Benchmarling and The Smart Practice - Best Practice News Alert 158

CURRENT CIRCULATION: DATE: ISSUE NO:

7475 15th April 2008 158

Welcome to Health & Life’s free email newsletter service. Tell a friend that we would be happy to add their email address to the distribution list. This service is to provide Health and Life’s clients and those who attended our presentations with up to date information on key financial and practice management issues that may affect your practice. Please do not use this as a substitute to seeking professional advice.

Writer in charge: Mr David Dahm BA.Acc, FCPA, FTIA, Ffin, FAAPM, GLFG.

The Good, The Bad, The Ugly and The Smart

WORRIED ABOUT YOUR NEST EGG!?!

With the news of economic doom and gloom we have all heard the saying “there is only three (“two”) things in life that are certain death and taxes” and the passing of time (this is our add on). The best use of that time becomes the most critical factor.

Health and Life is a consulting, tax and accounting healthcare practice which was created from our last recession and appreciates time in itself is opportunity to take advantage of or reckon with. Doing nothing will achieve nothing this is also another certainty.

The healthcare industry is lucky and recession proof I guess it is fortuitous we all work in one industry that will not feel the same economic shocks your other investment portfolio’s or business interests may feel with the recent stock market rout and credit crunch (especially those with margin calls!).

Some pundits speculate we are looking at a possible recession that could extend over the next 3 to 7 years. We would agree with these sentiments.

Unfortunately the recent economic uncertainty has set back quite a few peoples early retirement plans and have brought into question who can you trust to manage your money and what should you invest in next where you can eat well and sleep well. For all of you the answer may be literally right under your nose. Please seek professional advice before acting on this information.

How can I quickly recover my savings?

We have always believed your practice is your best and most tax effective investment and now is the best time to invest in healthcare which is recession proof.

Afterall you have immediate control and you understand your own backyard better than anyone else.

More importantly it is possible to sell your practice to your peers for a fair price. To the contrary it is just another myth self – perpetuated by a lack of understanding. This myth is fuelled by the fact that practices that do not put effective succession plans in place such as encouraging investment friendly, tax friendly, asset protection friendly

and family friendly ownership to the non-owner. The simplest and most overlooked solution is to offer ownership to provider who currently work for you. We will explore these issues in this edition.

In this edition we cover: 1. THE UGLY – The Credit Crunch and Sharemarket Rout!

2. THE BAD – Losing your nest egg to something you can’t understand or control 3. THE GOOD - Invest in your practice! Death and Taxes are the next big thing!

3.1 Recruitment and Retention – providers don’t join practices that don’t have a future and cannot demonstrate they are well run 3.2 Pathology Laws – no longer is it a kick back to ask for a high market rent 3.3 Sustainable Investment – what are the costs and market rental rates?

3.4 Tax Effective – save legally up to $15,000 p.a. or more by becoming an owner • Family trusts: the smart tax and asset protection opportunity (New Discretionary Unit Trust –ATO Tax Payer Alert Warning)

• A NEW super fast way to pay for your building • A NEW super to borrow money to pay for your building • Use your super to pay off your building 4. THE SMART – do something

Practice Merger/Growth Criteria – why because your objective is to sell your practice someday for a fair price.

“Don’t bother throwing good money after bad” The Biggest Myth! Providers don’t want to own practices.

4.1. Vision: If you can’t see it does not exist then it won’t happen.

4.2. Attitude: Be prepared to compromise and use common systems and procedures.

4.3. Leadership: Great leaders lead from behind and not in front.

4.4. Governance and Commitment :just because you own shares in BHP does not mean you have to become the next CEO. 4.5. Advisers: your accountant/advisor needs to look beyond the numbers and understand and work the opportunity for you What is the ideal minimum to get started?

Where to from here?

The Good, The Bad, The Ugly and The Smart 1. THE UGLY – The Credit Crunch and Sharemarket Rout!

For those of you who have been reading our past emails carefully we did warn and speculate there would be a problem. So why did we think something was up Sub prime and the Credit Crunch – the worst is still to come?

In 2007 a lot of press reports from the US raised concerns that the interest income from people who could not afford their home loans were being on sold to financial markets this is called securitization.

We first noticed there was a big problem in October 2007 when a US judge upheld a ruling that said anyone who had one of these loans did not have to repay it back because it was impossible to identify who the lender(s) were. Specifically these loans initially had low hockey stick “honeymoon” interest rate which after 3 years shot up to very high rates forcing many borrowers to default on their loan repayments.

In my previous life as an auditor it was self evident it will take some months for the market to realize the problem and they still have not quantified how big the problem is and whether it is over yet.

This is a trillion dollar international problem has put the US into a recession. The reality is everybody indirectly or directly sells and invests in the US so the European, Chinese and ultimately our own economy will be affected.

To date the resulting effect is over a 30% fall in the value of the Australian Stock market. This will take some years to recover. Property prices are also affected. We believe we have not hit the bottom just yet. The next to be affected are companies with large corporate debt as fewer customers buy their goods and services – it is a fact consumer confidence is down. We believe it will be at least another 6 to 18 months before the full extent of this problem is identified. It would not hurt to wait and see. We are experiencing higher real interest rates, however they should ease off at the end of the year as the signs of a slower Australian economy will put pressure on the Reserve Bank to reduce rates. If you are investing, avoid consumer discretionary industries like hospitality, luxury goods and entertainment and companies that have high borrowings. Non – discretionary industries are like food, healthcare and utility companies they may offer a safer prospect. Please consult your adviser.

2. THE BAD – Losing your nest egg to something you can’t understand or control

The real problem hits those over the age of 50 who are relying on their investments for an early retirement over the next 5 to 10 years. Our general advice is if you don’t understand something don’t invest in it. Some options are: 1. Extend your retirement plans and save; 2. Consult your financial adviser about investing in a more conservative portfolio and avoid get rich quick schemes that are difficult to understand such as margin lending schemes or contracts of difference;

3. Consider re-investing in your practice which is the “real engine room” and source of any savings. At least you can understand and control this investment which is recession proof and it is an industry familiar to you. After all you visit your practice on a daily basis at least know what is going on versus blindly following the advice of others.

3. THE GOOD - Invest in your practice! Death and Taxes are the next big thing!

The good news is practice ownership provides excellent investment and taxation opportunities if it is set up correctly. Practice ownership provides clinical control and financial recognition. Significant financial gains are achieved in larger practices as we shall see below.

The reality is people will always get sick regardless of the economy and the Government will predominantly pick up the bill. This is why your practice will always be recession proof and remain a value business if set up properly.

GPs that form larger groups creates economic certainty amongst not only your peers so your basic overheads (including a good practice manager) can easily be met but also for those other tenants such as specialists and allied health who can also ride off your coat tails. They are prepared to a premium for access to your referrals which is legal and ethical. This also provides excellent clinical integration opportunities and seamless care.

Bigger practices attract better and higher paying tenants because a large group of GP’s can provide a high level of walk-in patients. It can provide cheaper and more effective comprehensive care if the services are properly integrated such as sharing of IT infrastructure, staff, appointments and computerized records (with access restrictions).

3. 1. Recruitment and Retention – providers don’t join practices that don’t have a future and cannot demonstrate they are well run.

New infrastructure, good business and clinical systems, tax, investment and family friendly practices will successfully recruit practitioners to your practice.

There are plenty of doctors out there but the real question is, are they attracted to your practice? With the right business model and contracts you can screen who are going to be “stayers” and who are the “tyre kickers” in your practice. It is important you have the right business model and structures that attract doctors and that is presented clearly and accurately in writing. If not you will have trouble recruiting and retaining doctors because this process in itself is what actually provides certainty and confidence.

The number one mistake practices make is not to ask or offer ownership (properly presented) to their existing non-owner doctors. If you secure one young doctor they will suddenly start to secure their friends for you. This is a vote of confidence you give to the next generation which they will appreciate and reciprocate because it is now in their interests too.

Medical and professional staff come from: 1. Doctors coming out of corporate contracts:

Many doctors are coming out of their 5 and 7 year contracts after the large 2000 buy outs. They have open minds and are more financially capable and savvy to recognize a good investment opportunity in private practice.

2. OTD’s corporate doctors: The second source are overseas doctors. Clearly this is advantageous to practices that are declared as areas of need. Contact us to fast track this designation for both metropolitan and rural areas. The main thing to do is to lock in a minimum of 5 year terms with overseas doctors in their contracts.

Contact us on how our template agreements achieve this outcome fairly to both parties.

3. Registrars: Registrars are still and opportunity however they are more business and lifestyle savvy and won’t accept 100 hour weeks. So it is important your practice offers not only good financial rewards but mentoring support and ownership opportunities upfront. Offer a career progression from trainee to employee to non-equity associate to junior equity associate (an interest in the business and or building). They do this successfully in law and accounting firms.

4. Allied Health If you have a spare consulting room, opportunities to provide allied health services from nurses, physiotherapists, dentists and pharmacists makes your practice more attractive for providers to join. Don’t waste the spare consulting room opportunities.

It is a win win for the patient, the provider and practice owner.

3.2. Pathology Laws – no longer is it a kick back to ask for a higher market rent You can now charge market rents without fearing the new legislation. Don’t believe anyone who tells you there are “set rates” this is simply not true and his how they keep their rent bill down. See our attached press interviews featured in Medical Observer. Basically the Government has done a back flip on the legislation and it is much more clearer and open than before. The bottom line is a $3000 sqm or even higher rent is legal so long as there has been an open tendering process. You can now include common area, fixtures and fit outs including staff. Contact us for more information to purchase our template agreements and how to do this without fear of breaking the law.

3.3. Sustainable Investment – what are the costs and market rental rates?

So you want to build a general practice what do some of the numbers look like?

Below are some indicative (legal and ethical because they are based on market rates = where there is a willing seller and willing buyer) numbers and they will vary from State to State that may be of interest: Building (Once Off) Investment/Costs: • •

Land $700 to $1000 sqm Building Cost excluding fit out and land $3000 to $4000 sqm depending on quality.

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Fit out $1600 to $2000 sqm depending on quality and no specialised equipment.

Rental Income: • • • • •

Medical Rent $500 sqm Physiotherapy $200 to $600 sqm Pathology rent $1000 to $3500 sqm (incl. fit outs and common area) Pharmacy rent $700 to 1000 sqm GP’s and Allied Health 40 to 60% of gross receipts.

Medical Centre properties should yield 12% to 14% per annum with the head lease being carried by the GP’s. This area should be subleased to other tenants for a higher rent. These should be based on an open written tender process to avoid allegations of kick back arrangements. Contact us for further information about the new kick back laws and how they operate at a practical level and to purchase our template tenancy agreements.

3.4. Tax Effective – save legally up to $15,000 p.a. or more by becoming an owner •

Family trusts: the smart tax and asset protection opportunity Using commercial principles income splitting can save a full time equivalent doctor billing $280,000 pa through practice ownership a minimum of $15,000 p.a. and provides superior asset protection by using service trusts correctly.

In many cases practices are sold like off the plan homes but with no plan and then people complain that they can’t sell their practices. This is the sole cause for uncertainty and indecision.

Tip: Before becoming an owner most don’t actually find out how much they are really better off or even ask the right question. The figures can be quite compelling even against the most generous corporate no strings attached offer. You can’t asset protect or income split with a corporate and the upfront goodwill payment in most cases is not tax free. This is a common mistake and misconception.

The next one is practices do not know how to present the practice figures or structure so they make sense to a bank, adviser or even the spouse of the doctor. It needs to show in writing that ownership arrangements are flexible that allows part time ownership and/or vendor finance.

Discretionary Unit Trust – NEW ATO Tax Payer Alert Warning Watch out. Without a practice agreement anybody who has borrowed money to buy units in your “hybrid” service trust may be denied a tax deduction if you use a discretionary unit or “hybrid” trust. A possible solution is to use one of our practice agreements that eliminates this problem. Even if you are a solo practitioner using a discretionary unit trust where the unitholders have borrowed money to buy the units to invest in the practice a legally enforceable practice agreement must be in place. Contact us for further information.

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A NEW super fast way to pay for your building

With the new superannuation rules that no longer have Reasonable Benefit Limits you can access your super funds to purchase your practice building as an investment. This special exemption allows you to access your superfunds now. In turn your property can pay a good rent back to your super fund and pay tax at the lower rate of 15%.

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A NEW super way to borrow money to pay for your building Another new change is your superfunds can borrow money to purchase your practice property which is very tax effective. Fully tax deductible* principal repayments through self employed contributions can be made and used to reduce your debt quickly. – see below.

You can either make these payments as a self-employed person or via your corporate trustee that runs your family trust.

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*Use your super to pay off your building From July 2007, the age-based limits will be abolished and replaced with a concessional contribution limit of $50,000 per annum (a 5 year transition period will apply to provide for a $100,000 limit per annum for individuals who turn 50). Concessional superannuation contributions are those paid from pretax income and include employer contributions and salary sacrifice contributions. Concessional contributions are taxed at 15 percent. Structured correctly you can use these superannuation contributions to retire your property debt.

4. THE SMART– DO SOMETHING

Practice Merger/Growth Criteria – why because your objective is to sell your practice someday for a fair price.

The Biggest Myth! Providers don’t want to own practices Nobody wants to join a practice where the owners do not want to grow it and the owners have a negative view of their practice and are planning to leave in the next 12 months.

People do not want to own or pay for poorly run practices. That have poor business models (that is they can’t pay for themselves), business and clinical systems and no certainty.

A practice needs vision (a future 5 – 10 year direction), culture (happy staff) and commercial sustainability (it is so profitable people want to join the practice and are prepared to pay for it).

Most importantly if it is not in a written document that is not clear with supporting legal documentation that is transparent it is safe to assume that it does not exist and it is the very reason people remain unfairly skeptical of your practice merits and why they are not prepared to pay to join it or even make enquiries.

A clear and transparent financial statements and management report speak volumes to people seeking to join your practice. Prove it just don’t talk about it. You are

running out of time if you are considering retirement in the next 5-10 years to attract the next generation of doctors. Is it worth leaving the farm empty handed or leaving a legacy that people want to own and pass on to the next generation.

If it is not in writing such as practice plans and SIGNED practice agreements then all the verbal promises in the world will not give confidence to a potential buyer to commit. Would you buy shares in a company that did not have an annual report stating how the business was going which looks beyond the numbers?

Unless you pass the following critical tests don’t bother throwing good money after bad and keep investing in your practice. These steps are important if you are thinking about merging or spending more money on your practice – what is the end point?

The answer is to one day to ultimately sell your practice.

4.1. Vision: If you can’t see it does not exist then it won’t happen.

Practitioners must see and/or visualize/imagine their future (e.g. a 10 GP multi disciplinary co-located practice) and understand the benefits and want to grow larger.

A one page written bullet point statement is all that is required. The ultimate view is a legal and moral commitment to encourage succession planning for the next generation.

4.2. Attitude: Be prepared to compromise and use common systems and procedures.

“We” not “me”. Be prepared to compromise a little but you do not have to give up your professional or personality differences in fact this can be an asset.

4.3. Leadership: Great leaders lead from behind and not in front.

It is essential one doctor is elected to lead the group and set the Agenda. Not every doctor has to deal with the minutiae of detail. Their key role is to discuss and facilitate a group consensus. A management committee together with a practice manager who does the majority of the work makes the rest happen. 1% is inspiration from the owners and 99% is implementation from the practice manager.

4.4 Governance and Commitment : just because you own shares in BHP does not mean you have to become the next CEO. Are you prepared to work under a fair and balanced governance structure established by the group. It is OK to agree to disagree and peoples differences especially in relation to money and commitment (whether full or part time) can be accommodated. The key is to appoint the right people and then delegate.

We have template practice agreements that can be purchased that acts as a devils advocate document that deals with the tricky issues of patient record ownership, management, profit sharing and guaranteed buy out prices. It normally takes one meeting/teleconference with us to merge practices together and doctors on average sign off in 3 months. Be prepared to sign off! Contact us for further information.

4.5. Advisers: your accountant/advisor needs to look beyond the numbers and understand and work the opportunity for you.

Appoint experienced advisers who have done this before. Ask to talk to their clients as a reference check. At Health and Life nationally this is the core of our work building or merging practices with each other. We have key like minded tenants such as pharmacists that are prepared to integrate services and rent space at extremely competitive market rates. This reduces uncertainty and saves time and money in

advertising. Most importantly you do not have to re-invent the wheel and can start working on the more interesting stuff.

What is the ideal minimum to get started?

Minimum 6 to 8 doctors or work towards this number with local GP’s Where to from here?

1.

Consult your professional adviser in relation to any advice suggested;

2.

If require any news alert back issues email us;

3.

If you are not sure about any issues raised in this broadcast contact David Dahm on 1800 077 222 for an initial free no obligation consult, or email us at pa@healthandlife.com.au. Health and Life provides comprehensive practice consulting, accounting, taxation and financial planning advice for group practices and individuals.

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