How Are Your Billing Ratios? The Biggest Hurdles in Buying or Selling a Practice (Part 1) What You Don’t Know About Your Realty Lease Will Hurt You! How to Plan for Personal Financial Success Locating Your Dental Practice High Stakes Insurance Poker How to Deduct Your Home and/or Cottage Mortgage Interest
The
Professional
Advisory For Healthcare Professionals
How Are Your Billing Ratios? GRAHAM R. TUCK H.B.A. C.A 2 The Biggest Hurdles in Buying or Selling a Practice (Part 1) 1
BARRY A. SPIEGEL
3
LL.M., Q.C
What You Don’t Know About Your Realty Lease Will Hurt You! IAN TOMS B.Sc. (Hons)
How to Plan for Personal Financial Success BARRY R. McNULTY CFP, FMA, CIM, FCSI 5 Locating Your Dental Practice DR. RON WEINTRAUB 6 High Stakes Insurance Poker Dr. IAN WEXLER 7 How to Deduct Your Home and/or Cottage Mortgage Interest 4
DAVID CHONG YEN
CFP, CA
1
How Are Your Billing Ratios? GRAHAM R. TUCK
H.B.A. C.A
Quite often when I speak to groups of dentists I talk about ratios in a dental practice. Today I am writing about Billing Ratios so that you can compare your practice to them. First to set some of the parameters: 1) The ratios are difficult to use for new practices and specialty practices. 2) Ratios may be very different when comparing small towns to Toronto. 3) Ratios are not perfect but should give a good indication of where your practice sits relative to other practices 4) The ratios assume that the provider is working forty eight to fifty weeks per year A) Billings per day: Doctors Experienced doctors should be able to bill $100,000 per day of the week that they work. That is to say if a doctor works four days per week his personal billings should be about $400,000 per year. This would include the hygiene examination fee. I have seen dentists doing $150,000 per day of the week that they work but these are the exception to the rule. What can go wrong to not achieve these results? If there is a limited patient base, the practitioner’s income could be much lower as his or her time is expanded to fit the patient load. B) Billings per day: Hygienists. Hygienists have three levels of production, 1) Limited soft tissue management program would have 5% to 15% of the adults in the practice with periodontal appointments. Billings, excluding the doctor’s examination fee, would be about $800 per day or about $40,000 (per
day of the week they work) over the course of a year. In other words if a hygienist works three days one would expect billings of (3 X 40,000) $120,000 per year. This is net billings after missed appointments etc. 2) Moderate soft tissue management patients would have 25% to 45% of the adults in the practice with periodontal appointments. Billings, excluding the doctor’s examination fee, would be about $1,000 per day or about $50,000 (per day of the week they work) over the course of a year. In other words if a hygienist works three days one would expect billings of (3 X 50,000) $150,000 per year. This is net billings after missed appointments etc. 3) Strong soft tissue management patients would have 50% to 70% of the adults in the practice with periodontal appointments. Billings, excluding the doctor’s examination fee, would be about $1,200 per day or about $60,000 (per day of the week they work) over the course of a year. In other words if a hygienist works three days one would expect billings of (3 X 60,000) $180,000 per year. This is net billings after missed appointments etc. What can go wrong to not achieve these results? a) The hygienist has too many last minute cancellations which cannot be filled. This would have a negative impact on achieving the desired results. To overcome this problem reduce the Hygienist’s hours so as to not use all of the patient base the do the original bookings, thus there would be patients available to fill in the openings as cancellations cause holes in the schedule. b) Not charging the current fee guide can certainly have
a negative impact. To overcome this problem meet with the staff to set a new direction to better reflect the current fee guide.
Graham Tuck, H.B.A., C.A., is the broker/owner of Professional Practice Sales (Ontario) Ltd., which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1 (888) 777-8825 or by e-mail at: grtuck@rogers.com.
2
The Biggest Hurdles in Buying or Selling a Practice (Part 1) BARRY A. SPIEGEL
LL.M., Q.C
The Vendor and Purchaser are close to agreement on the purchase price. In fact, they may have signed an Agreement of Purchase and Sale, subject to review by their lawyers or accountants. Often, they have reached this stage of the negotiations having dealt only with each other, with or without the assistance of a broker. Unfortunately, the deal falls apart leaving the both the seller and the buyer confused and annoyed and facing legal and accounting fees. Why did this happen? There may be many reasons why, during the process of “due diligence”, when the buyer investigates the details of the practice, unexpected and unavoidable problems can arise with such matters as the patient lists, the record keeping of the seller, the condition of the equipment and a host of other issues. These are the normal risks any potential buyer of a business takes, but those are not the areas that we will address. This article will analyze the matters which, in my experience, are often the biggest hurdles to a successful transaction and which, if dealt with early, might avoid a significant waste of your time and money. The problem is, all too often, that the parties do not even discuss some of these matters until well into the negotiations or even after the agreement of purchase and sale has been signed. By that time, the parties may already have a major investment in the project. Some of the significant hurdles, which should be dealt with early in the discussions and which may crystallize potential problems early in the discussions are: • The valuation of the practice; • The allocation of the purchase price; • The employees; • The Lease.
Due to restrictions on space, this article will be presented in two parts. The Valuation All too often, there is no professional valuation. Obviously, the buyer is taking a huge risk if he relies solely on his or her own view of the practice value. There are a large number of matters, that a professional valuator will review, that may not even cross your mind. Although, in the course of my years of practice, I have reviewed hundreds of transactions, I have never offered my views as to the value of any practice. It is not my specialty, nor, I suspect, is it yours. Assuming that the seller has provided you with a valuation. Is it current? Was it prepared by an experienced valuator of dental practices? Does that valuator have a reputation for valuing conservatively? After having been satisfied that the valuation the seller has shown you is from a qualified valuator, you must then review the valuation with caution. Remember that it was prepared for the seller and was based primarily on information given to the valuator by the seller. Even though the valuator knew that the document was prepared for a sale of the practice, he has no direct obligation to the buyer. The buyer would be foolhardy to rely on it without making his or her own investigation, or even without getting a second, independent valuation. In the next edition of the Professional Advisory, I will conclude my remarks on these major and sometimes avoidable obstacles to a successful transaction. Barry Spiegel is a senior lawyer whose practice is devoted to corporate, commercial and business law, with special emphasis on advising and consulting for the dental profession. He can be reached at (416) 8650330; or fax to (416) 363‑8451; or e-mail to barry@spieglaw.com.
3
What You Don’t Know About Your Realty Lease Will Hurt You! IAN TOMS
B.Sc. (Hons)
Most tenants are not aware of lease flaws until a problem is encountered which results in significant, unexpected, and unnecessary costs. Some of the most common and expensive lease problems are listed
below. If addressed during initial negotiations or at renewal time, they will maximize the value of your practice both as an ongoing concern and at transition time.
1) Term renewal options absent or landlord friendly. Tenant friendly options to renew the term of your lease are essential. They provide you with the ability to control the length of time and conditions under which you or your successor may operate at the premises.
permit the practice of general dentistry, all dental specialties, the practice of dental hygiene and/or any professional medical discipline. Together with the assignment and exclusivity clauses, this provision enables the broadest range of transfer possibilities.
Your option should provide you with control of the space for at least the next 10 years, at your discretion. Rental rates should reflect the market, at the time of renewal, for similar unimproved premises in the area.
5) Exclusivity provision missing or weak The “exclusivity clause” should prevent the landlord from permitting another tenant to operate in any space controlled or owned by this landlord, within a specified distance from your premises, for any use described in the “use clause.” This will eliminate direct competition, and force the landlord to ask your blessing when entertaining an offer for any such use. This can create a leverage position in your favour.
2) Assignment and/or sharing ability restricted or absent. You must be able to transfer the lease, and all related obligations, to a business incorporation, or another individual and to share your space with an associate, with minimum interference from the landlord. Without the ability to share your premises, your ability to develop the practice is limited. Without the ability to assign the lease, your ability to sell the practice will be impaired. 3) Personal tenant covenant. Avoid personally guaranteeing the obligations expressed by the lease. The tenant should be a business corporation. The person(s) behind the corporation should limit their personal exposure. If more than one person is sharing lease obligations, then each person should have a predetermined level of exposure. If you are part of a group tenancy without a partnership agreement, please talk to your lawyer about a partnership agreement - now! 4) Absent, limited or vague “use clause” The “use clause” should be very precise and include as broad a range of uses as possible. The clause should
6) Additional rent provision open ended Commonly, leases permit a landlord to charge the tenant for any cost remotely associated with the building, at the landlord’s discretion; this often results in outrageous rental payments. Avoid an argument about what additional rent elements are legitimate. Simply agree to pay a reasonable sum subject to annual adjustment related to an inflation index. The time is now. Please review a copy of your lease and plan a strategy to correct any issues referred to above. Ian D. Toms, B.Sc. (Hons), acts as a tenant advocate on behalf of select retail and professional tenant clients primarily in the Greater Toronto Area. Mr. Toms is a real estate sales representative representing Professional Practice Sales (Ontario) Ltd. Mr. Toms was a multi-unit retail tenant and landlord for over 10 years and has since spent several years as a realty lease consultant. He can be reached toll free at (877) 216-1013, or by e-mail at iantoms@pipcom.com.
4
How to Plan for Personal Financial Success BARRY R. McNULTY CFP, FMA, CIM, FCSI While a tremendous amount of time goes into planning and working in the practice, very few dentists spend much time, if any, planning what happens after the practice. As one client described it, this is the “missing link.” To address this, you must not only plan for what happens to your money after it leaves the practice, but also for using the practice as the tool to drive your personal finances. How is this accomplished? 1) Clearly define your goals. What is it you want to do with your life and what is important to you? By setting goals, we direct all of our strategies and actions to their end. 2) Starting point: figure out where you are today in a financial sense. This includes a practice and personal
cash flow statement (what comes in and what goes out) and a net worth statement (what you have and what you owe). It is important to know where you are relative to your goals. 3) Risk Management: protecting your Starting Point. You need to make sure there is nothing unforeseen that can compromise your Starting Point. No one likes to think about being stricken by a major disease, injury or disability, but for the security of you and your family, it is important to recognize that this could happen to you. 4) Strategy: what is the most efficient route to get you from your Starting Point to your Goals. You may be closer than you think! While each area is integrated with the other, you should have a clearly defined strategy for each tool at your disposal. These are:
a) The Practice Tool: a practice business plan should meet your personal needs. b) Tax Planning Tools: these can very often bring you closer to your goals without any additional time at chair side. You should investigate professional incorporation, hygiene incorporation, trusts, RRSPs, RESPs, income splitting, retirement compensation arrangements, individual pension plans, health and welfare trusts, etc. c) Portfolio Management Tools: too often people either assume too much risk with their investments or are too conservative. A properly defined investment strategy is managed on an asset allocation basis, which is determined by your goals, risk tolerance, time horizon and starting point and does not involve market timing. d) Debt Management Tools e) Cash Flow Management Tools f) Insurance Tools g) Retirement Planning Tools h) Education Planning Tools 5) Written Plan: each strategy should be clearly written
and readily accessible to facilitate future decisions 6) Edible Bites: each strategy should be broken down into edible bites. Implementation of each strategy is the most important part. If it is not implemented, it is just a piece of paper. 7) Monitoring: this is a living document, affected by multiple factors. When new issues arise, the plan needs to be modified accordingly. 8) Update: At least once per year you should repeat the entire process. When new issues arise, the plan needs to be modified accordingly. In a nutshell, this process is the key to personal financial success. Why don’t most people employ this system? The main reason is that they don’t know how to go about it. Your financial future is not something that should be left to chance. I encourage you to be proactive in your planning and take action sooner rather than later. Good luck! Mr. Barry R. McNulty CFP, FMA, CIM, FCSI is with Raymond James Ltd – McNulty Group, Independent Financial Services .- Member CIPF. The opinions expressed by the author are not necessarily those of Raymond James Ltd. He may be contacted at 905-470-6222 ext 216 or barry.mcnulty@raymondjames.ca.
5
Locating Your Dental Practice Dr. RON WEINTRAUB Many dentists,at various stages in their careers, have decided to start a new practice; some have even changed the location and type of practice. Before you choose a location try to determine the desired characteristics of the new practice you are about to launch. Different types of practices can be broken down into categories based on location - rural, urban or suburban. Some fundamental choices need to be made based on the impact the area would have on the type of practice you want to develop. Rural (smaller centres) Advantages 1) Often access to a larger (albeit spread out) patient pool with less concern about the busyness factor Office rents and human resource costs tend to be less onerous while applying the same fee schedule. 2) An increased opportunity to become an integral part of the professional leadership of the community 3) Access to hospital appointments and ability to treat with General Anaesthesia 4) Other professionals are considered more as cohorts and friends than as competitors 5) Enriched family life and access to outdoor sports while enhancing a sense of belonging to the community 6) Exposure to more varied types of dental challenges
since specialists aren’t as readily available; therefore, forced to expand skill set 7) Probably better opportunity to be very financially successful Disadvantages 1) Feelings of isolation 2) Sheer volume of patient needs for basic caries pain management might not allow a balance of comprehensive dentistry to be provided 3) Support of various specialities can be difficult to obtain 4) Limited social, cultural and educational outlets for family 5) Access to continuing education may limit taking advantage of short or evening courses 6) Laboratory services are more difficult to obtain, from both patient and practitioner perspective 7) Ability to recruit associates and hygienists is more limited 8) Less chance, at end of career, to be able to sell practice profitably, since the plethora of patients allows a prospective dentist to set up on his own Urban Advantages 1) A very high concentration of potential patients, in a small geographic space 2) Higher awareness and concern about preventive health
and appearance - more receptive to aesthetic strides dentistry has made 3) Ability to call, on short notice, people in proximate buildings to fill last minute cancellations 4) Many locations served by subway and good rapid transit 5) Requests for evening and weekend hours are very low 6) Able to work with specialists at a close proximity 7) Close to continuing education 8) Those who do not enjoy paedodontics don’t have to turn away a significant part of a potential patient base 9) Those in speciality areas of practice can have G.Ps from a larger distance refer to them since patients have easier access 10) Can live and work closer to the cultural heart of the cities 11) Some people perceive a downtown location to be more prestigious Disadvantages 1) Probably do not get opportunity to treat all members of patient’s families 2) Often parking is a significant and costly problem
3) Many downtown office dwellers are on very tight schedules and may cancel on short notice 4) Tend to see a greater number of “type A” stressed individuals who are very demanding and require outstanding customer service 5) Practices costs often higher [eg, higher rents] often limit space for office amenities to both staff and patients (less comfortable reception areas and staff rooms) 6) Additional increase in mobility of patient base - their loyalty is limited by geography The next article will be devoted to the more complex suburban option. Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings to the Professional Advisory, over thirty years of knowledge and experience in the practice of general dentistry. Large companies such as Patterson Dental, Ash Temple Ltd. & the former Canadian Dental Co. have all sought his particular brand of expertise. Ron has been known to offer insight in the areas of practice enhancement. As a consultant to Innovative Practice Solutions, Ron can be found advising dentists on practice purchases, sales, location evaluations, associate buyins, and practice mergers. Dr. Weintraub can be contacted at (416) 224-1775 or admin@bvdental.com.
6
High Stakes Insurance Poker Dr. IAN WEXLER
Generally, most people wouldn’t think of their dentist as a serious gambler - these people would be wrong! Some of the dentists I have met, play with bigger stakes than those found in Las Vegas. The difference between the casino blackjack or craps player and these dentists is that the stakes for the dentists are much higher - their entire financial future.
They say: “I can’t afford to buy disability coverage now because it’s too expensive and I still have student loans;” “I just want the cheapest stuff until I can afford to buy really good insurance;” “I’m young and come from a family with really good genes so I’ll probably never need it anyway;” “I just spent so much on this practice that I just want the lowest cost insurance there is.” These are just some of the lines I hear on a regular basis. However, these are the same individuals who panic at ‘claim time’ when they realize they were under-insured or are having a problem collecting benefits because of the “fine print” in their policy. Buying a Parachute If a dentist had the opportunity to buy a parachute that was guaranteed to open every time, yet cost a few dollars more than one that didn’t have the same guarantee, you would think that the guaranteed parachute would be
purchased every time. This is not the case. Many are willing to take the risk that “all parachutes are generally the same,” or “the odds are that both will open, so I might as well go for the cheaper one.” Parachutes are a lot like disability insurance - you get what you pay for. Cost The best non-cancellable, guaranteed renewable long term disability plans are not cheap. This is especially true for older dentists who have significant incomes. I am also aware of the often overwhelming cost that a combination of all the other types of insurance plans might entail. It is important to remember though, that out of all the life, disability and other policies you hold, the one with the greatest financial impact on you and your family is long term disability. Long Term Consequences There are several key factors which many fail to consider when considering long term or other disability insurance protection. The first is that people are living longer, so if you have a long term claim, you will have to consider what happens once your coverage runs out at age 65. Secondly, since people are living longer, at least in part due to medical advances, you will need more money to fund your retirement. Lastly, many individuals have had
their retirement portfolios decimated during the recent stock market correction. Therefore, a long term disability could have devastating consequences on how and when you plan on retiring.
a career ending accident tomorrow. In this case, you may wish to think twice before purchasing the “cheaper parachute.”
Think of Your Family When considering any type of disability protection, especially long term disability, think about your family’s financial well being should you suffer a major sickness or
Dr. Ian Wexler is considered Canada’s leading authority on insurance issues for dentists. He is the President of Protect-a-dent and Protect Insurance Agencies Inc. in Toronto which provides disability and life insurance products and services to Dentists across Ontario. He can be reached at (416) 391-3764 or drwex@protect-ins.com
7
How to Deduct Your Home and/or Cottage Mortgage Interest DAVID CHONG YEN CFP, CA Who Benefits?
provided they are reasonable:
Individuals who: a) Have personal non-tax deductible debts, such as a home mortgage, and b) Own a practice, which operates as a proprietorship or partnership, and c) Have built up value in the practice.
a) Dental/medical supplies and lab fees b) Salaries c) Rent d) Utilities e) Business taxes f) Licence fees g) Equipment rental h) Legal and Accounting i) Office Expenses j) Maintenance and Repairs k) Telephone l) Bank charges and interest related to the expense account m) Any other cost required to operate the practice
Tax Saving: You can get a tax deduction for interest expense on loans, which would otherwise have been personal non tax-deductible debt. What is the Tax Savings? For example: Loan - $600,000 Interest Rate (approximate) - 6% Interest Incurred - 36,000 Tax Bracket (approximate) - 46% Annual Tax Savings - $16,560 How To Do It? General Concepts: 1) Set up two (2) bank chequing accounts 2) Expense of practice are paid from first bank account, referred to as “Expenses Account” 3) Revenues of practice are deposited into second bank account, referred to as “Revenue Account” 4) Loans from bank gets deposited into “Expense Account” and used to pay for practice expenses 5) Revenues are withdrawn from Revenue Account and used to pay off non tax deductible debt such as home/ cottage mortgage Specifics: Only business and capital expenditures (equipment, computers, office renovations) should be paid out of the “Expense Account”. Therefore, the “Expense Account” may pay any of the following
The expense account should not pay any of the following: i) The non-deductible portion of meals and entertainment and car expenses; ii) Draws to the dentist; iii) Any non-deductible fringe benefits paid to employees; iv) Any other expenditure, which are not deductible for business purposes. All expenditures mentioned in (i) through (iv) should be paid from the “Revenue Account”. Tax Department’s Perspective Since the loan was used and can be traced to business expenses, the interest on the loan is tax deductible as such interest was incurred in order to earn income. It is imperative that the audit trail is strictly adhered to, otherwise CCRA, the Tax department, could deny the deduction. David Chong Yen, CFP, CA with an international firm background and more than twenty-three years of experience, advises healthcare professionals and owner-managers. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or E-mail david@dcy.ca. This article is intended to present tax saving and tax planning ideas and is not intended to replace professional advice.
Q A &
Please address your questions to: The Professional Advisory for Healthcare Professionals 308-7050 Woodbine Avenue, Markham, Ontario L3R 4G3 T. (905) 470-6222 F. (905) 475-4082 info@theprofessionaladvisory.com
Q Is it reasonable to expect that CPP benefits will continue to be available in the future for retirement planning purposes?
A While many people are concerned about the future of government finances I would say it is quite reasonable that you plan on receiving the CPP benefits that you are entitled to. There are two reasons for this. First in his most recent report the chief actuary for the plan has stated that at the present contribution rate reserves continue to build. In fact he estimates that by the year 2050 assets in the plan will be over 5.8 times annual projected expenditures. By 2075 he projects that this figure will grow to approximately 6.5 times annual expenditures. At that point it is expected only 32% of investment earnings will have to be added to contributions to make required benefit payments. His calculations have been approved by an independent panel of actuaries by the way. The second reason I believe CPP benefits will be available is the very strong seniors lobby here in Canada. We all paid into this pension plan. We are all entitled to the promised benefits. It would be extremely difficult for any politician to change that.
Q How many patients would make up a full time practice for one dentist?
A Generally, I think of 1,200 active patients with a reasonable distribution between recall, semi active and new patients to make up a full time practice. Active, meaning that the patient has been in the practice in the last 2 years. I have seen practices with 2,500 active patients but these tend to be underachieving practices given the patient base. Twelve hundred patients should also require about 4.5 days of hygiene per week if there is a reasonable soft tissue management program in the practice.
Q How do I cost effectively get my landlord to perform his duties such as snow and ice removal, light bulb replacement, window or washroom cleaning? A First, check your lease to make sure it is the land-
lord’s responsibility to complete the work. Secondly, confirm the result of your review with a lease consultant or your lawyer. Then send the landlord a notice clearly describing the problem, and indicate that if the problem is not corrected by a certain date, you will complete the work and deduct the cost from your next rent installment. Be prepared for a significant reaction but stand your ground!
Q My insurance advisor recently recommended
that I dump a whole bunch of extra money yearly into a universal life insurance policy as a retirement investment. He claims it’s the best thing I could do for retirement income, and even better than an RRSP.
A Although applicable for some, this is currently one
of the biggest scams, in my opinion, in the insurance industry today. I have found that many presented with the “over-funding concept” of universal life plans are rarely told about how they really work including hidden costs, penalties, investment options, and realistic rates of return. My advice is to tread very carefully, and to consider another opinion from an insurance advisor who can determine whether you are a good fit for such a plan. Finally, if you already own such a plan, you may wish to have someone else review it in detail.
The views expressed in any article are those of the author alone. They should not be acted upon without the advice of your “professional advisors”.