Income Management: Know Your Discretionary Spending Limits A Checklist for Key Lease Data Reality Check on the “Cosmetic Dental Pracice” Life Insurance Policies Can EXPLODE Six Ways You Can Benefit From Trusts Your Premises Lease Can Be Your Worst Enemy Early Warning Signs When Buying a Practice
The
Professional
Advisory For Healthcare Professionals
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Income Management: Know Your Discretionary Spending Limits BARRY R. McNULTY
CFP, RFP, CIM, FCSI
A Checklist for Key Lease Data IAN TOMS B.Sc. (Hons) 3 Reality Check on the “Cosmetic Dental Practice” 4 Life Insurance Policies Can EXPLODE 2
DR. RON WEINTRAUB
Dr. IAN WEXLER & JEFF CAIT MBA, CLU, CFP
Six Ways You Can Benefit From Trusts DAVID CHONG YEN CFP, CA 6 Your Premises Lease Can Be Your Worst Enemy 5
GRAHAM R. TUCK
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H.B.A. C.A
Early Warning Signs When Buying a Practice
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BARRY A. SPIEGEL
LL.M., Q.C
Income Management: Know Your Discretionary Spending Limits BARRY R. McNULTY
CFP, RFP, CIM, FCSI
Having a successful practice and earning a relatively good income are only part of the equation that leads to a rewarding and financially secure life. In addition to earning an income, it is also critical that you manage it effectively. Time and time again I have met with dentists who by all outward appearances have “made it.” You know what I mean. They have an ideal practice, a big house, a great car, and all the appearances of financial success. Upon examination however, it turns out that the real story is all too commonly quite different. While they have enjoyed what most would consider a significant income it has not been managed well. Consequently they may owe significant sums, have little in the way of real security, and are under varying degrees of financial stress. One of the principal reasons for this unenviable state in my experience is simply that many do not know how to go about making good decisions when it comes to the management of their incomes. There is a saying that I firmly subscribe to about decisionmaking and it is as follows: “You need good information to make good decisions.” I’ll expand on that a little further. Let me share with you what I believe to be one of the most important pieces of information you should have when making any financial decision. There’s no magic to it. In fact, at first blush you may think it somewhat obvious. This critical piece of data is what I call your Discretionary Cash level. Discretionary Cash is the only component of your income
that you have any real control over. Most income you earn, when you think about it, is already committed. Practice expenses, taxes, and living expenses can certainly take up most of what we all make. That’s why understanding your level of Discretionary Cash is so important. This is the money that is available for making changes. Do you want to reduce debt? The funds will come out of Discretionary Cash. Do you want to buy a bigger home or a cottage? The money will come from Discretionary Cash. What about saving for your children’s education, your retirement and financial security? How about upgrading equipment in your office? The list goes on and on. Here’s the point. Your level of Discretionary Cash is really a barometer for this type of financial decision. Your resources are not infinite. Understanding in advance your level of Discretionary Cash gives you the ability to decide whether or not you can afford a project or goal. In a way, if you make a financial decision, which potentially involves additional spending, it’s like “shooting in the dark” unless you have this key piece of information. So I strongly recommend that you take the time to work out your level of Discretionary Cash. It’s the kind of information you will need to make good financial decisions! 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 905-470-6222ext 216 or barry.mcnulty@raymondjames.ca.
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A Checklist for Key Lease Data IAN TOMS
B.Sc. (Hons)
The most frequent inquiry received during the course of my work is “what do I do now?”, usually following receipt of correspondence from the landlord. It soon becomes apparent during the ensuing conversation that unintentionally, the tenant is or was not aware of vital lease information that it required to act in advance of a situation, and that this lack of awareness has led to the concern. The most common example: “I know I had an option to renew the term of my lease; now my landlord claims that the option has expired and is threatening to kick me out if I won’t agree to pay double the rent that I am currently paying!” Knowledge provides the leverage to control key lease terms and conditions which directly impact the success of your practice including rent, term length, premises size, signage opportunities, parking, use, and ability to transfer the lease upon the sale of your practice. If you don’t know what these terms and conditions are, by default, you give the landlord control of the future of your practice, which will cost you thousands of dollars. To provide yourself with control and therefore the ability to manage the future of your practice, photocopy, complete, and place this page in your office lease file. Call me if you need any assistance completing this summary. Consult this summary at least annually. Place a photocopy of all of the lease documents in a file at your office. Place all of the original lease documents in a safety deposit box.
Photocopy, complete, and place this page in your office lease file. 1. Tenant: _____________________________ 2. Premises address: Suite/Unit # ____, ____ ________________ ___., ______________, Ontario ____ 3. Current term dates: commencement date: __/__/__ dd mm yy expiration date: __/__/__ dd mm yy 4. Term renewal dates: commencement date: __/__/__ dd mm yy expiration date: __/__/__ dd mm yy 5. Term renewal option dates: expiry date: __/__/__ dd mm yy exercise date: __/__/__ dd mm yy 6. Additional term renewal options: __ term renewal option(s) of __ year(s) each. 7. Monthly rent: $ ___._ base rent + $ ___._ addnl rent + $ ___._ GST = $____.__ 8. Landlord name: _____________________ Mailing address: ____________ ____________ phone: (____) ___-______ fax: (___) ___-______ 9. Original copy of lease stored in the safety deposit box on ___/___/___ dd mm yy 10. Additional information _____________________ _________________________________________ _________________________________________ _________________________________________ 11. Date summary completed: ___________________
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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Reality Check on the “Cosmetic Dental Practice” Dr. RON WEINTRAUB Like you, I receive advertisements each week enticing me to position my dental practice as a “Cosmetic Dental Practice”, suggesting that doing so will cause my profitability to soar while I work only two/three days a week. Sent by external marketing firms, continuing education gurus and/or digital technology companies, the central theme is to attract wealthy, appearance conscious patients that will pay highly for cosmetic procedures. Many of these ads include testimonials from dentists who claim their practice “went thru the roof”, “quadrupled production”, “got five hundred new patients last month”, etc, etc... If something sounds too good to be true, it usually is. In my analysis of dental practices, the forgoing assertions are not valid. Quite frankly, focusing a practice on this type of patient is both limiting to practice growth and very expensive. The data suggests the most profitable dental practices are still the well managed, family-oriented, restorative practices. Of course these practices do cosmetic procedures as well. However, they would hardly be considered a “Cosmetic Dental Practice”. Developing a successful dental practice takes time and effort - building your clinical skills, refining your practice systems, building trust with your patients. With these essential elements, you have the very best foundation for an excellent cosmetic practice - your existing patients, people who already have a trusting relationship with you. These are the people who are the most likely to be highly receptive to cosmetic care. While they may not fit the wealthy, appearance conscious profile, you may find many of them are very interested in what can be done and are glad that you asked. Let me caution you here. Suddenly being hyper-focused on cosmetics will undoubtedly startle and/or confuse your patients and can possibly break the trust you have built. (Remember, the main ingredient in trust building is consistency.) Cosmetic care should be part of the overall treatment plan and presented as such. So ensure you have a few before and after photos to show your patients. Hang a few photos in well appointed locations around your office. Ask your patients if they are happy with the appearance of their smile. Use a shade guide and record a shade during each preventive visit - keep them aware of any changes. When you do provide cosmetic procedures to your patients, ensure the result meets or exceeds their highest expectations. Just as critical, ensure the experience is a positive one. Patients talk, and with
both of these in place, your patients will refer others to your practice and your cosmetic practice continues to develop. The products and services offered in the advertisements on your desk can certainly assist you in the process. But forget about any “magic bullet” and resist the temptation to believe what you know can’t be true. Your practice may not be the “Cosmetic Dental Practice” but it will be successful, profitable and fun. 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 buy-ins, and practice mergers. Dr. Weintraub can be contacted at (416) 224-1775 or admin@bvdental.com.
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Life Insurance Policies Can EXPLODE Dr. IAN WEXLER & JEFF CAIT MBA, CLU, CFP Throughout life there are many opportunities to make mistakes and then correct them. In preparing for the eventuality of death, however, there is no second chance - you have to get it right the first time. Therefore, it is important for each of us to review and understand the various components of our estate plans. One of the primary “tools” in our estate plan is the life insurance policy. Many unwary policy owners may be in for an unpleasant surprise when they discover that their policies may be worthless when they die. The most notable of these policies is a very common, yet sometimes unreliable policy known in the industry as Universal Life with Yearly Renewable Term (YRT) insurance charges. Looking under the hood of Universal Life The insurance (mortality) charges in a Universal Life policy are normally priced in one of two different ways: Yearly Renewable Term (YRT) or Level Cost of Insurance (LCOI). To simplify, the YRT plans prices are based upon the specific incidence of death each year. The charge is low when the insured is young, but it grows each year to reflect the growing risk of mortality as one ages. LCOI plans, on the other hand, cost more in early years because they average out the YRT charges by assuming an investment return on excess charges paid in the early years. The insurance company takes on the risk for investment performance because it guarantees the LCOI charge. When an insurance premium is paid, the company subtracts the mortality cost as well as their expenses. The remaining cash is called the cash surrender value (CSV). The CSV is then determined by the investment return realized by the insurance company, and is compounded over time. If the return on the CSV is relatively high in
the early years, a YRT-priced policy performs very well. If returns are low, the LCOI-priced policy will be more effective. How Your Policy Can Explode The major issue that causes policy “explosion” is when a YRT policy is coupled with lower than expected return on the CSV. As the YRT charges increase year by year with age and the return on the CSV is low, the charges eat into the CSV balance eventually driving it to zero. This result can also happen with LCOI priced policies, but the major difference is that to keep the policy in force after the CSV is gone, the LCOI charge is level, and in later years, more affordable. The YRT charge becomes greater each year and if the insured lives to age 100 the mortality charges will equal the death benefit. The bottom line is that at some point well before this, the life insurance policy that you have been paying into for years will become unaffordable. How to Protect Yourself Now Contact your insurance broker and have him review your policies now; some can be amended to reduce this possible exposure. Solutions are harder to come by when the CSV starts to reduce, so it’s important to do your research on a timely basis.
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 Jeff Cait MBA, CLU, CFP is the life insurance specialist for Protect Insurance Agencies Inc. He has over 20 years of experience in designing life insurance programs for professionals and high net worth individuals. In addition, he teaches financial planning courses for Centennial College, and is currently instructing the “Investment and Tax Planning” PFP (Personal Financial Planning) course for Bank of Nova Scotia employees.
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Six Ways You Can Benefit From Trusts DAVID CHONG YEN CFP, CA
Your success has enabled you to build up a comfortable nest egg. Are you taking full advantage of the opportunities available to make sure that your property is managed according to your directions, or transfer assets to your family or a charitable organization during and after your lifetime?
If not, consider setting up a trust. Below are six ways that you can benefit from trusts. 1. Are you looking to reduce your current tax bill? A discretionary family trusts provides flexibility in distributing income amongst beneficiaries in different
tax brackets. If structured carefully, you can take advantage of a family member’s lower marginal tax rate on income that would otherwise be taxed in your hands at the highest marginal rate. i.e. you can deflect income away from you to family members who are “poorer”. 2. Do you own a business and want to limit the future capital gains tax payable by your estate? By restructuring the shareholdings of your company and a family trust, you can cap your future tax liability. All future growth of the business would accrue to the shares held by the family trust. 3. Are you interested in reducing future tax bills for your family? Instead of leaving your assets directly to your spouse or adult children, bequeath them to testamentary trusts for their benefit. Income earned by these trusts is taxed at graduated rates. The family continues to receive all the annual income of the trust and has access to the capital, while benefiting from the tax savings. 4. What strategies are available to avoid or minimize pro-
bate fees? The Ontario government charges a fee to probate a will; the highest rate has been 1.5% (applicable to estates over $50,000). Transfer your property to a “living trust”, and you can eliminate or minimize the probate fees levied on your estate. 5. How do you provide for the next generation after your death? Minor children (or grandchildren) or incapacitated dependants do not have the legal capacity and appropriate knowledge to own or manage their inheritance. A testamentary trust incorporated into your will ensures that property is held and managed for them long after your death. 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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Your Premises Lease Can Be Your Worst Enemy GRAHAM R. TUCK
H.B.A. C.A
The lease of your premises can be a positive or negative factor in the sale of your practice. The banks will want to assure themselves that you will have possession of the premises well into the future if you intend to stay at that location. If so, it is appropriate to have your lease contain multiple options to renew to ensure possession into the future. If you want to ensure your occupation for 20 years, you could obtain a ten year lease with a ten year option to renew. However, this scenario will restrict how quickly you can write off the leasehold improvements for income tax purposes. The Income Tax Act permits you to write off your leaseholds improvements over the term of your lease plus the first renewal period, with a minimum of 5 years. Therefore, the 10 + 10 lease would permit the write-offs over 20 years or 5% per year on a straight line basis. This is a slow rate. A better alternative would be a three year lease with a two year option followed by three additional 5 year options. This also provides you with up to 20 years of occupation but you can write off the leaseholds in 5 years at the rate of 20% per year. Save your taxes now not in 20 years.
If the intention of the purchaser is to move the practice then you will want to have a short commitment to the lease. A three to four month commitment is ideal as it would give you time to organize the transfer of the patients to another location.
The worst possible combination is a low billing practice with poor visibility, high rent and a long term lease. This is typical of many new practices that have started from scratch. I recently reviewed a mature practice billing $150,000 annually, with three years remaining on the lease. The patient base was 250 active recall patients with virtually no new patients in the past year, and gross rent was $35,000 per year. In my mind this practice is unsalable because the rent is continuing for three years and as such the practice cannot be moved to an existing practice.
The worst possible combination is a low billing practice with poor visibility, high rent and a long term lease.
If your rent is over 10%, this is a negative factor in the value of the practice and the desirability of your practice. If the rent (occupancy cost) is under 5% in a larger urban community in Southern Ontario, this is a positive for the value of the practice. My recommendation is that if you are near the end of your lease and you are anticipating selling within the next few years, and your landlord likes having a dentist in that location, I generally would
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recommend shorter leases with multiple shorter options to renew. If you are having someconcerns about the renewal of your lease there are professionals who can step in and handle your negotiations with your landlord.
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
Early Warning Signs When Buying a Practice BARRY A. SPIEGEL
LL.M., Q.C
If you can spot certain problems early in your consideration about buying a practice, you may save yourself a great deal of time, legal and accounting fees and aggravation. The earlier you walk away from a bad deal, the happier you’ll be when the right opportunity presents itself. Over the years, I have seen many of these “deal-breaking” issues arise after the agreement of purchase and sale is signed. If this happens before closing, the buyer will be surprised and frustrated. Even worse, if the discovery is made after closing, the results are potentially disastrous. Here are some of the pitfalls to avoid: The Financial Statements - If the seller does not provide you with current financial statements prepared by a professional, you should find out why. If you have only income and expense information, you should be satisfied that it is accurate and that you have in your possession a detailed list of the assets you will be buying. An appraisal can be extremely helpful and it usually contains the appropriate financial information. However, be sure to read the appraiser’s notes carefully to see where the information was obtained and whether you van be certain that it is accurate. Don’t be afraid to ask for more detailed information. If it is not available, you have every reason to be concerned. Liabilities - Although it may be premature, at such an early stage in negotiations, to conduct a formal search of court records, it is appropriate to ask the seller if there are any major liabilities that will have to be dealt with before closing. A list of creditors will eventually surface, but finding out early in the discussions can alert you to a potential problem area. Equipment - At the beginning of your discussions, you should make it a point to specifically ask the seller if all the equipment is in good working order. If it is not, there are a number of questions you will want to ask.
Billing - From the outset, you should try to discover the seller’s billing practices. If the seller follows the current ODA fee schedule, you can accurately evaluate the accuracy of the annual billings. If not, in what material ways are the billing practices different? Do they artificially inflate the gross billings? If you make changes will this alienate the existing patient base? Material Contracts - Obviously, you should know if there are any associate agreements, cost sharing agreements or partnership agreements, but you should also ask the seller what other material contracts bind the practice or the seller. Asking these questions can bring a flood of relevant information. Discovering some of this information at the outset, whether you are dealing with the seller or a broker, can help you and your advisors decide if you should proceed By asking a few important questions early on in your investigation of the practice, you are a winner whether or not you proceed with 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) 8650330; or fax to (416) 363-8451; or e-mail to barry@spieglaw.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 I have now missed my term renewal option deadline, and I am faced with a huge rent increase. Do I have any options at all?
A By missing your deadline, you have transferred your most powerful leverage position from yourself to the landlord! You now need to create a leverage position which will very likely be much weaker than your original position; you are now working to minimise your loss as opposed to maximizing your gain. You need to retain a professional to assist you in this matter. Q My financial planning advisor is trying to sell me insurance coverage as well as take over my existing life and disability coverage. He says that it’s better to have one person take care of all of my financial needs. What should I do?
the assets as shown on the financial records of the company, which may limit your tax deductions. Secondly, if you were to distribute the assets of the company to you, its sole shareholder, there may be income tax consequences. Therefore, the value of practice assets you buy may be considerably different from the value of the shares of the corporation which owns those assets. Your accountant should be able to calculate the difference in the price and advise you before you make an offer to purchase. Offers to buy shares are very different from offers to buy assets and you should be sure of the route you wish to take before having an offer prepared.
A Although many financial planners have a very good working knowledge of insurance products and are licensed to sell them, it is recommended that you keep the two areas separate. Life and disability insurance are incredibly complicated, from the range of products available to understanding claims. The same goes for financial planning. It may to be best to work with someone who specializes in each of these intricate areas versus dealing with a “general practitioner.” Compare this to how patients are referred to and best handled the majority of the time by specialists in dentistry. Would you want a GP performing orthognathic surgery on you? Q Why is there a difference in the price when one buys shares of a dentistry professional corporation instead of the assets of the practice? A When you buy the assets of a practice, you will be able to depreciate the assets for income tax purposes based on what you paid for them. However, when you buy shares of a company, you inherit the cost base of
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”.