The Professional Advisory
65
FOR DENTAL PROFESSIONALS
VOL. 65 June 2014
To accept good advice is but to increase one’s own ability — Von Goethe
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Contents
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Accept Good Advice Ralph Crawford BA., DMD
Why Most Dentists Won’t Achieve Their Retirement Goal
Mark McNulty BA, CFP®, CIM®
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Alternate Tenancies Ian D. Toms B.Sc. (Hons)
Potential Challenges Everyday Dental Practice May Face Dr. Ron Weintraub
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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. Mark McNulty is President of McNulty Group, a firm responsible for managing $200 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. 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.
S is for Savings Plans David Chong Yen CPA, CA, CFP Louise Wong CPA, CA, TEP
Do dental equipment and dental technology affect a practice value?
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 soley on Practice Management.
Colin Ross, MBA
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Legal Checklist to Purchase a Dental Practice
David E. Rosenthal BA., LL.B.
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. David Lind is the Principal and Broker of Record at Professional Practice Sales Ltd., which was established in Ontario in 1991 and is a leader in dental practice valuations and sales. Prior to joining PPS, David lead the healthcare business for CIT Financial Ltd. This gave him a strong understanding of the personal and professional needs of dentists as they entered and exited the profession. 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.
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“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:
Accept Good Advice Ralph Crawford BA., DMD crawford@dccner.com
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recently had a breakdown of my 10 year old computer and being almost computer illiterate I had no choice except to seek advice from son-in-law Rodney who from my experience seemed to know a great deal about this electronic world we live in. Plus, Rodney understood how little I knew about what to do. First, we bought a new computer – and I use the “we” but it was really Rodney’s choice – and he set about to put it all in operation. It has been quite a learning experience getting familiar with all the new programs and especially working with Windows 8-1 but I’m getting there – thanks to Rodney’s patience and steady instruction. The weeks struggling with “new things” took my mind back to 1989 when I was appointed editor of the Journal of the Canadian Dental Association. There I was introduced to the computer world and given a Toshiba T 1200 lap top – apparently innovative in its day. It was the first laptop with a removable battery and the first that had a “Resume” function. And again, I relied on the great advice and instruction of fellow workers. I still have that Toshiba T 1200 and reached into our storage cupboard to see what it looked like. Surprisingly, I almost fell off the step stool from the weight of it. Curious, I put the circa 1989 portable laptop on the scale and would you believe, it weighed almost 15 pounds. How the computer world has changed. By happenstance while struggling with the new computer setup I came across a saying of von Goethe, the 18th century author and statesman: To accept good advice is but to increase one’s own ability. Again curious, I delved a bit into Geothe’s life and found he was quite the money manager. I found reference about Geothe saying he succeeded financially not only because he planned ahead and was thoughtful about how he used money, but also because he didn’t let earning it become the ultimate goal of his life. Goethe didn’t’ worry about money, he managed it.
Thinking about the excellent help I needed for my computer problems, I couldn’t help but think how true the fact: To accept good advice is but to increase one’s own ability. And isn’t that what The Professional Advisory authors are doing in each and every publication. They are providing advice on how better to manage our lives. Within this issue note how Ron Weintraub in his Potential Challenges Everyday Dental Practice May Face, deals with the factors influencing the economic landscape. Mark McNulty probably surprises many when he estimates that 70 per cent of dentists will not achieve their financial goals. He then outlines Why Most Dentists Won’t Achieve Their Retirement Goal and offers good advice for a solution. Purchasing a dental practice is never easy and it is noted that David Rosenthal in his Legal Checklist to Purchase a Dental Practice outlines good advice in his 17-point checklist of legal matters to consider. In Ian Toms’ article, Alternate Tenancies, the opening sentence There are circumstances when a typical tenancy just won’t work just begs good advice, and Ian, like his fellow authors, does just that: he provides it. David Chong Yen and Louise Wong tell us that as dentists reach the prime of their careers they start to focus on maximizing their savings in the most tax-efficient way possible. They then provide a multitude of good advice as they look at various investment vehicles. Colin Ross answers his own question in Do Dental Equipment and Dental Technology Effect a Practice Value? with the good advice how both equipment and technology do play a substantial role. Geothe was right on with his wisdom: To accept good advice is but to increase one’s own ability. And there is no doubt much will be gained when readers Accept Good Advice from this issue and all issues of The Professional Advisory.
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Why Most Dentists Won’t Achieve Their Retirement Goal Mark McNulty BA, CFP®, CIM®
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ased on my experience, I estimate that over 70 per cent of the dentists practicing today will not achieve their financial goals. This belief comes from 18 years of conversations with dentists about their finances, as well as information from files my firm collected the decade before that. What makes this situation even worse? This was during a period when things were good - dentists were scarce and patients plentiful. That is not the case today in most of Ontario. Most people have a goal to retire one day. I do not know a single person who wants to spend less when they reach this all important milestone. The average dentist I know spends $150,000 per year after-tax ($12,500 per month) in retirement. This means if you want to retire by age 62, you will need $3.8 million in savings. Most dentists don’t reach this target.
standing of how their idea will impact the other areas of your financial plan. } They purchase financial products that do not deliver on their promises, and are sold by commissioned salespeople with obvious conflicts of interest. A big part of the financial industry is just a marketing machine. They figure out what your needs and concerns are, then develop products that, on paper, fulfill your need or address your concern with little or no work on your part. A proper financial plan is a model - it is not a product. } They treat each aspect of their practice and personal financial affairs separately. You are your practice and your practice is you. If your practice is making less money than last year, then you need to spend less money personally.
WHY WILL MOST FAIL? } As many people do, dentists spend a lot of money
when compared to what they earn. Overspending is undeniably the main reason most dentists will not achieve their financial goals. It is also the most neglected. If you want to achieve your financial goals it is actually quite simple – track your personal spending and spend less than you make. } Their goals are not clear. If you don’t have a target you are working towards, how can you know if you are making forward financial progress? } They do not take the time necessary to properly manage their practice and personal affairs. The majority of people (dentists included) run their lives looking backwards. Around April when they receive their tax return from their accountant, they realize what happened the previous year. Unfortunately, when the year is complete you cannot make any changes. } They rely on disjointed advice from advisors. Many advisors have great ideas, but because they are not focusing on your big picture they are limited in their under-
WHAT IS THE SOLUTION? We have seen and used many different models of financial management for dentists over the past thirty years. The one that works the best integrates all your practice and personal resources and focuses them on your financial goals. We call this a Big Picture Game Plan. STEP ONE:
Establish Your Starting Point
Where are you today in a financial sense? This includes a calculation of your practice and personal cash flow, and a statement of your Net Worth. STEP TWO:
Quantify Your Goals
Identify the size of the nest egg needed to fund your future, and by when you need to reach it. It is your eventual target or destination.
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STEP THREE:
Strategy
Once we have a good idea of your Starting Point (where you are today in a financial sense), we need to overlay strategies to see if they bring you closer to your goals. These strategies might include incorporation, cash flow tracking, risk management in your investments, tax planning, etc. STEP FOUR:
Monitor and Update
We recommend you set up systems to provide ongoing reporting on your progress against the plan. You should have a quarterly statement that shows you more than how your investments performed or how your practice did. This single report should tell you how all the key indicators in your financial plan operated, and illustrate how you made forward financial progress in that quarter. I realize this seems like a great deal of work, and you should be focusing on doing what you do best—dentistry. If you cannot find sufficient time to complete these four steps, I encourage you to surround yourself with a team who can. Remember, sound financial planning is five per cent planning and 95 per cent implementation. You don’t just need to develop a plan, you need to live your plan.
This means if you want to retire by age 62, you will need $3.8 million in savings. Most dentists don’t reach this target.
Please send comments to
Mark McNulty is President of McNulty Group, a firm responsible for managing $200 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. Mark may be contacted at 1‐866‐261‐4768 ext 209 or mark@mcnultygroup.ca
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Alternate Tenancies
Ian D. Toms B.Sc. (Hons)
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here are circumstances when a typical tenancy just won’t work. For example, a market may not have any suitable space, or landlord lease requirements in a market, or the development type may make a tenancy economically irrational. In these circumstances, alternate approaches to tenancy will permit access to a market where no suitable space exists. These types of tenancies take significant effort to arrange because they are not “off the rack”. These approaches are not available without the guidance of a seasoned realty leasing professional.
1. If a premises does not exist, build it!
a. By a landlord – existing landlords may have vacant
land waiting to be developed, and will do so for the right use and price. For example, we just completed a lease for space in the parking lot of a large shopping mall, at a set of lights, in line with a Tim Hortons and a Kentucky Fried Chicken, where, in exchange for a 20 year term, the landlord agreed to complete the paving, curbing, landscaping and build a 3,000 square foot custom built building to the point where the tenant only has to add cabinetry and equipment. b. By a developer - some properties, whether vacant land or existing buildings, are available to be developed or redeveloped for the right opportunity. In exchange for a long term commitment, developers will buy and convert a property to suit a specific tenancy. For example, vacant automotive stations may provide a great opportunity for conversion to an oral health clinic as they are usually 1,500 to 2,000 square foot free standing buildings on corners at traffic lights with very high profile and great parking. 2. Lease back
The concept of buying properties, converting them for use by a long term tenancy and then selling them to a third party with a long term lease in place has been used to create successful chains such as Safeway across the U.S. In Canada, Canadian Tire and Sobeys are examples of large tenants who lease space in plazas they used to
own. The advantage of this approach is that you can locate where you want to in the plaza, write your own favourable lease, and then sell the plaza to a third party to avoid tying up your money. 3. Temporary leasehold improvements
A problem with dental clinics is the expensive and fixed nature of the leasehold improvements which include plumbing, wiring, and internal walls. Short term leases do not make sense because of the cost of the fixed improvements. A solution is to make the improvements “portable” meaning that raised flooring can be installed over plumbing and wiring, modular cabinetry and locking interior walls can be installed and then removed and relocated from time to time, providing the operator ownership and the ability to relocate, permitting access to properties with short lease terms. 4. Waiting lists
Since typical lease term lengths are five years, approximately 20 per cent of tenancies come up for renewal each year. If you register interest with a landlord for a property you wish to tenant, then you have a reasonable chance of taking space in that property if an existing tenant is weak, becomes insolvent, or does not exercise their option to renew. Alternatively, developers will often agree to lease space a number of years before their development is completed. The problem with both of these ap-
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proaches is that you have little or no negotiating leverage as you have to openly admit you want the space. A second problem is that you may have to wait for the space to become available for a number of years. 5. Property purchase
Alternate approaches to tenancy will permit access to a market where no suitable space exists.
A number of clients have exercised their option or right to purchase the property in which they are tenants – with very positive results. Owning the commercial plaza in which your practice is located provides an opportunity to manage the property as you see fit while building equity. The everyday headaches of being a landlord can be assigned to a property manager, and the rest of the tenants do not have to know that in fact one of their co-tenants is actually the landlord. All of these approaches are risky and require significant effort, but the reward may be well worthwhile. 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 iantoms@pipcom.com, or through his web site at: www.iantoms.com.
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Potential Challenges Everyday Dental Practice May Face Dr. Ron Weintraub
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s Yogi Berra famously said “The future ain’t what it used to be”. Certain actualities seem to merge producing an altered dental reality for those of us in the provider community. Some of the portends seem to have already had a degree of influence on how we attempt to thrive in the projected dental environment. Three factors are influencing the changing landscape: economic, sociologic, aetrogenic.
ECONOMIC General economic pressures, many of which have been outlined in the February 2014 Ontario Dentist reported by Rose Abate as well as information in the R.K. House Report, may negatively affect future dental practices bear examination. According to Abate } Our practices are operating in an uncertain
economic environment that seem to put particular pressure on the middle class of our potential patient population, which is probably the backbone of many of our consistent patient base. Unfortunately, some of these people have already included dentistry on their list of discretionary expenses. } Many job opportunities available to new entrants to the
work force are not strongly oriented towards providing health benefits in general and dental care in particular. } Many contemporary remedial dental procedures, by
nature of their sophistication and complexity, require financial investments of some thousands of dollars that for many in this economy may be problematic. } Conducting business in a practice within a typical dental
office environment also poses additional financial burdens; for example, the cost of human resources, rental units, energy, increased equipment, and sundry expenses. These factors put pressure on the office to provide ethical quality dentistry at a fee that allows people who need the health care to be able to access it financially.
With these factors in mind, dentists have a legitimate expectation to be able to earn a living commensurate with the educational and financial investment they made in their practices.
SOCIOLOGIC Another challenge is the sociologic pressure closely intertwined with economic pressure. Notwithstanding those of us who practice in a province that is growing in population, the growth is asymmetric. In other words, most of the growth is concentrated in major urban areas, such as the Greater Toronto Area. Often a significant portion of the increase is due to immigrant population. It is understandable that immigrants take time to integrate into mainstream society, and they are often “potential” patients. Finding a dentist is not the first priority for many who are newly arrived. This group, therefore, is very important for the future growth and stability of any province. They are, for dentistry, often a “potential resource” to replace patients that have moved on. Another sociologic factor we have discussed previously is the new consumerism that seems to be the current attitude of our younger patients’ perception of health care. For example, for this demographic, location, hours of operation, and customer service profile seem to have increasingly more sway with them than the reputation for competency. This leads to a propensity to demand appointment hours that fit most easily into their schedules, such as after work, hockey practice, dance, or other personal interests that create high demand for key hours leaving significant schedule openings in the middle of the day.
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AETROGENIC Finally, self-inflicted aetrogenic factors – those that cause harm – are becoming more apparent. Most recognizable are the following examples: } Advertising initiatives displaying questionable taste and
reduce dental procedures to the status of commodities. Such advertisements do little to enhance the value perception of dental services; for instance, goofy tooth and brush logos tend to infantilize the sophisticated health care facilities that most dental offices represent. } Featuring Invisalign bracing on the Internet as special
purchases on sites such as Dealfind and Living Social. } Radio and TV spots that offer special reduction for seniors.
Based on the assumption that they do not contravene our Royal College of Dental Surgeons’ regulations, they certainly contribute negatively to conflating dentistry with costs leaving out the health benefits dentistry offers.
Three factors are influencing the changing landscape: economic, sociologic, aetrogenic.
The concepts of attempting to lure new patients into our premises by any means possible and then attempting to convert them into knowledgeable, appreciative recipients of our care is a bridge too far. One has only to follow the path that retail pharmacy has been on to see professionalism relegated to a small part of a very large entity. All is not doom and gloom. Identifying the problems leads to possible solutions we will address in a future edition with suggested measures to assist in maintaining dentistry’s well-earned professional profile and allowing more of us to be proud of our achievements and practices. 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.
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S is for Savings Plans David Chong Yen CPA, CA, CFP Louise Wong CPA, CA, TEP
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s dentists reach the prime of their careers, they start to focus on maximizing their savings in the most tax-efficient way possible. We will look at the following investment vehicles: } Registered Retirement Savings Plans (RRSP) } Registered Education Savings Plans (RESP) } Tax Free Savings Accounts (TFSA) } Individual Pension Plans (IPP) 1. Registered Retirement Savings Plans
There are four main benefits of an RRSP. First, you receive a tax deduction, deductible either in the year of contribution or in a future year where you expect your income to be higher. Second, income on your contributions accumulates tax-free until you withdraw from the RRSP. RRSPs can also be an effective way to save for a first home, since up to $25,000 of pre-tax money per spouse inside the RRSP can be used to pay for the home, repayable to the RRSP over 15 years. Finally, RRSPs permit income splitting by allowing you to contribute to a spousal RRSP, allowing for part of your RRSP to be taxed in the hands of a lower-income spouse upon retirement. Note that because withdrawals are treated as taxable income, you need to ensure that your marginal tax rate at the time of contribution is higher than the rate at which the withdrawals are eventually taxed. Without planning, you may end up paying more taxes on the withdrawal than you saved on the contribution, depending on your income bracket for the year of withdrawal. For this reason, any withdrawal from an RRSP before actual retirement should only be done with professional advice. Note also that since withdrawals from your RRSP will form part of your income, planning should take into account any Old Age Security clawback once your income exceeds the threshold ($71,592 for 2014). Annual RRSP contributions limits are capped based
on your prior year’s income, up to a maximum amount ($24,270 for 2014 and $24,930 for 2015). Dentists looking to save more for their retirement may find they need additional investment vehicles besides a RRSP, such as insurance policies, or IPPs (below). 2. Registered Education Savings Plans
RESPs allow you to save up to the lifetime limit of $50,000 towards the cost of your child’s post-secondary education. As with RRSPs, accumulating income in the RESP is not taxed until the funds are withdrawn, (although unlike RRSPs, contributions are made out of after-tax dollars). Withdrawals from an RESP are taxed in the hands of the student who typically has little to no income allowing for income splitting of any investment income. In addition, the RESP receives a 20 per cent matching grant from the federal government on annual contributions up to $2,500 per beneficiary (to a lifetime maximum per beneficiary of $7,200). In other words, the RESP receives a $500 risk-free return in the year of contribution for each year’s $2,500 contribution. Note that proceeds from withdrawals can only be used towards reasonable education costs of the beneficiary. If the beneficiary does not pursue a post-secondary education, and there are no other eligible beneficiaries, you may have to withdraw the funds yourself. This means repayment of the matching grants, and tax payable on the investment income earned in the account. RESPs will also affect a student’s application for government loans such as Ontario Student Assistance Program (OSAP) as it counts as the student’s income. 3. Tax Free Savings Accounts
TFSA s allow you to earn investment income tax-free. No taxes will ever be paid on withdrawals of contributions or accumulated income. They also provide flexibility since
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you can withdraw funds from a TFSA at any time without penalty, with no withholding taxes or any obligation to report the transaction on your tax return. For those saving for a large foreseeable expense, TFSA s are a great investment vehicle to use for parking savings until they are required. TFSAs are paid with after-tax dollars (i.e. no tax deduction). Annual contributions are limited to $5,500 per year per person. Finally, while there are no restrictions on withdrawals, note that a withdrawal and re-contribution during the same calendar year is treated as a separate contribution.
Note that IPP providers typically charge both an upfront set-up fee, and an annual maintenance fee. In addition, an actuarial valuation is required every three years to calculate the contribution limits, which must be factored in as another expense. Funds in an IPP are locked-in until retirement and should be viewed as a long-term retirement asset. Your PC also has an annual contractual obligation to fund the IPP, increasing your PC’s cash flow requirements. Income splitting is not available in an IPP unless your spouse is an employee of the PC .
4. Individual Pension Plans
An IPP is a super-sized pension which allows your Professional Corporation (PC) to make tax-deductible contributions to fund your retirement. Similar to an RRSP, income earned inside the IPP is tax-free until withdrawal. Other benefits include: } Creditor-proof: Assets held in the IPP are protected if you are sued or go bankrupt } Higher limits: Contribution limits will vary depending on your age, length of service and past salary, but are typically higher than RRSP limits. } Defined benefit plan: If your investments do poorly, your PC can “top-up” your pension with additional tax-deductible contributions. This provides you with more certainty about your retirement income. } Deductible fees: Annual IPP maintenance fees paid by the PC are deductible, unlike RRSPs.
Your saving strategy can involve a combination of approaches, so discussing the right choice and mix for your circumstances with your financial advisors is an important part of the road trip.
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.
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Do Dental Equipment and Dental Technology Affect Practice Value? Colin Ross MBA
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n our business as dental practice valuators, most of our practice valuations are for dentist’s who are not planning to sell their practices for at least five years, but want to make their practice more valuable for the future. We are constantly asked about whether or not the adoption of new equipment and or technology can increase the value of a practice. The short answer is; Yes, under favorable conditions, the adoption of new dental equipment or technology can increase a practice’s value beyond the value of that specific piece of equipment. This fact actually creates goodwill in the practice, which is the goal of dental practice owners. From a practice valuation standpoint, the reason that a practice value may change is due to the possibility that the equipment or technology somehow affected practice cash flows and earnings. When researching this article, one of the dentists I spoke with said that the successful adoption of technology into his office let him do in two hours what it formerly took him an entire day. He called this success, his offices “Techwill”. In a typical dental practice valuation, the typical value of equipment (excluding leasehold improvements, and supplies) relative to a practice’s total value is approximately 10-15 per cent. Therefore relative to the entire practice, equipment and its contribution to a practice’s performance is sometimes overlooked. There is a significant investment in equipment that is functional in nature – compressor, cabinets, chairs, X-rays, handpieces etc. – which are required to operate a general practice. And then there is the other category which may include new or high technology. The acquisition of the functional equipment is necessary to keep a practice operational and it needs a proper budget allocation for eventual updates. But it is the adoption of technology that needs to be well planned, because if the investment fails, there is a cost to your practice. I believe that your goals should be to remain current with technological advancements and to determine if
they fit your practice, as well as the possibility of a return on the investment. While there are advantages to the adoption of new equipment and technologies, there are occasions where having too much, the wrong type, or unused equipment will detract from the value of a practice due to depreciation inefficiencies. In addition, if the technology is overly specific, there may be a limited number of buyers who will place value on that technology. Also, just because an asset doesn’t add value, it may enhance your clinical satisfaction, and make you happier to go to work, which is priceless. The most important factors to equipment and technology decision making should be: 1. Does it have a clinical advantage? And 2. Does it have a benefit for my patients? Once that is determined, and you are confident in the technology, the financial portion of the evaluation of the asset can begin. Here are some examples of very generic purely, mathematical models of how a piece of technology can affect practice value. Let’s takes a practice that we valued in 2014. The practice was valued at just over $900,000, and had all factors in balance — good production, good patients, good profits and good location. If we simply made the following adjustments to the input factor in our valuation template here is what we found: Example 1
If this practice had a four year old Intraoral Digital Radiography system valued at $15,000 and produced savings of approximately $8,000 per year in film and time costs, the value of that practice would have increased $23,000, or $8,000 in goodwill. Example 2
If this practice had a four year old Digital Panoramic system, valued at $30,000, and its revenue less loss revenues from FMX, was $4,000, the value of that practice would have increased by $39,000 or $9,000 in goodwill.
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Example 3
If this practice had a four year old CAD/CAM system valued at $65,000, and produced $30,000 in lab savings per year, the value of the practice would have increased by $102,000 or $37,000 goodwill. Example 4
If this practice had a four year old CAD/CAM system valued at $65,000, and it was unused, the value of the practice would have increased by $47,000, a decline of $18,000 of goodwill.
These examples are very simplistic, as maybe other factors changes in the practice that may not have been exact, however, if cash flows can be improved, practice values can be increased. These examples are not the only examples of equipment enhancements, as there may also be equipment that I have missed, including cone beam Panoramic X-rays, soft tissue lasers, office expansions to add capacity, cost savings due to time savings, etc. In addition, I have not considered the tax or financing considerations of these decisions, as those matters should be dealt with by your accountant. In addition along with the possible practice enhancers, because we are in a more competitive dental environment, there may be an advantage to consider technology. In some cases, it may also help attract or retain patients due to the perception of being a technologically current practice. In summary, your equipment and new technology plan should receive as much attention as your marketing, practice management, and clinical areas of your practice. The goal is to create an equipment plan that has a budget to replace and update functional assets, and a budget or strategy to review the costs versus benefits to your practice to possibly take advantage of the currently available technology. I hope that down the road some if this new technology will help you to create your own practice “Techwill”.
In a typical dental practice valuation, the typical value of equipment (excluding leasehold improvements, and supplies) relative to a practice’s total value is approximately 10-15 per cent.
Please send comments to
Colin Ross MBA, 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
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Legal Checklist to Purchase a Dental Practice David E. Rosenthal BA., LL.B.
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hen purchasing a dental practice, there are many legal issues to consider. Ideally these matters should be dealt with early in the purchase process. This will enable you to make informed decisions about the nature of the purchase transaction and help avoid costly problems later. Outlined below is checklist of some of the legal matters to consider when purchasing a dental practice.
a. Understand why the existing associate
is not purchasing the dental practice. b. Do proper written agreements exist
with the associates. c. Are associates bound by non-solicitation
and non-competition covenants. d. Can the associate agreements be trans-
ferred and assigned to the purchaser.
1. Carefully review the appraisal of the vendor’s
practice with your own professional advisors. 2. Conduct your own due diligence including a detailed patient chart audit. This is a very critical element in the purchase process. When a dental practice is valued, typically the tangible hard assets comprise only about 20 per cent of the total practice value while the goodwill is valued at approximately 80 per cent of the total practice value. Goodwill includes the patient lists, custody and control of all patient records and files (including patient billing records and treatment plans), patient charts, x-rays and models, and use of any dental practice names. 2. Given such value of goodwill it is imperative the purchaser completes a detailed patient chart audit and satisfies himself or herself of the number and quality of the active patient charts and lists. 3. Determine what you are buying – shares or assets. 4. Understand the allocation of purchase price to different asset classes if purchasing assets and the tax effect of such allocation to the purchaser. 5. Determine the taxes payable by purchaser on various asset classes if purchasing assets. 6. Use a dentistry professional corporation as purchaser. 7. Add family members as non-voting shareholders of the purchaser corporation. 8. Review the vendor’s cost share agreement or partnership agreement, if applicable, and determine if any changes are required as a condition to the purchase. 9. Review the vendor’s existing arrangements with the current associates working at the practice, including:
e. Are changes required to associate agree-
ments as a condition to purchase. 10. Carefully review the vendor’s premises lease
to determine: a. The term of lease is at least 10 years,
including renewal options. b. For renewal options is rent to be fair mar-
ket rent to be agreed, or failing agreement by arbitration. c. Whether ‘danger’ clauses exist, including: relocation - landlord right to relocate the practice within the building or plaza. demolition - landlord right to terminate the lease early if building to be demolished or substantially renovated. termination – landlord right to terminate lease when vendor sells the practice and requests landlord consent to transfer lease to purchaser. d. Whether changes are required to the premises lease as a condition to purchase. 11. Review the vendor equipment leases and other materi-
al agreements that purchaser may be required to take over on purchase. 12. Carefully review all staff arrangements the vendor has, including: a. Do proper written agreement exist for all staff, whether
dental hygienists, chairside assistants and others working at the practice. b. Is notice to terminate an employee limited to Employment Standards Act (Ontario) minimums or does common law extended notice periods apply.
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13. Determine if the purchaser will retain all staff after
closing and on what terms: a. Understand purchaser legal obligations regarding staff
going forward. b. Require the vendor to pay all or a portion of any termi-
nation costs of staff for several months after the closing date; the typical arrangement is a 50/50 sharing of staff terminations by the vendor and purchaser for the first three months from the purchase. c. Implement new proper written agreements with all staff immediately after closing if the vendor only had verbal arrangements with the staff.
Conduct your own due diligence including a detailed patient chart audit. 14. Ensure the vendor agrees not to solicit patients after
closing and not to compete with the purchaser within a reasonable geographic distance and for a reasonable amount of time after closing. 15. To assist in transition of patients to the purchaser, retain the vendor as an associate after closing with a proper written associate agreement. 16. Understand your rights and obligations (and the vendor rights and obligations) in the definitive legal purchase and sale agreement. 17. Hire industry recognized expert professional advisors who specialize in advising dentists in purchasing dental practices. 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.
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TheProfessional Advisory FOR DENTAL PROFESSIONALS
The Professional Advisory
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FOR DENTAL PROFFESSIONALS
VOL. 63 February 2014
Progressus – a going forward, advance
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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
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