that these two practices are very similar. The production on a perpatient basis of approximately $500 per year is very similar indicating that treatment acceptance is reasonable and the results should be reproducible by most dentists. The adjusted after-tax net income is the income available to the owner after paying all overhead expenses, paying the dentist producers (including the owner) 40 per cent of their gross collections, and after paying the corporate tax that is due on Dentistry Professional Corporation income at the rate of 15.5 per cent. In essence, this is profit from ownership and is the amount that the owner will use to pay for the practice. The $123,000 difference in net income is typical of the difference in profit between remote practices and urban practices. This is due to much higher overhead for things like rent, common area expenses, and staff in urban practices. We are left with the coverage ratio which shows us how long in years it will take the buyer to pay for the practice if he or she were to use all the net income and not have to pay any interest. This is obviously not practical but it does show that you could pay off a practice in a remote community twice as fast as you could near a major urban centre. Stated another way, if you took 10 year loans for the purchase of both practices you

would have approximately twice as much net income left over (after paying yourself as a dentist) in the remote practice. This is a compelling financial argument for considering a practice in a remote community. There are many other benefits in a remote community to be considered as well: • Patients have very high regard for dentists • Patients are extremely loyal • Hours of operation are more reasonable--typically 9 - 5, four days per week. • Your cost of living will be less • Far less crime • Commute to the office is usually measured in minutes not hours • More favourable work/life balance I am aware that there is some awareness of this situation with organized dentistry. I believe the CDA has begun analyzing this as there will definitely be an increase in the shortage of dentists in remote communities in the future. I would urge dentists who are frustrated with the bidding wars that go on in the GTA, or dentists that just want to get out of the “rat-race” and live a more balanced life, to consider the remote communities across Canada as a very viable option. 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

3


The Professional Advisory

Vo l. 56 : Sep t ember 2012

Legal Matters When Purchasing a Dental Practice DAVID ROSENTHAL BA., LL.B. Please send comments to david@drlaw.ca. In volume 55 of The Professional Advisory I wrote about legal matters to consider when selling a dental practice. In this article I will discuss those same issues, except from a purchaser’s perspective. The following points will help purchasers make informed decisions about the nature of the purchase: 1. Price Determination - How is the purchase price determined? For an asset purchase the purchase price is allocated to various assets. A proper valuation of the target practice by a reputable appraiser is critical and will assist in determining asset values. Review the allocations carefully with your accountant to help finalize the purchase price. Keep in mind that the appraisal was prepared for the vendor’s benefit and not for the purchaser, so review the values carefully. 2. Professional Corporation - Typically the purchaser will be a dentistry professional corporation (PC). There can be significant tax benefits when using a PC as the purchaser. You need to ensure the purchaser PC legal documentation and minute book are up-to-date and in compliance with the laws relating to the PC, especially the rules of the Royal College of Dental Surgeons of Ontario (RCSDO). The purchaser PC must have a Certificate of Authorization issued by the RCDSO before it can carry on the practice of dentistry. 3. Assets or Shares: What are you purchasing? There are many tax and legal considerations and differences between a share purchase versus an asset purchase. Hire an accountant and lawyer

4.

5.

6.

7.

who understand the issues when purchasing dental practices. When purchasing assets the purchaser pays all transfer taxes, being Harmonized Sales Tax (HST), on the purchased assets. Those taxes are in addition to the purchase price. Certain classes of assets are subject to HST. Exemptions may be available so that HST is not paid on certain purchased assets. Review the asset allocations carefully with your accountant and make sure you understand the tax implications. Cost Sharing or Partnership - If the vendor is currently in a cost sharing arrangement or partnership, upon closing the purchaser will assume the vendor’s rights and obligations under those arrangements. The purchaser must carefully review these agreements to understand those rights and obligations. If any changes to those arrangements are required, then make such changes a condition to be completed before closing the purchase. Purchase Agreement - This is the definitive legal document so make sure you understand all your rights and obligations, including your representations and warranties, covenants, conditions and indemnities. The Vendor’s Associates - Consider what happens to the vendor’s existing associates on the purchase. Do you want to keep them? If the associates leave the practice, what effect will that have on the practice? Review the associate agreements to determine what non-solicitation and non-competition covenants bind the associates. If changes to those arrangements are required, make such changes a condition to be completed before closing the purchase. Premises Lease - A purchaser (and purchaser’s bank financing the transaction) will require a long term lease in place with renewal options. Review the existing lease as the purchaser is taking over the vendor’s rights and obligations under the lease. If amendments to the lease are required, make such amendments a condition to be completed before 4 4


The Professional Advisory

Vo l. 56 : Sep t ember 2012

closing the purchase. If the purchaser is your PC, will provide that the vendor is responsible to pay the landlord will likely require your personal all staff termination costs during the first three guarantee of the PC’s obligations as tenant under months after the purchase. the lease. 10. Non-competition or Non-Solicitation Covenants 8. Leased Equipment - Review all existing equipment The purchaser should require the vendor to leases. Typically the vendor will be required to agree (i) not to compete within a certain area pay out all such leases in full and transfer the for a certain time after closing, and (ii) not to equipment to the purchaser free and clear of any solicit the patients and staff at the practice. I claims. Or, if the purchaser is taking over the recommend you read again my article in volume #53 ongoing lease payments and obligations under of The Professional Advisory, which discussed nonequipment leases, the purchase price for those competition covenants. assets should be reduced accordingly. 9. Staff - There are potentially large liabilities 11. Vendor associating for transition after closing The purchaser may want the vendor to remain regarding terminations of employees. Typically at the practice to assist in the transition or for a the purchaser will keep all employees and assume longer term association. Think about what your all liabilities for staff. However, the purchaser expectations are after closing. How long do want may not have worked with the existing staff before closing and will not know if certain staff members you the vendor to stay after the purchase and on are suitable or not. Ideally the purchase agreement what basis? 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.

5


The Professional Advisory

Vo l. 56 : Sep t ember 2012

Be an Investment Farmer MARK McNULTY BA, CFP, CIM www.yournumber.ca

Please send comments to mark.mcnulty@raymondjames.ca. Growth is challenging in Ontario this summer. Our hard working farmers battle record-breaking heat, teamed with low precipitation. And while the farmers worry about the fruits of their labour, so too do investors. The ailing global economy, teamed with low interest rates, continue to curtail the growth expected by many investors. Farmers have come to terms with their inability to grow crops - farmers can design optimal conditions for growth, but crops grow themselves. Some years will undoubtedly cultivate better results than others; but irrespective of the year, the formula remains steadfast - envision the need, plant the seeds, tend the fields, reap what you sow. This strategy has yielded the best long-term results, which awards farmers the confidence to stand by their approach, even during years of drought. If you plant your dollars like farmers, you can create conditions optimal for growth and feel confident in your strategy even in bad market weather. Be an investment farmer: 1. Envision the need; 2. Plant your dollars in the best fields; 3. Tend your fields in good and bad; 4. Reap what you sow. Envision the need - know your number Farmers need to know how much (and what type) of crop is necessary for harvest each fall. Before planting any dollars in investments, envision your need, and when you will need the harvest. Leading Canadian pension funds have managed their investment strategy in this way. The method is known as Liability Driven Investing (or LDI). Your LDI might be the number of dollars which will allow you to maintain a lifestyle

of $120,000 annually from age 62 throughout retirement. A lifestyle such as this may require you to accumulate $3.2 million in assets. This may consist of: • full CPP benefits from you and your spouse in retirement; • $1,000,000 in RRSPs • $1,800,000 in tax paid capital and TFSAs (Tax Free Savings Accounts)

This is your number and your liability driven starting point for finding a strategy to get you there. Plant your dollars in the best fields Many portfolios are designed for long-term growth with little consideration for the long-term ends: your annual retirement harvest. Should the retiree require a harvest of dollars during a down market, a portfolio designed for long-term growth may not be able to meet the retiree’s immediate needs, leading to two results: 1. The dollars taken from the portfolios are not grown, increasing the likeliness that your portfolio will be unable to yield the annual harvest required in retirement; 2. Fewer dollars remain in long-term investments to recapture lost growth when good market weather returns. 4 6


‘‘

The Professional Advisory

Vo l. 56 : Sep t ember 2012

Some years will undoubtedly cultivate better results than others; but irrespective of the year, the formula remains steadfast - envision the need, plant the seeds, tend the fields, reap what you sow.

To avoid this, invest as farmers. Farmers preserve some crops in the cellar, and possibly some extra seed in the barn, allowing them to wait out bad weather years and maximize crop yields in good weather. Consider preserving five years of retirement needs in cash and near cash investments for those “rainy days”. This affords you the ability to avoid selling long-term investments in bad market weather today, while sustaining your ability to meet your retirement goals tomorrow. Tend your fields in good and bad - review your investment performance Market conditions may defer growth in some years, and elate you with growth in others. Regardless of the result, tend to your dollars using the same process and rigor in both up and down markets. This will help you make sure your portfolio is structured to meet your LDI goal. Begin evaluating the performance of your portfolio by revisiting your LDI goal; ensuring the target at which you are aiming is still the same.

‘‘

Performance should be measured in terms of the progress made towards your retirement. a. Was performance achieved as a result of the strategy, or execution of the strategy? b. Are there appropriate dollars preserved in shortterm investments? c. Are longer-term investments expected to continue growing, or is it harvest time? d. Will any strategy augmentations better progress the portfolio towards my goal? Reap what you sow Investment farmers create environments that allow dollars to grow: consuming dollars preserved in short-investments in bad market weather, harvesting long-term investments in good market weather, or a combination of both. Be an investment farmer: create conditions for growth, believe in your strategy and tend to your portfolio, and you will be afforded the time to watch your planted dollars grow. pA

Mark McNulty BA, CFP, CIM is the managing principal of the McNulty Group of Raymond James Ltd., member of 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 905-470-6222 ext 209 or mark.mcnulty@raymondjames.ca.

7


The Professional Advisory

Vo l. 56 : Sep t ember 2012

Fifty Shades of Reality DR. IAN WEXLER www.protect-ins.com

Please send comments to drwex@protect-ins.com. As I write this, people in the United States are reeling from a devastating event from a few days ago, a massacre where a lone gunman killed twelve individuals and wounded over fifty in a movie theatre in Colorado. When I look back over the dozens of articles I have written over the years, more than a few have been written shortly after a major tragedy. All of these articles have a common theme, they reinforce the message that you never really know what tomorrow holds, and if you feel it’s important, that you can do something to protect yourself, your family, and your practice…at least financially. In dealing with such tragedies, it is easy to understand that most people look at such events and think “this can never happen to me!” Call it fear, discomfort, procrastination, or just reality avoidance, many simply choose not to deal with issues that have the potential to cause uncomfortable thoughts. It is so much easier to view the world and your future, as I wrote a few articles ago, through rose colored glasses. Given the opportunity, I believe that very few of us would really want to know our futures, for example, how long we have to live, will we incur any serious illnesses, what will be the cause of our demise. No one really wants to know that bad things can or will happen tomorrow. I have personally interviewed over a thousand professionals, mostly dentists, asking them their innermost thoughts on all of the major “what ifs in life?” The responses are all completely different. Some approach it as a clinical exercise. “Yes, I don’t ever intend on becoming really injured or sick. I will work until age 70…sell the practice, retire, and probably live to around 85 based upon my genes.” Some approach

it, as if they have already been told the answer. “My financial advisor told me I am financially secure or will be in five years….and I will never have any financial worries after that regardless of what happens to me.” A number say, “Well, I just don’t have a clue”, while others provide some rationale that any “bad stuff ” that may happen is very far off and that any financial consequences will easily be dealt with. It is always hard for me to hear someone say, “If I die, I don’t need to leave much…my wife will sell the house, take the kids out of private school, and move into an apartment.” Finally, one of the responses that continues to blow me away, and that I just heard from last week from a new dental school grad is, “Premiums are bit expensive and I’d like to work for a while before I buy any coverage.”

When I reflect upon my purpose as an insurance advisor, I feel that it is my role and duty to help guide my clients or prospective clients to make proper insurance purchasing decisions. In thinking about it, this really is not different at all from what you (and I used to do) as dentists. We examine, we diagnose, we treatment plan, and we present choices and options for patients to maximize their oral health before any treatment begins. As you all know, a significant part of this is to educate patients, and to do what is best for them ensuring they understand the risks involved. 4 8


The Professional Advisory

Unlike dentistry however, I cannot tell them exactly what will happen and when in life, if they don’t insure themselves properly. In dentistry, we can inform a patient what will happen and the consequences, if they ignore or do not care for their oral health properly. When discussing insurance planning, my firm’s team of specialists and I make a point of telling prospective clients that there are no right and wrong answers, just educated guesses based upon different snapshots in time. This is the best we can do…the direction and risk level they choose is up to them. The Bottom Line The goal of insurance or risk planning is not to make you or your families fabulously rich if something bad

Vo l. 56 : Sep t ember 2012

happens to you. It is simply to avoid financial hardship! A lot of people, including a good number of insurance and other professional financial advisors, just don’t get this. I hear all of the time that you are better investing your money elsewhere than in life or disability coverage, or even healthcare benefits. This is complete and utter nonsense. Insurance is not a bad thing! People need to get over the fact that it costs money to protect your greatest risks and assets. It’s a major part of your financial life whether you choose to have some or not. You cannot buy or live in a home, drive a car, or practice without it. So don’t avoid it. You need it whether you like it or not…that is the reality! 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 900 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. 9


The Professional Advisory

Vo l. 56 : Sep t ember 2012

Seven Lease Investment Tips IAN D. TOMS B.Sc. (Hons) www. iantoms.com

Please send comments to iantoms@pipcom.com. I speak to tenants everyday who are overwhelmed by what they don’t know about their lease, the real estate market, and the art of leasing property in general. They are bewildered by so many variables, overbearing personalities, industry standard language, and all the unfamiliar strategies flying by - and don’t know where to begin. Typically, these individuals are used to being the expert so they try to charge ahead and unravel their lease issues themselves. That’s unfortunate. The truth is that you have to know what you do and do what you know, and to monkey around with such an important investment as a lease without the skills or training is not appropriate. Here are seven tips to help you manage your lease affairs properly, without actually doing the work yourself. 1. Think of your lease as an investment. a. A carefully managed lease will provide you with operating profit returns on an ongoing basis, and an improved sale value at transition time just like a stock that pays dividends - until you sell it at a high point in the market cycle. b. If you don’t make periodic investments, you won’t grow your asset. Therefore, periodically invest in lease evaluation and negotiation with the goal of making sure your lease has all of the features it should have, such as protected use, ability to assign, and options to extend. 2. Think like an investor. a. Prudent investors know what assets they have to invest, and where those assets can be most strategically placed. Your assets are time and clinical skill. Therefore, invest your time and effort in your practice, not negotiating your

lease, or worrying about real estate issues. If you are interested in lease and real estate matters, learn as much as you can to make educated decisions from the sidelines. b. During lease negotiation, keep matters in perspective. Think big picture. Don’t be fooled by the lure of short term gain for long term pain. Saving 50¢ per square foot in base rent at the expense of an option to renew could cost you the sale of your practice. c. Watch your lease time line; know when to hold, when to make changes to your lease, and when to sell. 3. Remember the “Field of Vision” investment rule. a. If you are looking for short term returns from your lease, don’t sign it. Look for long term stable returns and value appreciation. b. Keep your eye on the far end of your career when you plan to sell your practice and, from the point you intend to sell, always make sure your current term plus options to renew are equal to or greater than your purchaser’s loan amortization period. 4. Watch your investment return in terms of practice profitability instead of fretting about the real estate market. a. Don’t fret about residential real estate values. The residential real estate market has little or nothing to do with your rent value or your day-to-day operation. News flash - we all have only 168 hours in a week - spend these hours on what’s directly affecting you now and don’t borrow anxiety from unrelated matters. 5. Be a conservative investor. a. Focus on a known stable long term return. Don’t gamble. You wouldn’t borrow to invest, why borrow to pay your rent? Lease appropriate space, at an appropriate rate, and take care of yourself and your patients. b. Focus on the profitability of your day to day operation. Increase production by extending your hours rather than relocating to bigger more expensive space. 4 10


‘‘

The Professional Advisory

Vo l. 56 : Sep t ember 2 012

The truth is that you have to know

what you do and do what you know, and to monkey around with such

‘‘

an important investment as a lease without the skills or training is not appropriate.

7. Have realistic investment return expectations. 6. Choose your investment advisor carefully. a. Real estate is a slow process; you need to plan a. Don’t negotiate your own lease. Would you trust me to perform a root canal procedure on you and grow your investment over a long period after an evening seminar and reading a few of time. It can take years to shape and prune a chapters from a book? No way. great lease. b. Don’t be penny wise and pound poor. Saving b. Understand and choose the type of real estate $1,000 in professional fees by retaining the wrong that “fits” your long term needs. Don’t expect top advisor might cost you the ability to sell your practice. end office space to provide ample free parking or c. Choose a person who understands your needs, pylon signage, or that retail space rents for the has significant personal experience and a proven same as office space rent. pA track record of negotiating success.

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.

11


The Professional Advisory

Vo l. 56 : Sep t ember 2012

Transitioning the Successful Specialty Practice: A Challenge DR. RON WEINTRAUB www.innovativepracticesolutions.ca

Please send comments to drronips@rogers.com. In contrast to the ease with which general practitioners in major population centres are able to sell their practices, specialists often struggle. We need an understanding of the relative differences between the transition experience of general versus specialty practices and suggestions to ameliorate this challenge to provide insight in planning the transition. One of the reasons specialists are challenged in finding a participant in the transition process is the smaller pool of qualified candidates available in proportion to the identified opportunities for acquisition. The correspondingly smaller number of some newly minted specialists who are interested in purchasing and the recently observed trend toward specialists procuring associateships within large general group practices negates the option of purchasing a standalone office. Elements of the Transition Experience: General vs. Specialty When transitioning a general practice, location is significant and offers tangible enticement. A good location offers an enhanced potential for walk-ins and new patients. Systems orientation and a highly skilled, dedicated support team also add significant value. Long standing relationships built between the office team and patients can be perceived as transferrable value added as a general practice’s existing patient base offers the promise of future provision of comprehensive dentistry, much of which might already have been planned but not yet implemented.

Moreover, it offers an opportunity to leverage an existing brand and grow exponentially as a result of strategic marketing. By contrast, the transition of a specialty practice is subject to a variety of constraints. Notably, the goodwill value is often affected by a number of factors. Unlike a general practice, location is not an enticement of significant value in a specialty practice. The practice need be accessible only to the referring dentist’s patients. Most specialty practices are driven primarily by professional confrere’s referrals and, secondarily, by satisfied patients. Essentially, a large part of what a specialist purchases is access to these referral sources. The ability of purchasers to identify with and connect to the incumbent dentist’s referrals is crucial to their ability to make a case for purchase. Whereas in a general practice, a patient base is built upon long term associations, in specialty practices, in most instances, long term retention of patients is negligible as most patients are returned to their referring office. Repeat visits for care are unusual. In other words, many specialty office patients have a distinct “shelf life”; for example, Oral Surgery, Endodontics, Paedodontics, and Orthodontics. Because long term retention in such offices is minimal, systems orientation and a highly skilled, dedicated support team do not necessarily add significant value unlike in a general practice. This reality has a strong negative effect on the goodwill value attributed to the expected cash flow value from a predictable future patient base. Another consideration for specialty practitioners is the necessity to align treatment philosophies of the existing specialist with those of the potential purchaser. As training for most specialties occurs at many different institutions, it’s natural that despite similar basics, the treatment emphasis could differ. This presents another potential obstacle for the purchaser who may be looking for a “modality fit” to carry on the practice. 4 12


‘‘

The Professional Advisory

Vo l. 56 : Sep t ember 2 012

One of the reasons specialists are challenged in finding a participant in the transition process is the smaller pool of qualified candidates available in proportion to the identified opportunities for acquisition.

Finally, an influential factor not to be overlooked is the effect on specialty practice purchases and valuations of some general practice offices providing “in house” procedures once commonly referred to specialty facilities. Among them are Invisalign orthodontic procedures, soft tissue management programs, uncomplicated implant placement. Strategy to Improve Marketability of Specialty Practices The strongest antidote to the malaise surrounding the transitioning of specialty practices is the Group Practice. This is a concept that specialists grasped far earlier and more vigorously than their generalist counterparts. Important benefits include the following: • Potential of ownership of multiple locations and the ability for practitioners to introduce themselves to many generalists in the communities that the practice serves • Guaranteed opportunities for long term, ongoing mentorship • Opportunity to form relationships with referrers to the group practice alongside the primary referee • Allowance for a more seamless transition when one member of the group decides to cut back or retire. This strategy envisions offering a partnership in the

‘‘

group as soon as a proper associate relationship has proven mutually beneficial. A written contract to effect a “buy in” should be negotiated prior to the associate starting with the practice and “triggered” at the point that the agreed upon preliminary period has been successfully accomplished in the eyes of both parties. Consideration of the Single Specialty Practitioner The most problematic grouping is the single practitioner, often the possessor of a loyal referral practice with a lucrative financial outcome. A number are mature, interested in selling, slowing down, and possibly associating in the practice. Many of the concerns outlined influence this grouping considerably. Some ideas to consider include bringing on an associate early even if the principal needs to transfer some of the production to accommodate this individual. Another idea is updating and upgrading the operation in order to entice the limited number of potential purchasers. Transitioning of any type of practitioner is a demanding process. Although challenging, specialists who plan ahead and act decisively can succeed in crafting a satisfying transition. Perhaps enlisting the advice of various professionals in the dental field can prove beneficial insight. 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.

13 1


The Professional Advisory

Vo l. 56 : Sep t ember 2012

Traps to Avoid When Buying a Dental Practice DAVID CHONG YEN CFP, CA www. dcy.ca

Please send comments to dcy@dcy.ca. Purchasers of a dental practice should consider the following traps prior to buying a dental practice: 1. What is the average revenue per patient being generated by the vendor? Consider that the average revenue generated by a dentist in Ontario ranges between $600-700 per patient. Where the vendor generates above $1,000 revenues per patient, will you, the purchaser, be able to sustain this revenue level? 2. Is the vendor collecting co-payments? If you purchase this practice and enforce collection of co-payments where the vendor has not been collecting same, then likely a significant portion of the patient base will leave your practice. 3. How many active patient charts are present? Ensure you do a chart count to verify the number of active patient charts, observing the following: a. Are treatment plans provided by the vendor consistent with your clinical philosophy? b. Are there opportunities to serve patients more comprehensively? Example: Are complete oral exams, panoramic x-rays or full mouth series etc., being performed on a frequency consistent with your clinical approach? I consider a patient chart to be active where the patient has been to the practice during the past 12 months and shows a recurring pattern of coming to the practice. 4. Can you afford to repay the loan and feed yourself and family? Ensure that a cash flow forecast on a monthly basis is prepared, which should answer the following questions: a. How much money will you need to not only purchase the practice but operate the practice

after you have purchased it? b. How much cash will you have at the end of each month? c. How much profit will you generate each month? Note: the amount of profit generated could be significantly different than the amount of cash in your bank, since the loan repayment is not an expense and therefore does not reduce profit, but yet reduces the amount of cash in your bank account. d. How long will it take you to repay the loan that you have borrowed to buy the practice? If you need more than seven years to repay the loan, then question the profitability and affordability of this practice. In certain parts of Ontario, where bidding wars for practices occur, ensure that repaying the loan will not leave you and your family with too little cash to live on. 5. Do the numbers presented by the vendor make sense? Ensure that your advisors perform due diligence, identifying any unusual items/exceptions as well as any opportunities for the purchaser. 6. Can the landlord terminate your lease? If your premises lease contains a demolition/relocation clause, this could be a warning signal. A demolition/relocation clause in a premises lease means that the landlord can terminate your lease upon providing the notice outlined in the lease or force you to relocate to another location within the plaza/building. Relocation can be disruptive to your business and this renovation/relocation cost could be a hidden unanticipated cost to you. 7. How long do you have the lease premises for? If the remaining premises lease term and options to renew is not at least five years, (and preferably at least seven), then you will have difficulty securing a loan as your banker will require you to have a remaining premises lease term and options to renew for at least as many years as the banker is lending you the money to buy the practice. This should be addressed by your lawyer. 8. Can you assign or transfer the premises lease to another buyer? If you cannot assign or transfer the lease to another buyer then the value of the practice that you 4 14


The Professional Advisory

are buying could be significantly reduced/impaired. 9. Who is responsible for employee severance/ termination costs? Note: the employees are a significant part of the goodwill inherent in the practice that you are purchasing. However, sometimes purchasers do terminate/sever staff and if so, who will bear the severance/termination expense? This should be addressed by your lawyer.

Vo l. 56 : Sep T ember 2012

10. Will the purchaser retain all of the vendor’s patients? In many cases where an effective transition plan is implemented, purchasers retain 90 per cent or more of the patients. Therefore, when preparing your forecast, please account for or incorporate into the forecast, some loss of patients inherent in any transition from vendor to purchaser. 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. 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 September/2012