The Professional Advisory
72
FOR DENTAL PROFESSIONALS
VOL. 72 November 2015
The Five “Cs” of Success
ProfessionalAdvisory.ca
TPA 72.indd 1
15-10-28 9:44 AM
Contents
3
The Five “Cs” of Success
4
The Lease Summary: An Essential Tool for the Tenant
Ralph Crawford BA., DMD
Ian D. Toms B.Sc. (Hons)
6
Leadership Within The Emerging Complex Entity Called “The Dental Office” Dr. Ron Weintraub
8 10 12 14
Making Lemonade from Losses
David Chong Yen CPA, CA, CFP Louise Wong CPA, CA, TEP
Good, Better, Best – The Market has Spoken Colin Ross MBA
Non-Competition Agreements
David E. Rosenthal BA., LL.B
Biographies Ralph Crawford is an Honours Graduate from the University of Manitoba and has enjoyed a varied dental career. Prior to being editor of the Canadian Dental Association Journal from 1989 to 1997, he operated a Winnipeg private practice concurrently with being a clinical instructor at the University of Manitoba. He served as President of both the Manitoba Dental Association and Canadian Dental Association. Ian D. Toms is a nationally recognized real property lease consultant with over 27 years experience. He is considered an authority on tenancy issues, lease features, facilities and technicalities, and the art of tenancy negotiation. Ian has drafted and negotiated thousands of lease arrangements for national retail and medical professional tenants in 16 states and 8 provinces, with a specific emphasis on the GTA.
Dr. Ron Weintraub is the founder of Innovative Practice Solutions (IPS) and former owner and founder of Bayview Village Dental Associates and Downtown Dental Associates. He practiced dentistry from 1963-2004 and has consulted on behalf of major dental suppliers, manufacturing companies, as well as individual dental offices for over 20 years. In 2004, Ron gave up clinical practice in order to focus solely on Practice Management. David Chong Yen and his chartered accounting firm currently advise hundreds of dentists and healthcare professionals on tax, estate and financial planning, valuations and accounting. David obtained his Bachelor of Arts degree from the University of Toronto, attained his Chartered Accountant’s Designation while working at an international firm and has subsequently completed the CICA In-Depth Tax Courses.
Colin Ross is a Partner 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: colin.ross@ppsales.com
The Canadian Dollar
Mark McNulty BA, CFP®, CM® David Rosenthal is a senior lawyer whose law practice is devoted to business, corporate and healthcare law for dentists. David advises dentists on a broad range of legal matters, with particular emphasis and legal advice on purchases and sales of practices, corporate reorganizations and professional corporations. David also speaks frequently about such matters, including guest lectures at the faculties of dentistry. Mark McNulty is President of McNulty Group, a firm responsible for managing $250 million of Ontario dentists’ retirement savings. McNulty Group helps professional families transition from a life of successful practice to a stress-free retirement by using a holistic approach of practice and personal retirement planning. Mark is the author of The Transition Coach 2.0–A Canadian Dentist’s Guide to a Perfect Retirement, and The $6 Million Dentist: Successful Succession in 7 Modules.
The Professional Advisory | VOL. 72 November 2015
TPA 72.indd 2
15-10-28 9:44 AM
3
“The Professional Advisory consists of a group of six independent professionals who provide services to the dental profession, each of whom 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.”
Notes from the editor:
The Five “Cs” of Success Ralph Crawford BA., DMD crawford@dccnet.com
N
ot long ago I was clearing out and shredding a lot of being dramatically different from five to ten years ago, and material from an overflowing filing cabinet and came it’s not hard to see that the application of “The Five Cs” has across a memo relating to what I’m guessing was a dental a great influence on the adoption of an effective leadership practice course I had attended many years ago. There was style. David Rosenthal deals with Non-Competition Agreements no specific indication what course it was, but the memo read “The Five “Cs” of Success in Conducting a Dental Prac- which arise when purchasing or selling a practice, entering tice” and listed the five of them: Comprehensive, Continu- partnerships or cost sharing agreements, and when entering ous, Competent, Compassionate and Coordinated Care. My associate agreements, whether as a principal or an associate. geriatric mind is still struggling over the origin of the memo, It isn’t difficult to see that his “Five C” Care approach can but looking back over the many years of practice, I remem- make that particular important time much more successber that every now and then I got to thinking, “Hey, is this ful. Mark McNulty’s article is titled The Canadian Dollar. And who do you know today that isn’t someway or another following “The Five Cs”. When looking at life in general, whatever task one is un- affected by our Canadian dollar’s present status. Included dertaking, consideration of the “The Five Cs” is certainly a in the article is a graph showing the Canadian dollar value positive action to move forward. Being Comprehensive, versus the US value over 45 years and it isn’t hard to imagContinuous, Competent, Compassionate and Coordinated ine how much “Five C” hard work Mark and his office put can only lead to doing the best you can to make sure the task in to deal with the complexities of today’s dollar value. Colin at hand not only benefits those to whom you are responsible, Ross’ Good, Better, Best– The Market Has Spoken deals very but in the long run will have strong influence in achieving effectively with dental practice values and concludes that “It your own Success. As we look at this particular issue of The is certainly not impossible to move from good to better and Professional Advisory – and all previous issues – one can’t maybe even to best, but it does take insight, planning and help but feel that “The Five Cs” plays an important role in time”. And isn’t insight, planning and time integral to “The bringing success not only to one’s professional practice but Five Cs” road to success. Yes, after a fair amount of time and work the filing cabinet to the well-being of life itself. Take Ian Toms’ The Lease Summary: an Essential Tool is much less crowded and better organized. Despite the comfor the Tenant. As it reads, leases can be quite complicated, puterization of today isn’t it interesting how all that paper but Ian’s attention to “The Five Cs” sorts them out so they just keeps coming in and piling up? But the good thing of the are comprehensive to all involved. Not every decision is a organizing task is the memo from the past that reminded me winner says David Chong Yen and Louise Wong but with of The Five “Cs” of Success in Conducting a Dental Practice” – Comprehensive, Continuous, Competent, Compassionate, their “Five approach to capital, non-capital ColinC” Ross is a Partner in Professional Practice and Salesallowable Ltd. (www.ppsales.com), which specializes in the valuation and sale of dental practices. He canlosses be reached at (905) 472-6000 or 1-888-777-8825 e-mail at: colin.ross@ppsales.com Coordinated Care. business investment it’s like Making Lemonade from orand Losses. Ron Weintraub’s opening sentence in his Leadership Within the Emerging Complex Entity called “The Dental Office” refers to the evolving contemporary dental facility VOL. 72 November 2015 | The Professional Advisory
TPA 72.indd 3
15-10-28 9:44 AM
4
The Lease Summary: An Essential Tool for the Tenant Ian D. Toms B.Sc. (Hons)
A
s a busy healthcare provider, the last thing on your mind is your premises lease. The problem is that since your premises lease controls the space where you provide the service, not understanding or not managing your lease and related obligations can and will lead to expensive and time consuming situations. You can easily avoid disaster by having a handy and convenient summary of your lease obligations to refer to from time to time. You likely receive a monthly investment portfolio snapshot; why not have a handy lease summary? Know that your landlord tracks your lease information and manages its position on a lease summary; it’s an industry standard that just makes sense. If you are a tenant without a lease summary, you are giving your landlord an opportunity to take advantage of you. A lease summary helps you manage your affairs over time enabling effective and timely decision-making. Your summary should provide you with bottom line lease information extracted by an expert after careful consideration and integration of all your lease documents, enabling you to easily review all relevant lease information without taking the time to search, read through and understand each and every clause of your lease. Your properly organized summary will enable quick, convenient and appropriate decision making, even when your lease is very complex. Your lease summary should be written in plain, easily read and understood English, and provide you with the key financial, business and legal information as well as any unusual lease provisions. Your lease summary should also point out those features missing from your lease which would be appropriate to protect your position. Your lease summary should keep things short and simple (two to five pages), without missing any nuance or subtle detail. Summarized lease information should be based on your individual need and let you know who, when and what to do about each issue requiring your attention. Each lease is unique; therefore each lease summary is unique. To give you an idea of some of the terms and condition immediately available to you in your lease summary, consider the following list of details possible in a lease summary.
Lease term
• commencement date • expiration date • number and length of renewal or extension term options, and associated time lines • how the options to renew or extend are administered Rent
• net or base amount, per lease year and per square foot • additional rent amount, per lease year and per square foot • how base rent should be managed • additional rent inclusions and exclusions • how additional rent should be managed • rent deposit amount Premises
• address • area measurement definition and certification • use of ancillary areas including parking • use of premises and exclusivity Insurance
• landlord insurance obligations • tenant insurance obligations Landlord options to
• terminate the lease when demolishing the building • terminate the lease as an alternative to assignment • relocate the premises • interfere with lease assignment Tenant options to
• relocate the premises • expand the premises • terminate the lease
The Professional Advisory | VOL. 72 November 2015
TPA 72.indd 4
15-10-28 9:44 AM
5
Lease assignment
• sharing with others • subletting to or with others • financing against premises assets • lease assignment when the practice is to be sold Tenant
• who or what is the “tenant” • who is a guarantor, or an indemnitor and what are the related obligations • can the tenant assign the lease and if so on what terms and conditions Landlord
• who is the landlord • who should you call about tenancy issues • is the tenant protected if the landlord sells the property
not understanding or not managing your lease and related obligations can and will lead to expensive and time consuming situations.
Additional provisions
• are you restricted by a radius provision • are there any missing or conflicting provisions • what are the landlord and tenant notice provisions • do you have the ability to install appropriate signage • what are the landlord representations and warrantees • if the property is expropriated, who gets the award • are you required to participate in a merchants association or pay fees • are there any environmental provisions or LEED (green building rating system) requirements • who pays utilities and on what basis • what are the landlords administration fees • who pays for heating, ventilation and air conditioning replacement Contemporary lease documents are very complex; reading and understanding them properly takes many years of train-
ing and experience. If your summary is wrong, or misses or misinterprets any important information, you will make the wrong decision. My clients have enjoyed the benefit of a lease summary for many years, and always have the option to call for a consult concerning any aspect of their lease and their position from time to time. We also input important lease term dates in our computerized data base system and let our clients know well in advance of any important decision making time. Each tenant should have a professionally and properly prepared lease summary immediately available for quick reference. Call me now to further understand the benefits of a lease summary and how my services can protect your interests.
Please send comments to
Mr. Toms has been creating and preserving realty leasehold value since 1986 and can be reached at (705) 743-1220, by e-mail at ian@realtyleaseconsultant.com, or through his web site at: www.realtyleaseconsultant.com.
VOL. 72 November 2015 | The Professional Advisory
TPA 72.indd 5
15-10-28 9:44 AM
6
Leadership Within The Emerging Complex Entity Called “The Dental Office” Dr. Ron Weintraub
T
ypically, an evolving contemporary dental facility is dramatically different from the norm of five to ten years ago as predicted from a healthcare and business perspective. “Change brings opportunity” according to businessman Nido Qubein and change is what we need in the leadership of the current emerging complex entity of the modern dental office.
THE NEED FOR EFFECTIVE LEADERSHIP STYLE Large multi-provider entities often include a complex support group of administrators and treatment professionals. In addition, some larger entities offer specialty services in-house that, more often than not, require a leadership style that can deal with the burgeoning numbers. Among the departments are the following: Administration
1. Office Manager 2. Treatment Coordinators 3. Re-care Coordinators 4. Back-Up Coordinator (sometimes counter-productively referred to as the floater). Professional
1. Restorative Hygienist 2. Re-care Treatment Hygienist 3. Level 1 and Level 2 Clinical Assistants 4. Denture Therapist This level of staff/employer interface requires a team approach to patient care, and a successful team needs a designated team leader. It behooves us to have the owner/operator dentist delegate the various responsibilities in the role of team leader being careful not to deflect from his/her crucial clinical responsibilities. The structure and protocols of the office should be such that the leader (dentist) uses the art of appropriate delegation and as the practice leader, discharges responsibilities. Based upon their behaviour, different types of dentists apply their leadership style to the variety of challenges pre-
sented in carrying out the mantel of leadership. For example, micromanagers operating strictly as a boss as opposed to a leader must be constantly reminded of the appropriate role as a leader. We often provide a strategically placed chart in their private office as a reminder of the characteristics of a “Boss” and a “Leader”.
ONE STYLE OF LEADERSHIP: THE ABDICATOR PERSONALITY One ineffective leadership style we don’t recommend is the “Abdicator”. This designation carries with it significant long term danger for leaders of the practice. The risk lies in the fact that such leaders are not sufficiently knowledgeable of the operation of the office beyond the confines of the clinical area that they see as their domain. When issues arise, “Abdicators” commonly respond “I know nothing about this matter; just have Zelda/Ruth/ Carey look after it and please don’t bother me”. The hazards of this scenario are overly empowering by giving long-term employees, who are knowledgeable in connecting with patients, carte blanche to decide what is the best interest of the practice. Often the decisions coincide with what may appear best for the individual personality and skill set of the particular staff member. Procedures tend to get institutionalized into forming a “that’s how we always do it” dental office. Often, most of the on-going indigenous protocols are unwritten and recorded only in the mind of the incumbent administrator. Should he/she become ill or leave for some reason, no formal description is in place for new hires to build on. It’s a case of them “not knowing enough to know what they don’t know”. Their concept of the expected contemporary norms of customer service may well be years out of date. All information with operational problems is filtered through the overly delegated office staff and leads to justification for the status quo.
The Professional Advisory | VOL. 72 November 2015
TPA 72.indd 6
15-10-28 9:44 AM
7
BOSS
LEADER
Drives employees
Coaches employees
Depends on authority
Depends on good will
Inspires fear
Generates enthusiasm
Says, “I”
Says, “We”
Places blame for the breakdown
Fixes the breakdown
Knows how it is done
Shows how it is done
Uses people
Develops people
Takes credit
Gives credit
Commands
Asks
Says, “Go”
Says,” Let’s go”
STRATEGY TO MOTIVATE AND IMPROVE ISSUES: PERFORMANCE METRICS An effective leader’s introduction of performance metrics into the everyday operation goes a long way to motivate and ameliorate many issues. The purpose of performance metrics is to quantify and observe the various functions required in job descriptions and the particular task required of the function; for instance, for the Re-care Coordinator, the sheet or computer page has a section on any given date listing the following: a. The number of calls made to attempt to maximize the hygiene schedule; b. The number of patients actually reached and as a result, those who booked their appropriate hygiene visits; c. Those who said they would call back, thus giving a list of potential fill-ins for short term cancellations; d. Patients who indicated they would not be returning and reasons for not doing so provide an opportunity for the hygienist to contact and recapture the former patient. Established performance metrics are quantifiable based on expected work outputs and serve as a self-motivating document for the Hygiene Coordinator. It allows staff to show that they were working hard and were able to fill the schedule for the weeks ahead. In addition, it allows leadership to comple-
An effective leader’s introduction of performance metrics into the everyday operation goes a long way to motivate and ameliorate many issues.
ment the Hygiene Coordinators when they do an exemplary job and to find ways of rewarding them. In addition, it sets the standard for what is expected from the next person who accepts the responsibility of the Hygiene Coordinator role. Leaders’ use of performance metrics creates a concrete database that is readily available for evaluation, thereby producing an empowering effect and positively affecting the ongoing growth of the success of the practice. Consequently, the ability of leaders to accept accountability and praiseworthiness of the team lies in the adoption of an effective leadership style.
Please send comments to
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.
VOL. 72 November 2015 | The Professional Advisory
TPA 72.indd 7
15-10-28 9:44 AM
8
Making Lemonade from Losses David Chong Yen CPA, CA, CFP Louise Wong CPA, CA, TEP
N
ot every business or investment decision you make will turn out to be a winner. That doesn’t mean you can’t salvage some value from your losses. Understanding what losses are available and how to use them will allow you to make the most out of a bad situation. Remember the Canada Revenue Agency (CRA) takes their share when you have gains, why shouldn’t you be able to benefit from your losses. There are several types of losses with each having their own rules. Let’s take a look at some of the common losses you may have heard of.
CAPITAL LOSSES A capital loss arises when you sell a capital asset at an amount less than what you originally paid for it. Capital losses include investments such as bonds and stocks and other items that have a long lasting nature. This doesn’t include the sale of products or inventory as part of your regular business at a loss. Capital losses are restrictive in nature. You can only claim 50 per cent of the capital loss for tax purposes and they can only be claimed against a capital gain and not other sources such as employment, rental or dividend income. In some cases, you can run into a situation where you have a large capital loss, but cannot use it to reduce your taxes because you have no capital gains to apply it against. Fortunately, in these situations, you can either carry forward the loss indefinitely until you have a capital gain to offset it against or claim it against capital gains reported in the past three years. You also cannot claim a capital loss on depreciable properties. This would include real estate, vehicles and equipment. For example, if you sell a rental property at a loss of $100,000, you won’t be able to claim a capital loss on the building portion. Finally, towards the end of the tax year, many advisors will encourage you to sell stocks which are in a loss position to offset any capital gains you had during that same year. This
strategy can help you by eliminating taxes that would have otherwise been payable. However, keep in mind for those stocks which you would like to buy back, there is a special rule which prevents you (or your spouse) from buying the same stock back within 30 days of the sale. For example, on December 15th, you sell stock X for a loss of $100 in order to claim a capital loss. You still believe it will appreciate in value over time and so you buy stock X again on January 3rd of the next year. Special superficial loss rules disallows you from claiming that capital loss since you purchased it within 30 days of selling it at a loss. You end up with no tax savings, additional transactions costs to sell and purchase the stock and your portfolio is in the same position as it was before. In this example, if you purchased the stock before November 15, 2015 or after January 15, 2016, you would be able to claim the capital loss.
NON-CAPITAL LOSSES A non-capital loss includes losses from business, employment or rental property. For example, if you are opening a dental practice, you may have a loss for the first two years during the initial start-up phase. Non-capital losses are less restrictive. They are 100 per cent deductible and can be claimed against other sources of income. They can also be carried back three years and carried forward up to 20 years to offset past and future income.
ALLOWABLE BUSINESS INVESTMENT LOSS (ABIL) An ABIL is a special type of capital loss which has hybrid qualities of both capital and non-capital losses. Similar to a regular capital loss, only 50 per cent of an ABIL can be
The Professional Advisory | VOL. 72 November 2015
TPA 72.indd 8
15-10-28 9:44 AM
9
claimed. The difference however is that an ABIL can be used against other sources of income similar to a non-capital loss. Just like capital losses, ABIL’s arise when you sell shares or loans/bonds for less than you originally paid. The key difference is that the shares and or loans/bonds being sold must be that of a small business corporation. Small business corporations are Canadian controlled private corporations in which at least 90 per cent of the assets are used in an active business in Canada. In other words, the corporation cannot be an investment or a rental company. As an example, perhaps your friend proposes an investment opportunity for you to either buy shares of his corporation or loan money to it which is currently building a ski resort. After five years of warm winters, the ski resort has had to close down and the money you invested is nowhere to be seen. In this scenario 50 per cent of the money you put in could be claimed as an ABIL and offset against your taxable income.
TIPS ON LOSSES Wait at least 30 days before buying an investment back which was sold at a loss. If you have a large capital gain in the year, consider selling other investments that are in a loss position to reduce your taxes. Carry back your losses to get a refund for a previous year. This puts money in your pocket immediately. If you have invested or loaned money to another small business and are not expecting to get anything back, speak to your accountant about claiming an ABIL.
Remember the Canada Revenue Agency (CRA) takes their share when you have gains, why shouldn’t you be able to benefit from your losses.
No one likes to make bad investments, but you don’t have to take on the entire burden yourself. In some cases, you may get back up to 50 per cent of your loss in tax savings. This allows you to make the most out of a bad situation.
Please send comments to
This article was prepared by David Chong Yen, CPA, CA, CFP and Louise Wong, CPA, CA, TEP of DCY Professional Corporation Chartered Accountants who are tax specialists and have 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 / louise@dcy.ca. Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.
VOL. 72 November 2015 | The Professional Advisory
TPA 72.indd 9
15-10-28 9:44 AM
10
Good, Better, Best – The Market has Spoken Colin Ross MBA
A
pproximately three years ago, we wrote an article in Volume 59 of The Professional Advisory entitled What Will Happen to Dental Practice Values in the Next 10 Years? In that article we cited key market factors that affect the market, and tried to predict how these factors will affect practice values. The key factors mentioned included; the economy, aging population of dentists, and the significant influx of new dentists. The premise of the article was that because of the aging dentist population there would be an increased supply of practices for sale in the market. In addition, because of continued new dentist graduation and immigration, and a strong economy, there would also be continued demand for those practices. The normal conclusion based on supply and demand economics should have been that if the above were to occur, total practice prices would fall. However in our article, it was our conclusion that the increase in supply of practices would not result in an overall collapse of prices, but instead the market would segment itself resulting in a greater differentiation of market prices between different practices. In our article we said that strong “high demand” practices would continue to increase in value, and the weaker or “average demand” practices would decline. Based on our recent experience it seems that this forecast is being realized. The market continues to stay very strong for the high demand practices. However we see that there has been a decline in the demand for average or below average practices. This segmentation of practice values has very significant implications to many dentists, and it is important that dentists realize how their practices measure up. In our experience the high demand practices generally have similar characteristics. These characteristics include: 1. Location: Main floor location with good access and visibility. The practice will have a long term lease with some protection versus competition, and ideally, be located in a growing community. The good news is that rural and small town practices, are gaining popularity as they generally have less
competition and more patients. 2. Patient count and demographics: Usually high demand practices have more than 1,200 active patients, good new patient flow, no specific ethnicity, and production that is reproducible. (A conservative Preventive and Restorative orientation versus lots of Specialty procedures). 3. Practice Operations: Efficiently run practice with good staff, strong hygiene orientation, collection of co-payments, and updated facilities (not new, but clean, current, and with some newer technology) On the other side the practices that will experience weaker demand are as follows; 1. Location: Not on the main floor, low visibility, leases with demolition clauses, no exclusivity in the building or plaza, or a highly competitive area. 2. Patient count and demographics: Usually low demand practices have less than 800 active patients, low new patient flow, large proportion of ethnicity, and or perform lots of Specialty procedures. 3. Practice Operations: Average practice performance, problems with co-payment collections, and older or run down facilities. Those practices that fall into the former category will be in good shape when it comes time to sell. Those in the latter category will benefit from some enhancements in how the practice is run in order to reposition the practice to obtain good value. 1. Location: While we cannot change the location of a practice, the current market is asking for good exposure. If a practice is not in a high demand location, or has lease issues, this may result in the need to merge the patients into another nearby practice.
The Professional Advisory | VOL. 72 November 2015
TPA 72.indd 10
15-10-28 9:44 AM
11
2. Patient count and demographics: smaller practices are less attractive as they don’t have strong cash flows and do not provide full time dentistry. If a practice has significant ethnicity, there is a concern that there needs to be a specific dentist to take over that practice. In these cases, a growth strategy should be implemented to include all potential patients. 3. Practice operations: This is an area that can be managed. The practice can be improved operationally. Co-payments should be collected, and practice performance should focus on preventive treatments and patient education. In addition, although it isn’t a good idea to completely renovate, the practice facilities should be updated, clean looking, and the adoption of base technologies can be implemented. In the cases where a practice is in the average or low demand category the seller must be realistic about what they have. If the practice cannot be improved prior to selling, they must be willing to accept that the market conditions may limit their ability to sell their practice at a price that meets expectations. Naturally the best practices attract multiple offers and therefore the best prices. Those that are not in that category would be wise to seek assistance in preparing their practice for sale years ahead of their closing date. It is certainly not impossible to move from good to better and maybe even to best, but it does take insight, planning and time.
The market continues to stay very strong for the high demand practices. However we see that there has been a decline in the demand for average or below average practices.
Please send comments to
Colin Ross is a Partner 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: colin.ross@ppsales.com
VOL. 72 November 2015 | The Professional Advisory
TPA 72.indd 11
15-10-28 9:44 AM
12
Non-Competition Agreements David E. Rosenthal BA., LL.B.
A
non-competition agreement (Agreement) provides the dentist shall not compete or practice dentistry for a certain time period within a certain geographic area. Such an Agreement arises when purchasing or selling a practice, entering partnerships or cost-sharing arrangements, and when entering associate agreements, whether as a principal or associate. This article will deal only with points to consider in the non-competition aspects and not with the non-solicitation of patients and staff. These comments are intended only for general practitioners since there are different rules that may apply for specialists. The public policy starting point is that such Agreements are considered a restraint on a person’s ability to earn a living within his or her chosen profession. On that basis such Agreements are viewed as undesirable in a free market system. Therefore courts of law do not like supporting such Agreements, unless the Agreement is reasonably necessary for the protection of the recipient in that particular fact situation. If the Agreement is determined to be not appropriate in the specific circumstances, the courts could strike down the Agreement and determine the Agreement to be invalid and unenforceable in law. An Agreement will only be enforced if it is reasonable both as to the area of non-competition and to the amount of time the Agreement will be in force. That area may be only a few kilometres in a densely urban practice or 15 kilometres or more in a rural setting. The amount of time the clause remains in effect is important. In the case of new associates, they are very likely no threat at all if they leave within a trial period of three months, and generally only a minor threat if they leave within one year. For an associate agreement, consider a “phased-in” approach where the non-competition clause will not apply if the associate agreement is terminated within the first three months, will apply for one year after the associateship ends
if the termination occurs within one year, and two years thereafter. After a year or two away from the practice, a departing associate dentist will not likely be any real threat to the principal. Therefore, a two year covenant in most cases is usually adequate for an associate agreement. Unfortunately a common situation is when a principal dentist hires an associate but has no written associate agreement. The associate works at the practice for years, develops loyalty of patients, and then departs to work at another nearby dental practice. Naturally such loyal patients leave the practice and follow the associate to his/her new practice. A properly drafted agreement, which would include a non-competition covenant, could prevent such situation and protect the principal dentist’s goodwill. The courts tend to permit a longer period of time where the dentist giving the non-competition covenant has sold the practice for a substantial sum of money, versus a shorter time period where the dentist was solely an associate. Typically five years is the maximum time, but only to be used in cases where the dentist is selling the practice. The most valuable asset a dentist has is goodwill, being the intangible value of a dental practice including the patient list and files. In almost every purchase and sale transaction for a dental practice, the value of goodwill exceeds the combined value of all other practice assets. Imagine the scenario where a dentist purchases a large dental practice for $2,000,000, and goodwill is valued at 75
The Professional Advisory | VOL. 72 November 2015
TPA 72.indd 12
15-10-28 9:44 AM
13
per cent of such purchase price. As part of the typical transaction, the vendor dentist signs an Agreement not to compete. A dispute arises and the vendor successfully challenges the validity of the Agreement. The courts rule the Agreement is invalid and unenforceable in law against the vendor dentist. In other words, the vendor dentist is not bound by the Agreement. In such a situation there is nothing to prevent the vendor dentist from opening up a new dental practice nearby the practice just sold. If the sold practice has been established for many years and patients are loyal to the vendor dentist, patients may gravitate back to the vendor dentist at his newly established practice nearby. The result for the purchaser is the value of the goodwill just purchased from the vendor for $1,500,000 diminishes rapidly. The Agreement, whether a stand-alone agreement, or as part of an associate or other agreement, will be enforceable if it is reasonable in the particular circumstances. Consult your lawyer to ensure the Agreement is drafted properly and reasonably.
An Agreement will only be enforced if it is reasonable both as to the area of non-competition and to the amount of time the Agreement will be in force.
Please send comments to
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.
VOL. 72 November 2015 | The Professional Advisory
TPA 72.indd 13
15-10-28 9:44 AM
14
The Canadian Dollar Mark McNulty BA, CFP®, CIM®
I
t sometimes feels to me that every Canadian I know is a currency speculator. In some ways, we all are. We need US dollars to travel and if you’re like me and the families our firm works with, buying US dollars is an annual transaction. Lately, that trade has been a painful one. Approximately one year ago, the Canadian dollar was worth US$0.92. At the time of this writing it is worth US$0.75, a decline of approximately 18 per cent. The good news? Many portfolio managers, our firm included, have a healthy weighting in US stocks. Therefore, while the US stock market is down in 2015, our exposure has enjoyed double digit gains resulting from the currency. The question now is, “Do we take profits?” This is what I am talking about: let’s assume a $10 million portfolio consists of a 25 per cent weighting in US equities, all in the SPYDER S&P 500 ETF (SPY), for a position of US$2,500,000. Using 2015 year-to-date returns, the SPY is down about 3 per cent, leaving the US equities valued at US$2,425,000. However, the Canadian dollar has dropped 12 per cent and the US dollar has gained 13 per cent, relative to each other. This means that, in Canadian dollar terms, the US equity position gained about 10 per cent. The initial US$2,500,000 was worth C$2,905,750 at the exchange rate that existed at the beginning of the year. The value today of US$2,425,000 equities is worth C$3,198,810 at today’s exchange rate. That is a great profit. To help us with the decision of whether to capture the profit by converting some or all of the currency back to Canadian, we looked at the long term cycle of the Canadian dollar relative to the US dollar because at extremes it can be profitable to protect portfolios against an adverse currency move. Consider our portfolio example in the context of the chart below. The chart shows the Canadian dollar value of the US dollar over the 43 years 1972 to 2015. Note that the values in the chart are expressed in terms of how many Canadian
dollars it takes to buy a US dollar, so the highest point of 1.6 in 2003 means it cost C$1.60 to buy US$1.00. This is equivalent to a low $0.62 Canadian dollar. The chart shows that the relative value of the Canadian dollar fluctuates between par or 1.0 ($1.00) on the high side and between 1.4 and 1.6 ($0.65 and $0.70) on the low side. The important thing to note is the long term nature of the trends. The two long downtrends (when the Canadian dollar depreciated) between 1976 and 1986 and between 1992 and 2003 were about 10 years in length. The two main uptrends (Canadian dollar appreciating) were shorter, about 5 years long. It is also worth noting that there are no extended periods of time after 1976 when the dollar was stable. We are currently in the third depreciating trend from the most recent highs, when the Canadian dollar was trading above par with the US dollar in 2011. If history is any guide, it appears that this downtrend will continue for a while longer, but whether the Canadian dollar will eventually reach $0.70 or $0.65 is fodder for cocktail parties. At some point, another long trend will emerge where the Canadian dollar will begin appreciating back to par. For this reason, we are taking two approaches to crystalizing the gain we have enjoyed over the past four years. The first move is client specific. Most of the families we work with have annual spending in US dollars. In other words, they either live in the US for part of the year or have travel expenses in US dollars. For that reason, we are removing three to
The Professional Advisory | VOL. 72 November 2015
TPA 72.indd 14
15-10-28 9:44 AM
15
CANADIAN DOLLAR
Source: www.tradingeconomics.com
four years of costs from the portfolio. If a family has predictable costs of $20,000 USD each year, then we are removing $60,000 USD from the portfolio to fund these expenses for the next few years. This will save the cost of converting back and forth. Should the dollar remain low for an extended period like it has in the past, then our clients will be well covered. Secondly, from a portfolio strategy perspective we are converting 25 per cent of our US stocks into Canadian dollars. There are currency hedged exchange traded funds that one can buy. This allows us to lock in some of the profits in the currency but maintain our exposure to the US stock market. The current plan is to convert more should the Canadian dollar drop below $0.70. Based on historic trends, as mentioned above, we expect the Canadian dollar to be higher at some point this decade. In the meantime, while your trip south may be more expensive this year, don’t feel too guilty about spending the money. It is likely your overall net worth has increased as a result of the weaker Canadian dollar.
It is also worth noting that there are no extended periods of time after 1976 when the dollar was stable.
Feedback can be sent to info@mcnultygroup.ca
Mark is President of McNulty Group, a firm responsible for $250 million of Ontario dentists’ retirement savings. McNulty Group helps professional families transition from a life of successful practice to a stress-free retirement by using a holistic approach of practice and personal retirement planning. In addition to multiple television and radio appearances, Mark is the author of The Transition Coach 2.0–A Canadian Dentist’s Guide to a Perfect Retirement and The $6 Million Dentist: Successful Succession in 7 Modules.
VOL. 72 November 2015 | The Professional Advisory
TPA 72.indd 15
15-10-28 9:44 AM
Advisory TheProfessional Advisory FOR DENTAL PROFESSIONALS
The The Professional Professional Advisory Advisory
71
63
FOR DENTAL PROFESSIONALS
FOR DENTAL PROFFESSIONALS
VOL. 71 September 2015
VOL. 63 February 2014
Don’t Ask Progressus and You – a going Shall Not forward, Receive
Visit our website at www.professionaladvisory.ca to view current issue and complete archives.
advance
ProfessionalAdvisory.ca
ProfessionalAdvisory.ca TPA 63.indd 1
TPA 71.indd 1
14-01-31 1:52 PM
15-08-26 11:02 AM
Left to right: David Rosenthal, BA., LL.B. Spiegel Rosenthal Professional Corporation Barristers and Solicitors Ron Weintraub, DDS Innovative Practice Solutions David Lind Principal, Broker of Record Professional Practice Sales Ltd. Ian D. Toms, B.Sc. (Hons) Broker of Record Mark McNulty, BA, CFP, CIM Director, Private Client Group McNulty Group, HollisWealth David Chong Yen, CPA, CA, CFP DCY Professional Corporation Chartered Accountants
TPA 72.indd 16 TPA_FP.indd 1
15-10-28 9:44 AM 14-03-26 3:56 PM