The Biggest Hurdles in Buying or Selling a Practice (Part 2) Size Does Matter The Golden Rule of Dental Finance Locating Your Dental Practice: The Suburban Choice Why Your Insuance Broker Must Understand Your Dental Practice PST - Another Tax Dentists May Be Responsible for Collecting How to Select an Appraiser for Your Practice
The
Professional
Advisory For Healthcare Professionals
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The Biggest Hurdles in Buying or Selling a Practice (Part 2) BARRY A. SPIEGEL
LL.M., Q.C
Size Does Matter IAN TOMS B.Sc. (Hons) 3 The Golden Rule of Dental Finance 2
BARRY R. McNULTY
CFP, RFP, CIM, FCSI
Locating Your Dental Practice: The Suburban Choice DR. RON WEINTRAUB 5 Why Your Insurance Broker Must Understand Your Dental Practice Dr. IAN WEXLER 6 PST - Another Tax Dentists May Be Responsible for Collecting 4
DAVID CHONG YEN
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CFP, CA
How to Select an Appraiser for Your Practice
GRAHAM R. TUCK
H.B.A. C.A
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The Biggest Hurdles in Buying or Selling a Practice (Part 2) BARRY A. SPIEGEL
LL.M., Q.C
In the last edition of The Professional Advisory, I began discussing matters that you should review early in your negotiations to buy or sell your practice. The issues are: • The valuation of the practice (which I discussed in the last issue); • The allocation of the purchase price; • The employees; and • The Lease. Allocation of the Purchase Price In the valuation, there is usually a “breakdown” of the purchase price among the assets - the equipment and furniture, the leasehold improvements, the inventory, the goodwill etc. Once again, this was prepared for the seller and may well be to his tax advantage (and conversely, the buyer’s tax disadvantage). Therefore, the allocation of the purchase price in the valuation or by the seller or his or her advisors, should not merely be accepted by the buyer without questioning it and understanding the tax consequences and, if advised to do so, changing the allocation to numbers which are more beneficial to the buyer. Employees It is a common misconception that, if the seller terminates the services of the employees effective at the time of closing the sale, the buyer can rehire them and have no obligations to them for past services. In fact, if the buyer
retains the services of the seller’s employees, the buyer may be treated at law as a continuing employer, thereby “inheriting” the past service of the employees in question. This means that if the buyer subsequently terminates one of these employees without proper legal cause, there may be a huge and unexpected liability to the employee. By way of example, a long-term employee may be entitled to as much as a year’s pay in certain circumstances. The answer is to check with your lawyer early so that you will understand the liabilities that you may be assuming. Discussions with the seller at the beginning of negotiations may avoid surprises later on. This is a very controversial area since the seller, quite understandably, may have strong allegiances to his or her staff and does not want to see their services ended. This issue is, in my experience, the least understood and one of the more difficult issues in buying or selling a practice. The Lease Almost from the beginning of your discussions with a seller, you should find out the details of the lease of the premises, and, if possible, get an up-to-date copy of all lease documents. If there is little time left on the lease, are there options to renew? Is the rent at or above market? Will you need a new lease and, if so, who will negotiate it and how cooperative is the landlord. Can it be structured to your tax advantage and will you want use a corporation as the tenant?
By resolving these issues early, you can, if necessary, abort the deal in its early stages or at least understand what problems you may face when you purchase the practice. This could save you a lot of time, money and aggravation later
on in the 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) 865-0330; or fax to (416) 363-8451; or e-mail to barry@spieglaw.com.
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Size Does Matter IAN TOMS
B.Sc. (Hons)
Making efficient use of your space will improve your bottom line.
Carrying more space than you really need wastes money; an extra operatory measuring 10 feet by 10 feet may cost $3,000 a year! On the other hand, imagine the production increase by adding another operatory. Use free space. 1. Basement space. Often landlords will allow tenants to use basement space for no rent. This space is useful for storage, lab and administrative office space and can free up main floor production space. 2. Ceiling space. The space above the ceiling tiles and below the structural ceiling is empty, but could be ideal for equipment such as compressor and suction pumps, or storage. Note that this space may not be suitable for temperature sensitive materials. 3. Utility room. Many buildings have utility rooms which are used to store equipment related to the building, within which you may place your compressor and vacuum pump equipment at no cost to free up practice space. Expand or reduce your existing space to avoid relocation cost. 1. Expansion. Consider negotiating a right of first refusal to lease space above, below, or beside your practice; each time the space becomes available you have the option to lease that space. You may consider simply approaching an adjacent tenant and ask to lease part or all of their space. 2. Reduction. Consider reducing your space by assigning part or all of the space to an adjacent or new tenant by speaking to your landlord, your adjacent tenants, or a realtor. Manage your space to minimize cost. 1. Measurement: Tenants consider space measured from the interior surface of each perimeter wall. Landlords measure from the center line of the walls separating adjacent units, or the exterior surface of outside weather walls, as the case may be. Typically in office buildings, and occasionally in retail space, landlords add a portion of the common area (stairwell, lobby, utility rooms) typically “grossing up” the space measurement by 3% in
the case of retail and 15% in the case of office space. That space you measured as 1200 square feet becomes 1280 square feet including the walls, and 1472 square feet with the common area share! At $30.00 per square foot the difference in rental payments over 30 years between the 1200 and 1472 square foot areas is $252,000! 2. Shape: Consider two 1500 square foot spaces, one measuring 15 feet wide by 100 feet deep, and the other measuring 24 feet wide by 62.5 feet deep. The former must be arranged in a linear fashion, with a 4 foot wide hallway and 11 foot wide operatories. The latter has a 4’ center hall plan, with 10’ operatories on each side. A foot for the entire length of the narrow space is wasted, which at $30.00 per square foot equates to $90,000 over a 30 year career! 3. Size: Know that the final shape and size of space offered for lease is often negotiable, especially in space yet to be built. Design for efficiency, not what the landlord is trying to sell you. 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.
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The Golden Rule of Dental Finance BARRY R. McNULTY CFP, RFP, CIM, FCSI In over 20 years of working with dental professionals, I have had the opportunity to see what works financially and what doesn’t. This experience has led me to develop a number of key guiding principles. One of the most important and yet most fundamental is what I call “The Golden Rule of Dental Finance.” Simply stated, the Golden Rule is “Either you adapt your needs to what your practice earns, or you strategically adapt your practice earnings to meet your needs.” This is a very simple philosophy. Those who can live by it have more control over their finances, greater freedom to live their lives in a manner that they find satisfying, and typically have much less stress to contend with. Yet all too often in my experience, this simple doctrine is not followed. Why? One of the main reasons seems to be a lack of good, dependable information. It is not uncommon for a dentist to know exactly what his or her gross production is. While this is critical information, it is only part of what you need to be able to make good financial decisions. Think of it this way. It’s not just how much you produce that’s important. It’s also how much you have available to take home that counts. That means you also need to understand the cash flow your practice is generating. Cash flow in the practice is easy to calculate. Simply stated, it’s your gross collections minus your expenses paid. Understanding what cash is available is still only part of the information you need, however. It is also critical to properly define your spending needs. None of us has infinite financial resources. Decisions, therefore,
have to be made about where to spend your money. To benefit from the simple philosophy espoused by the Golden Rule, it is critical that you have detailed knowledge of the financial costs of your priorities. For example, how much should you regularly set aside for your financial security? I refer to this in a broad sense as building your pension. What about providing for your children’s education needs? The list can go on and on. There is certainly no shortage of things to which you can allocate your hard earned money. The point here is that in order to enjoy the benefits that living by this Golden Rule can bring, you need to understand what cash is available to you and prioritize the way you spend it. If this is not done, you will find that the money simply disappears on what could be thought of as secondary priorities. You also need this understanding so that you don’t overspend. There are a number of systems to help you with this. In a previous issue of the Professional Advisory, I wrote about an easy method with which we have had a lot of success. I call it Banking by Objectives. At the very least, I would recommend a Priority Spending system. With this approach, you first set aside those funds needed to meet your main priorities. You can spend the rest (but no more) with confidence. Good Luck! Mr. Barry R. McNulty CFP, FMA, CIM, FCSI is an investment advisor with Raymond James Ltd., Independent Financial Services. Member CIPF. The opinions expressed by the author are not necessarily those of Raymond James Ltd. He may be contacted at 905-4706222ext 216 or barry.mcnulty@raymondjames.ca.
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Locating Your Dental Practice: The Suburban Choice Dr. RON WEINTRAUB Locating a dental practice requires consideration of professional goals, desired category of patient, and location. Practitioners choose from rural, urban, or suburban sites. In making the best choice for your professional goals, several considerations need to be addressed. Dentists who call on us to assist in evaluating practice opportunities go through a process of determining which geographic location would best serve their personalities,
lifestyles, and aspirations for success. The previous article (Vol. 14) dealt with rural and urban choices. Looking at a suburban setting gives a full picture of available choices. The suburban alternative is evolving as a desirable site for many practioners. Among the reasons for considering a suburban practice are the reactions of companies to the high cost of downtown and midtown urban environments. Expensive
rent, staff, taxes, and parking have many large firms questioning the need to be located in the downtown core. For example, the mushrooming business environment of the 905-GTA area gives credence to this concept. Technology has diluted the necessity for large professional firms to be situated in the heart of urban centres resulting in firms’ relocation to the suburbs. This change leads to an opportunity for an advantage of combining a family patient-based practice with a significant business component. Oftentimes, a suburban practice combines desirable features of urban and rural options. Other times, unique features of a suburban practice include the following: a) Proximity to office buildings and family-type patient populations b) Stability of a patient base of those with residential ownership rather than of those with tenancy in highdensity rental units c) Lower overhead costs with option of six-day use of facility d) Expanded population growth opportunities of suburbs e) Fewer patient-imposed time constraints f) Greater opportunity for high visibility practice location g) Reduced commuting time h) Strategically situated suburban practices allowing patients who relocate to continue to access the practice i) Adequate parking adjacent to or close to the office On the other hand, disadvantages of suburban practices to consider are the following:
a) More difficult for specialists to attract referrals from out-of-area b) More advertising is required to attract people looking for cosmetic-oriented services c) Larger residential populations of new homeowners are often initially reluctant to abandon ties to existing dental relationships d) Affordability of comprehensive services may not be compatible with new resident’s financial position. On a cautionary note, it is wise to avoid locked-in suburban locations i.e.: service type sites in the centre of residential developments that limit exposure. In addition, significant shifts in demographics might change the culture of an area and impact the relationship of service providers to the community. In choosing the most desirable site for an office, practitioners require a self- awareness of their goals and a need to align them with the reality of the opportunities presented in an urban, rural, or suburban location. 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.
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Why Your Insurance Broker Must Understand Your Dental Practice Dr. IAN WEXLER
How important is it to have a dental background to sell disability insurance? To the average insurance broker, one has nothing to do with the other. Unfortunately, this could not be further from the truth! Dental Practices Are Unique
A dental practice is a very unique entity. Practices employ large staffs, spend fortunes on supplies and equipment, and quite often have a combination of hygienists, associates, partners, or even independent contractors. In addition, variables including: practice type (specialty versus GP), location of the practice, revenues of the practice, and even the types of dentistry performed play an important role in structuring a dentist’s business overhead expense coverage (BOE). Without an in depth knowledge of these issues, it is difficult, if not impossible, to properly structure a dentist’s BOE coverage. False Assumptions One can not automatically assume that associates, locums,
partners, or even hygiene income can cover your overhead expenses during a disability. Many patients will choose to wait for your return rather than be treated by a “stranger”. Even if you are lucky enough to find a locum or associate on short notice, he or she may not be capable of working all office hours, performing your style of dentistry, or even interacting well with patients and staff. Certain hygiene and recall patients given the option of coming in for only a prophy, in your absence, may choose to have both the prophy and recall exam done at the same time, upon your return. Reduced Benefits The BOE needs of the principal or owner dentist may also be reduced by the presence of an associate who can continue to generate practice revenue in the disabled dentist absence. The associate may be able to treat patients of the principal dentists, in addition to overseeing recall patients.
However, the insurance carrier may reduce BOE insurance benefits if an associate is working in the practice. I have analyzed the insurance needs of a number of “overinsured” practices with associates where because of substantial associate revenues, the actual BOE benefit would be nil. Various carriers have different criteria to determine payment of BOE benefits when an associate is working in the practice. An Associate Issue Rarely Considered When an associate generates a large share of practice revenues, the principal dentist should be aware of the financial impact to the practice if the associate suffers a disability. In this case, the extra income relied upon by the principal dentist to pay practice expenses could disappear overnight. In addition, the principal dentist would have to cover the entire overhead shortfall alone. A common misconception is that the principal dentist’s BOE coverage will “kick in” in this case - not so. Furthermore, an associate can not have BOE coverage to pay the principal dentist’s fixed practice expenses unless there is contractual obligation.
Without an in depth knowledge of these issues, it is difficult, if not impossible, to properly stucture a dentist’s BOE coverage.
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
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PST - Another Tax Dentists May Be Responsible for Collecting DAVID CHONG YEN CFP, CA
Have you been selling take home teeth whitening kits and toothbrushes to your patients? For purposes of the Ontario Retail Sales Tax (“PST”), products such as the take home teeth whitening kits and toothbrushes are considered taxable goods? That means these products are subject to the PST. What is PST?
your supplier a properly completed purchase exemption certificate. Other Concerns? When you sell both taxable and non-taxable goods and/or services to your patients, you must separate the charges and charge PST on the taxable goods. Otherwise, the whole amount (including non taxable item) is taxable.
What is a Vendor’s Permit?
Even if you paid PST on all your purchases and you did not make a “profit” on the sales to your patients, you still need to collect PST on your taxable sales. However, you could either recover the PST you paid, from the suppliers or the Ministry of Finance.
A vendor’s permit is required to charge, collect, and remit PST on the taxable sales of toothbrushes and take home teeth whitening kits. You (whether a dentist or a hygiene corporation) must obtain a vendor’s permit even if your sales are small i.e. there is no minimum sales amount. The fine for failing to obtain a vendor’s permit is $100 or more for each day that a person operates without a permit.
What if you have not been charging PST to your patients on the sale of those whitening products and toothbrushes and you want to do it right from the start? Anyone who voluntarily discloses past taxes to the Ministry of Finance will be allowed to settle any related debt by making full payment including interest. You will not be assessed penalties or prosecuted if the disclosure meets certain conditions.
PST is a consumption tax. This means that you should be charging your patients PST of 8% on sales of toothbrushes and take home teeth whitening kits.
What is a Purchase Exemption Certificate (“PEC”)? A PEC is used to claim an exemption from PST. As a vendor, you can claim an exemption from PST (i.e. you will not be charged PST) for taxable goods that you purchase and intend to resell. To claim an exemption, you must give
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.
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How to Select an Appraiser for Your Practice GRAHAM R. TUCK
H.B.A. C.A
There are several reasons to have your practice valued. 1. for sale purposes 2. for matrimonial purposes 3. for estate and or retirement planning 4. to value the practice when an associate starts 5. to secure a loan from the bank, and 6. for insurance purposes Most practice sales are based upon a valuation which may or may not be a quality valuation. How do you know if a practice valuator does quality work? There are several steps a practitioner should take toprotect himself. My suggestion would be to ask several different sources for their recommendation, do not rely on only one or two. Sources for recommendations: a) Your accountant, if he has several dentists in his portfolio, can give you his experience with different appraisers. Your accountant’s opinion is valuable but he is not an independent appraiser and would not be recognized as such to purchasers or banks. b) Other dentists who have gone through valuations for the same reason. This is an ideal source because there is more than the value of the practice to be considered. Such other attributes as: was the value accurate; did the appraisers do the job they were hired to do - did you
feel the appraiser/ agent represented them well? c) Your lawyer, if he has several dentists in his portfolio, can give you his experience with different appraisers. d) Your investment / retirement planer, if he has several dentists in his portfolio, can make you more aware of the differences among appraisers. e) Your bank manager. This is an important contact. If the banks do not accept the valuator’s report because he is not on an approved list of valuators then another costly valuation must be completed to get the financing for the purchaser to purchase your practice. Some banks have only two or three approved appraisers of dental practices. Ask your banker who is on the approved list for their bank. In the end you should feel comfortable with your appraiser and the job he is engaged to do, be it a matrimonial valuation or a valuation for sale purposes. In the end, you should expect the appraiser to be able to set a value which is achieved in the case of a sale.
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) 7778825 or by e-mail at: grtuck@rogers.com
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 What is the most common reason for wasted rental dollars? A Most tenants waste rent simply because they do not know what they do not know. At $30.00 per square foot, rent for a 1200 square foot practice costs over $1,000,000 over a career. Why would a tenant ever approach a million dollar investment without the assistance of a professional who has a comprehensive knowledge of commercial leasing?
Q I was recently told by my broker that I would have to pay a large “extra” premium for my life insurance because of a medical condition I have. What are my options? A Different insurance companies may respond differently to your medical condition, and charge a lower premium. For example, one well known insurance company currently has a special “standard cost” life insurance plan available for those with certain medical conditions. Ideally, your insurance advisor should always shop around to find you the best and lowest cost plan available. Q Why do lawyers’ fees vary so widely? A Unlike Dentists, who utilize either the ODA schedule of fees or their own variation of it, very few lawyers’ services are done on a tariff basis. Most often, the lawyer does not know in advance what obstacles he or she may face in a transaction. The time spent on a file can vary widely even where transactions seem to be very similar.
Your lawyer will not know, in advance, whether or not there will be a capable, co-operative lawyer on the other side of the transaction, nor who will he or she know who will be drafting most of the documentation. Even where the opposing lawyer is very competent, some lawyers spend a great deal of time “splitting hairs” as if the file is intended to be an annuity. Occasionally, the client on the other side of the “deal” will continue to negotiate long after a deal should have become firm, forcing your lawyer to spend an unnecessarily large amount of time on the file. Another possibility is that the very nature of the transaction changes during the course of negotiations (for example where an asset purchase turns into a purchase of shares) which will likely add a considerable amount of time to be spent by your lawyer and for which you will be charged. And, finally, you, the client, can reduce your fees by being prepared when you speak to your lawyer, thereby making good use of the time spent with him or her in meetings or on the telephone. Of course, there are other obvious and very important factors such as the amount and complexity of the transaction, and the urgency with which it is completed. When one reviews these variables, it becomes clear why your lawyer may have difficulty in providing you with a fixed fee for a transaction, and may advise you that even a rough estimate may have to be reviewed as the transaction proceeds. What the lawyer can do, is advise you of his or her billing policies and the rates of the lawyer(s) who will be working on the file and keep you advised frequently of the amount of time being spent on the transaction.
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”.