16 minute read
Disputes and awkward professional relationships
By Graham Middleton
Over 33 years, I came across a multitude of disputes involving partnerships, associateships and part practice sales to corporates involving dentists, veterinarians and other professionals. There were a variety of outcomes and a variety of causes among which jealousy, greed and unfair carrying of the burden of building and administering practices were prominent.
Names and some details have been altered to preserve the identity of those involved.
The incompatible veterinary partners, circa 1990
George was a competent veterinary surgeon but had a hair trigger temper while Ike was naturally diplomatic. Their practice was very profitable with several employed vets and about six support staff. George regularly snapped at staff if the slightest matter upset him. Ike quietly patched matters up and provided a safety valve for staff. The practice remained profitable but one day, Ike was diagnosed with a terminal illness and was forced to retire. Rather than have a new partner, George purchased Ike’s partnership share of the practice and premises. It proved to be a disaster, with regular turnover of staff. Such was George’s reputation in his profession, no staff member had to explain to a prospective veterinary employer why they had left his practice. Eventually George decided to retire after his practice had been badly run down. It took several years but the new owners rebuilt it into a vibrant practice and several former staff members became employees.
The controlling dental associate
James and Joe were associates in an established dental practice. James was controlling and many of his actions offended Joe who was naturally cooperative. James burnt off some good staff, while Joe was protective of those who supported him. James produced the higher fees but had a lifestyle which required more income. Joe’s lifestyle was modest and although he earned less, his financial position was much stronger.
Everybody in James’ life appeared to be expendable. He changed accountants and advisers regularly—his personal life was messy. A series of James’ chairside assistants departed for other practices as did a receptionist. Joe had a long-term chairside assistant who did not want to work for James. Two assistant dentists learned to avoid James as far as possible but got on well with Joe. One of them bought a one third associateship off James and Joe.
A year or so afterwards, Joe decided to retire at a relatively early age and sold his remaining one third to the other associate. The two newest associates were each capable of producing significantly more. One day, James announced that he was taking sick leave and was able to claim on his insurance policy. He failed to make adequate arrangements and lots of his patients drifted to other practices nearby while some transferred their allegiance to the younger associates. When several years later James decided to sell, his goodwill had vanished and the other associates were only prepared to offer a token payment for the remnant of his associateship.
The controlling accountant who destroyed the financial potential of a dental practice
Tom, Dick, Jo and Harriet were associates in a dental practice spread over four locations. Long ago the practice had been owned by Jo’s father who had had a long relationship with an accountant. Over many years the original city central practice (Central) had progressively spread to three suburban locations and Jo’s Dad had sold associateships to Jo and the other three but the practice had maintained a highly centralized structure and had a practice manager (Boadicea) who had taken on two assistants and who was close to the accountant. Boadicea and the accountant, known as “Stick in the Mud” or “Stick” for short had run the group centrally with the practice manager located at Central, but each of the associates spent most of their work time at the suburban locations. Parking and access had become progressively more difficult at Central and it was mainly staffed by employed assistant dentists. Two of the associates worked there for one and two days per week respectively. Stick counselled against change but had too little direct contact with the associated owners. It suited Stick and Boadicea for most contact to occur through her.
The practice ground along but its relative efficiency or DEBDIT percentage was a long way below the average of a vast number of sound practices. Stick had negligible knowledge of dental practice outcomes as his client base was a variety of unrelated small businesses. If Boadicea was questioned about practice outcomes she referred to advice from Stick. It was a classic case of the blind leading the blind. The associates became frustrated that they were struggling to earn more than they would have received as contractors producing their respective amounts of fees if working for other practices. They were getting little or no benefit from ownership. The myopic Stick did not see the problem and Boadicea was motivated to preserve the status quo which supported her team. If costs had been broken down and distributed it would have become apparent that Central was no longer viable and the group were carrying unnecessary baggage.
Eventually, many years after it became necessary, the group closed Central after having as many patients as possible referred on to whichever suburban location was nearest via a telephone redirection system and website. The remaining three practices were separated with Jo and Dick each owning one of the two smaller practices while Tom and Harriet formed a simple associateship at the larger of the three. The three separated practices engaged their own accountants, had a simple bookkeeping arrangement and the services of Boadicea and her two assistants were dispensed with. There were also other staff economies and Central’s premises were sold. Subsequently each of the practice owners enjoyed far more personal control while their profits were much improved. Stick had exerted far too much negative influence over many years and had collectively cost each of the owners a great deal of profit.
The lessons
1. A great many accountants claim to be good at giving business advice but too many have scant knowledge of dental practices and what makes them efficient and profitable; they make up their advice without having a basis for it. 2. Many practice managers are profit destroyers.
The financial adviser who lost the plot
Francis, better known as “Frankie”, discovered that he had a gift with words as a teenager and initially made a significant living as a life assurance salesman but was quicker than most to recognise the potential of the changes to superannuation contributions which came into effect on 30 June 1983. These changes permitted much greater tax-deductible contributions if paid by an employer. It turned out to be a catalyst for the incorporation of practices or service entities. A pretax salary could be cocktailed into a substantial amount of superannuation and a lesser amount of salary by a formula. Initially and for several years, most accountants did not understand the formula. For those in the know like Frankie, there were easy pickings because for the first five years after the change, superannuation contributions were not subject to any tax nor were superannuation fund earnings subject to taxation. Additionally, for several years, Australia had a punitive marginal tax rate on middle to higher incomes. Frankie talked in mysterious riddles to potential clients and had developed an impressive white board presentation covering everything from treasury notes through various forms of property and taxation rates including tax of insurance bonds and superannuation preceding and following the changes of 30 June 1988. His presentations were loaded with powerful phrases and he knew when to stop and look into the eyes of the recipients.
For most hearing Frankie’s presentation for the first time, he appeared as the only person they had ever met who had a 100% view of Australian investment and taxation facts. Whereas others were catching on fast and a financial advisory industry had been born, very few advisers could come close to matching Frankie’s presentation. A significant proportion of well-off clients hearing it for the first time were mesmerised and were prepared to do whatever Frankie suggested. Those with wider business experience recognised a carefully crafted and endlessly rehearsed sales pitch aimed at people’s emotions.
Frankie invariably identified a few weaknesses in his targets’ financials which suggested that their accountants had not been active in advising them.
Quite a few unethical accountants of the period had directed their clients into deeply flawed timber plantation investment schemes, investment in rubbish films and had been mislead into buying keyman insurance products despite being essentially self-employed. Many of these paid huge commissions to outwardly respectable chartered accountants and certified practicing accountants. Events were to prove Frankie right but he had his own internally geared integrated property schemes which in a rising property market in the mid 1980’s propelled by then high inflation and very high marginal tax rates before the Hawke/Keating reforms appeared to be an easy way to make money for his clients. Frankie negotiated a slice of the deals as reward for putting investment syndicates together. For several years these syndicates flourished and Frankie attracted clients who wanted to be included in a new syndicate or two.
Impact of the October 1987 Stock Market Crash
The October 1987 global stock markets crash not only changed the fortunes of Australia’s corporate entrepreneurs dramatically with a large number of them destined to collapse over the several succeeding years, but it also led to a reappraisal of Commonwealth Treasury and Reserve Bank of Australia senior bureaucrats together with various regulatory agencies. They took several years to identify problems and solutions but eventually advised the government that the financial excesses typical of the 1980’s had to be eliminated. Increasing interest rates were their primary weapon of choice and these also reduced inflation, but at a cost of very high unemployment. A number of the 1980’s entrepreneurs were convicted of offences and jailed, found their way into exile, were bankrupted or saw their corporate empires liquidated by banks. Treasurer Keating later explained the impact of huge increases in interest of 1991 as “The recession Australia had to have”.
A related impact was the destruction of a number of the internally geared property syndicates that Frankie had put together. Many tenants went broke or were enticed to move to far more attractive accommodation in recently built office towers with concessional rent periods of several years and other inducements. The rental income of Frankie’s property syndicates collapsed and was insufficient to cope with the rising internal interest burden. A number of syndicates became worthless as the gearing effect worked in reverse. By this time, many in Frankie’s business had realised that he lacked fundamental economic knowledge and the group fragmented.
Frankie reinvents himself
Ever the master salesman, Frankie was able to regroup, bring in new advisers, administrators and accountants and embarked on new vertically integrated investment structures syndicating vineyards and other rural schemes. These too were flawed and ultimately other partners dispensed with Frankie’s services. His once influential organisation had become worthless.
The lessons
1. Internal gearing works best when there is high inflation increasing asset values coupled with high marginal tax rates to give maximum tax benefit; 2. Even attractive property assets can fall sharply in value during a recession.
Recession also puts the businesses of tenants at risk; and 3. Recently the placing of Dixon Advisory into administration has focused attention on the weaknesses of internal vertically integrated structures.
Carrying a non-performing veterinary partner
Lindsay and Melinda bought a veterinary practice in partnership but it quickly transpired that Lindsay was a practice builder who had developed a substantial range of veterinary skills. Melinda simply did not contribute to the practice as a partner should, referring out to specialists matters that most competent vets treated inhouse. To make matters worse, many of the clients whose pets she referred to specialists never returned to the practice. Lindsay was able to treat most patients inhouse referring very little out and built up a strong personal following. Eventually, Lindsay demanded that Melinda perform or sell. Melinda’s spouse had a significant income and she decided that she did not want the stress of continuing as a partner if it meant working as hard as Lindsay and sold her partnership in the practice and premises to Lindsay. Subsequently the practice grew strongly. A visiting specialist did the small number of complex surgeries that Lindsay could not do and the clients were retained by the practice. Quite a few years later, Lindsay was able to sell the practice for an impressive amount and proceed to retirement with a nice home, a substantial superannuation fund and substantial additional assets.
Carrying other dental associates
James, a South African dental immigrant, had an impressive range of dental skills and was able to purchase an associateship in a capital city practice. James quickly outperformed the other associates and routinely provided treatments that the others were used to referring outwards. His own patient list grew and soon there was a spillover of new patient referrals to the other associates. The other associates were less efficient than James but refused to adjust the allocation of administrative overheads to reflect the relative costs and benefits. Eventually, James sold his associateship to the others and bought a practice a long way distant where he could build his own patient list confident in being able to keep the reward.
The impact of controlling accountant mark 2
Irecall being approached by a dentist concerning the frustrations of a practice with four owners with a weird structure presided over by the group accountant. Although the four owners had widely varying productivity, the structure worked against the most efficient dentists and subsidised the least busy. All associates in the practice plus a couple of assistant dentists were allocated 40% of their fees minus associated laboratory costs. The remaining profit after expenses was then split evenly four ways. In reality, the dentist with the greatest productivity was a great deal more efficient in his use of resources including his chairside assistant compared to the least efficient who were content to work at a
much slower pace producing less fees. A proper allocation of costs would have recognised the greater efficiency and profit per dollar of fees as well as the aggregate outcomes of the most efficient compared to the less efficient. The group accountant had little experience of other dentists and staunchly defended the structure he had designed many years earlier even though it was inevitably destined to tear the group apart.
Poor set-up advice by accountants
It is important when buying a dental practice to consider long term impacts of structure. I have seen many examples of poor business structure because an accountant, or occasionally a solicitor, advised it. Ownership via a company had attractions in the 1980’s because of the superannuation rules. Subsequent introduction of the small business capital gains tax concessions in 2001 indicates that practices should not be bought inside companies but rather goodwill should be owned personally. Once income is sufficient, consideration is given to licensing a company to conduct the practice. Goodwill ownership remains with the dentist. It is necessary to retain the long-term potential to reduce capital gains tax through the 50% advantage on sale of assets owned for more than one year personally and also to gain access to the small business capital gains tax concessions.
The other weakness of most accountants is that they simply do not understand the key factors which make some dental practices much more lucrative than others despite being owned by dentists of similar skill. The truth is that while a multitude of accounting practices have signage proclaiming that they provide business advice, the majority spend almost all their time providing annual financials and tax returns and understand little about their client’s businesses and practices.
I regularly came across dental practices which had been structured wrongly, but their owners were unable to explain why. Sometimes bad advice at the purchase time leads to long term outcomes which leave a dentist millions of dollars worse off at retirement. By that time, the accountant concerned has long since ceased practice.
Tips for choosing an accountant
1. When interviewing a prospective accountant, test them with searching questions about dental practices of which you already know the answers; 2. Don’t assume that because an accounting practice has a foothold in the dental profession that all of its accounting partners and staff have the same skills and give consistent advice; 3. Big is not beautiful. The most financially successful single owner practices have no more than two chairs occupied by other dentists, OHTs or hygienists.
Dual owner practices are the most efficient if they have no more than two chairs occupied by others in addition to those utilised by the owners. In the overwhelming proportion of practices, at least 85% of the profit is earned in the owner’s surgery(s). The owners are usually the most productive dentists and they are not paying a substantial share of fees to an assistant dentist for the fees they generate personally. Many accountants lack this understanding; 4. Size of accounting practices does not necessarily indicate better advice; 5. An efficient dental practice with a hardworking owner who has good personal communication skills earns more profit for the owner than can be achieved by a collection of small practices staffed by contractors. Be wary of accountants advising you to add several more surgeries or buy satellite practices; 6. If you’re so busy as to be unable to attend to all practice administration, use a part time bookkeeper who visits the practice for a few hours per fortnight, updates financials, arranges staff salaries and bill payments for your approval and provides a bank reconciliation; 7. Some accountants have only one or two dentists on their books but make the mistake of judging outcomes by comparison with dissimilar small businesses. It is essential that you ask the accountant how many dental practices he/she completes accounts for as distinct from the firm overall; and 8. Dentists considering buying a practice need to read “What dentists buying practices need to know” in Australasian
Dental Practice September/October 2021 and obtain the book “Financial
Success for Dentists” - See below. Best wishes to all dentists and specialists.
General Advice Warning
The information contained in this article is unsolicited general information only, without regard to the reader’s individual financial objectives, financial situation or needs. The information contained on this article is general in nature and you should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from an accountant or financial adviser. It is not specific advice for any particular individual and is not intended to be relied upon by any person. Before making any decision about the information provided, you should consider the appropriateness of the information in this article, having regard to your objectives, financial situation and needs and consult your professional adviser. Any indicative information and assumptions used here are summarised, are not a product illustration or quote and also may change without notice to you, particularly if based on past performance. This notice must not be removed from this article.
About the Author
Graham Middleton disposed of his interest in Synstrat group on 30 June 2020 and won’t be starting another business; He spent the later 33 years of his working life advising health professionals on business and financial matters. Dentists were the most numerous of his clients. He is the author of the recently published Financial Success for Dentists. Dentists may obtain a copy by making a donation of minimum $60 to the Delany Foundation a registered charity which assists schools in Ghana, Kenya and Papua New Guinea then email Graham at graham. george.middleton@gmail.com. A copy will be sent to you. All proceeds go to the Delany Foundation for its good work. Graham has paid for the printing and mail costs personally.
