The
45 Professional
Advisory For Dental Professionals
IN THIS ISSUE CRITICAL ILLNESS INSURANCE: HOW IT FITS IN YOUR PLANNING
BALANCE CREATES VALUE IN YOUR PRACTICE
Dr. Ian Wexler
David Lind
SHOW ME THE MONEY MAKE YOUR RENT DOLLARS WORK Ian Toms B.Sc. (Hons)
PRUDENT METHODOLOGY: PURCHASING A PRACTICE IN A HEATED ENVIRONMENT
PURCHASING A PRACTICE IN STAGES David E. Rosenthal BA., LL.B.
THE DENTIST’S INVESTMENT STRATEGY Mark McNulty BA, CFP, CIM
Dr. Ron Weintraub
GST/HST FOR DENTISTS David Chong Yen CFP, CA
plus BEING WILLING IS NOT ENOUGH: WE MUST DO NOTES FROM THE EDITOR
VOL. 45 : JUNE 2010
The Professional Advisory
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The Professional Advisory consists of a group of seven independent professionals who provide services to the dental profession, each of who specializes in a different eld. They have gathered to keep each other informed of the latest developments relating to the profession, and to produce this publication which is designed to provide expert information and advice solely for dentists and their advisors.
Being Willing is Not Enough: We Must Do RALPH CRAWFORD BA., DMD Recently I had a wonderful opportunity to view the Vancouver Art Gallery’s magnificent presentation of Leonardo da Vinci - The Mechanics of Man. The historic exhibit was generously loaned by Her Majesty Queen Elizabeth II from The Royal Collection at Windsor and presented the entire suite of da Vinci’s renowned Anatomical Manuscript A which encompassed 34 of Leonardo’s pen and ink anatomical drawings on 18 sheets of paper, rendered during the winter of 1510-1511. The drawings were accompanied with written descriptions in his unique mirror-image script. And of course, the exhibit included translations of the “reverse script” and the biography of the most prominent figure of the Renaissance. As I moved entranced from exhibit to exhibit and viewed and read of Leonardo da Vinci’s detailed dissections of human bodies at the University of Pavia I couldn’t help but think of my own struggles with human dissections and the hours spent pouring through Grant’s Atlas Of Anatomy 50 years ago. It is mind-boggling what Leonardo accomplished 500 years ago. And more than that! In reminiscing over the years my mind recalled a da Vinci quote that has so much to do with our complex world of constant change and urgent needs: I have been impressed with the urgency of doing Knowing is not enough; we must apply Being willing is not enough; we must do. What Leonardo da Vinci is essentially telling us is that even with all the knowledge of the world and the willingness to do something about life’s issues, it
isn’t enough. For success and fulfillment, we must do! And as we read through this issue of the Professional Advisory it doesn’t take long to realize that’s what the contributors are suggesting: knowing is not enough, we must apply, we must do. Ian Toms addresses the “must do” advisement in his Show Me the Money - Make Your Rent Dollars Work so you can manage lease affairs more to your advantage. And in deciding whether to purchase that all-important critical illness insurance, Ian Wexler alerts us on How It Fits (applies!) In Your Insurance Planning. Balance is essential in life - all of life and certainly in dentistry - and as David Lind points out, particularly with practice billings, assets and goodwill, Balance Creates Value. “We must apply” Prudent Methodology Purchasing A Practice In A Heated Environment says Ron Weintraub as dentists ponder location, professional consultation and valuation. And taking the purchase of a practice to yet another level David Rosenthal’s Purchasing a Practice in Stages outlines that sequential buy-ins are complex and require (and again, “we must apply”) careful planning. Dentists are entirely responsible for the management of their retirement capital states Mark McNulty in Dentist’s Investment Strategy and that certainly implies the element of “we must do”. Likewise, when it comes to GST/HST For Dentists, David Chong Yen suggests that those who have the option to register should weigh - does this not indicate “the urgency of doing” the pros and cons before jumping to conclusions. Leonardo da Vinci’s achievements and interests as architect, scientist, anatomist, inventor and painter reached heights unequalled in history. Yet the advice he advocated - whether applied to our daily lives, the practice of dentistry or the publications within The Dental Advisory - is as valid today as it was five centuries ago: Knowing is not enough; we must apply Being willing is not enough; we must do
crawford@dccnet.com
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Critical Illness Insurance: How It Fits In Your Planning DR. IAN WEXLER www.protect-ins.com
Despite what you may have heard from an insurance advisor, or heard on the radio, Critical llness insurance (CI) is not for everyone. For the majority of individuals seeking adequate insurance protection for themselves, their family, and their business, there are other types of insurance which should be considered first, e.g., long term disability (LTD), life insurance, and even business overhead expense insurance (BOE). As with every patient, each of you deserves to have a comprehensive insurance examination, diagnosis, and treatment plan that is tailored to your specific needs. This includes the development of an insurance priorities list. This list will constantly change depending upon such variables as your age, family situation, cash flow, assets and liabilities, and a whole range of practice issues. Does CI replace LTD or BOE? Despite what many individuals are told, CI should not replace conventional LTD or BOE. As most readers will know, CI covers a specific range of anywhere from several to approximately 25 illnesses, depending upon the plan. The lump sum CI benefit is tied to the diagnosis, and in general, a 30 day waiting period. Unlike LTD or BOE, CI benefits are not tied to one’s inability to practice or work. Why Purchase It? There are a number of reasons to consider purchasing CI for yourself, your spouse, or even your kids. Originally, when the plan was first introduced in Canada, some of the main selling points were that you could use the benefit’s funds to obtain medical care abroad, and to maintain your current lifestyle. Over the years, I have had an opportunity to speak with dozens of insurance advisors on why they sell CI and what their experiences have been at claim time. In addition, having sold hundreds of these plans myself
over the years, as well as having handled a number of claims, the following is an updated list of potential reasons to consider purchasing CI. • To have family and career choices, i.e, “I would like to work less and spend more time with my family, or I choose not to rush back to work.” • To get to the “retirement finish line” • Poor cash flow • To retire debt • A lack of reliance on OHIP and top quality current and future medical care • The financial impact on your business if a spouse incurs a CI • If you are hard to insure for conventional disability benefits such as LTD and BOE • Insufficient LTD to support your family lifestyle • Partner buy-out coverage Plans Have Changed Over the Years Just like all types of insurance, CI plans have morphed and developed over the years. Depending upon the company and the specific plan, some of these changes include: Standardized definitions of illnesses • Best doctors, which allows an individual to get a second opinion of their medical condition from a specialized team of physicians in the US, as well as being referred (with all arrangements made) to a top doctor or hospital for treatment and care • Partial benefits for certain illnesses • Conversion to Long Term Care and Long Term Care riders • A whole array of riders that include: • Coverage for your kids • Reducing or increasing benefits • Coverage for second conditions • Up to a 100 per cent return of premium at specific points in time Is the Return of Premium Rider worth it? The short answer is yes. In deciding on this somewhat costly rider, often the issue comes down to cash flow. If affordable, this is, without a question, the ideal and least expensive manner in which to purchase a plan… assuming you do not incur a claim.
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When Does CI Become Too Expensive? Although “expensive” is a relative term for many, CI starts to significantly jump in premium in the late forties for most. Therefore, it makes sense to consider CI planning before you reach this age bracket. Can CI be tax-deductible? Yes, it can be, in certain situations. At the same time, it is extremely important and highly recommended that anyone considering deducting premiums, obtain proper professional advice from your advisor and your accountant on the structure of the plan with regards to tax treatment by Canada Revenue Agency. Should Everyone Be Offered CI? Yes. It is important that although not everyone requires this coverage, everyone should hear about it, in order to make an informed decision. Readers should be leery however, of advisors who:
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• Tell you, “You must have CI!” • Have sold you a large CI plan with large monthly premiums, without adequately performing a comprehensive needs analysis, and addressing your true insurance priorities • Have never brought up CI, or have sold few or no CI plans • Think that it’s a good idea to replace your LTD, BOE, or even life insurance with CI PA
Dr. Ian Wexler is Canada’s leading authority on insurance issues for dentists. He is the President of Protect Insurance Agencies Inc. in Toronto which provides specialized expertise in life, disability, critical illness, long term care, annuities, and other insurance products and services to professionals, executives, and business owners across Ontario. He can be reached for questions or other enquiries at (416) 391-3764 or drwex@ protect-ins.com
Show Me the Money - Make Your Rent Dollars Work IAN D. TOMS B.Sc. (Hons) www. iantoms.com
“My rent is more than I can comfortably afford.” In a financially healthy practice, rent is less than five per cent of total production. Divide your monthly rent by your monthly production. If the answer is more than five per cent, then you need to decrease rent, or increase production. This article outlines some common opportunities to make your rent dollars work for you by managing your rent to production relationship. 1. High additional rent. Typically additional rent is the tenant’s share of realty tax, common area maintenance, insurance and “a bunch of other stuff ” that is often vaguely described in the lease. In this economy, landlords are scrambling to find additional sources of revenue, and additional
rental rates are soaring, with increases in some cases of 50 per cent on a year over year basis. You need to audit your additional rent payments to make sure what you are paying for is reasonable, nonduplicated, justified under the lease, and calculated properly. Most leases have a facility to enable tenant to at least receive an annual statement - which is the starting point for your audit. If you are not checking, you are by default agreeing to pay whatever you are charged, regardless if you agreed to pay or not. 2. Premises area. Premises area determines rent payment because rent is paid on a per square foot basis. a. Space measured incorrectly. If you have never had your premises area measurement confirmed, you need to. An error of 10 per cent means that your rent payment is 10 per cent wrong, either in your favour or the landlords. Your landlord will not offer to measure your space especially if they know that the measurement is incorrect in their favour. Understand area measurement criterion in your lease. The word “approximately” describing an indicated area ending in zeros is a flag indicating
The Professional Advisory
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that the rentable area is incorrect. Confirm the see lease facilities administered incorrectly resulting area measurement yourself, either by checking the in more rent being paid than tenant actually agreed area certificate or having your space measured. Do to pay! NOT ask your landlord because if it’s measured Simply read and understand your lease, make sure incorrectly in your favour your rent could actually the rent calculation math is correct, and that you are increase. Check to see if your rent is calculated on paying the correct amount per square foot for this curthe real area value. rent year. b. Too much space. You are wasting rent dollars 5. “Build it and they will come”, and they didn’t. Tenpaying for unused or unproductive space. ants often hoped a high end property would result in Contact the landlord to check if there is any interest in a high volume practice. Were you sold a bag of air? subleasing or assigning the unused space, or consider You are in it now, make the best of it. Take a step back alternatives to increase volume by productively using and look at the reasons you chose this high end propthis space. erty, and make sure you are taking best advantage of 3. High minimum rent. Many current rates were set those reasons. Make sure that expensive pylon sign is a few years ago at the high water mark. Tenants often working for you, and that you are capitalizing on the agreed to a long term (example 10 years) in exchange activity associated with your co-tenants to drive new for lower rent in the first few years at the expense of patient traffic. Communicate your convenient parkhigh rates in the later years, and now find themselves ing and hours of operation to your potential patient regretting that decision. community. Make sure the exterior of your practice Approach the landlord and ask for a rent reduction. radiates your message. Use your association with that Be prepared to justify your position by showing your big box store to generate awareness. operating statements. Alternatively, you can ask for Show me the money. Manage your lease affairs to your a lower rate than what you originally agreed to by advantage. PA renegotiating your lease to result in an “extend and blend” deal under which you now trade a lower rental rate than agreed to in exchange for extending the term at a higher rate in the future. Your goal is to Mr. Toms has been creating and preserving realty leasehold value for bring your rent: production ratio into line over time. tenants and landlords since 1986 and can be reached at (705) 7431220, by e-mail at iantoms@pipcom.com, or through his web site at: 4. Failure to manage lease facilities. Time and again I www.iantoms.com
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Prudent Methodology: Purchasing A Practice In A Heated Environment DR. RON WEINTRAUB www.innovativepracticesolutions.ca
When contemplating purchasing a practice in an environment of rapidly escalating list pricing, we need a focused process to guide us through the quagmire of considerations confronting us. A colleague from The Professional Advisory who expressed concern about his client’s seemingly desperate approach to purchase a practice after being “outbid” in three previous attempts motivated this article. His experience needs us to ask, “What deserves thought in deciding to purchase a particular practice”? Three major considerations to ponder are location, professional consultation, and valuation. Location Different regions present varying levels of purchase opportunities. The most actively sought regions in Ontario, for example, are the large urban centres; particularly, the GTA and areas within a one-hour drive of Toronto generally have heightened interest to potential buyers. Currently, the number of potential purchasers significantly exceeds viable practice sales opportunities resulting in an unprecedented sellers’ market. This seemingly overheated market environment cautions us to exercise vigilance in the quest for an appropriate practice. Although we strongly advocate purchasing an ongoing practice over the proverbially “start up and wait concept” of developing a practice from scratch, we need a strategy and perseverance. Professional Consultation A good place to begin our plan is by registering with a number of the capable practice evaluator/brokers. Making them aware of our criteria allows them to find suitable listings for possible purchase. Among
competent professionals focusing on the dental marketplace are lawyers, accountants, evaluator/ brokers, and practice management providers. The Role of the Practice Appraisal The appraisal is of primary importance to a purchase. It is a recent, accurate history of the performance of the practice over the past three to five years provided by a knowledgeable broker; it is a retrospective of the financial and professional success of the practice under the current leadership. As a stand-alone document, it is necessary to help finance and transact the sale. The Value Proposition Justifying the purchase price depends on specific criteria. A significant part of the value of the purchase lies in the ability to merge the prospective purchaser’s philosophy with the existing practice culture. Do the location and the current treatment mix conform to the purchaser’s concept of an “ideal practice” (see The Professional Advisory 44) are questions that demand pondering. Yet another criterion in evaluating the purchase price is the ease in which we influence the patient base to accept the new practitioner’s treatment style. Finally, financial realities affect the ability of the new owner to service the debt as well as to earn a livelihood from the practice. Our next concern is to identify the driving factors of this practice to be certain the new owner can deliver a similar level of care with a similar revenue stream. For example, a more senior experienced incumbent dentist may be able to deliver complex restorative procedures in-house such as implants, surgery, orthodontia, or periodontal services. Asking, “Can I provide patients with a similar level as the previous owner?” gives a reality check. Conversely, as a potential purchaser, we may have the competency to offer procedures that are currently referred. The potential increase in productivity could possibly justify offering above the evaluated price, which would align the purchase price with a reasonably expected outcome.
The Professional Advisory
Currently, the number of potential purchasers significantly exceeds viable practice sales opportunities resulting in an unprecedented sellers’ market. This seemingly overheated market environment cautions us to exercise vigilance in the quest for an appropriate practice. Valuation Factors Driving Practice Prices Upward The most important reason prices of practices have escalated is the disequilibrium between the supply of quality practices for sale and the demand. Although the Greater Toronto Area (GTA) probably has the lowest patient to dentist ratio in Canada, the preference for dentists who want to live and practice in large urban areas is undeniable. The downturn of the economy has altered the timeline of those preparing to retire accounts for one reason the supply of practices for sale is limited. As a result, owners are unwilling to put their practice on the market for personal financial reasons. Moreover, low interest environments limit the income derived from the sale. On the other hand, a major factor in the demand to purchase is the extremely low current interest rates
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for financing institutions. Since they base the lending on the previous owner’s performance, the estimated cash flow in the hands of the new owner would have to accommodate the new owner’s performance. The lack of quality associateships available to younger practitioners is another factor driving prices up. These practitioners are often unsatisfied working at two or three different offices. For that reason, they often prematurely seek ownership of a viable practice. Finally, the increased propensity for some practitioners to own multiple practices also stimulates the market. A troublesome reality to note is that prospective purchasers and their designates can gain access to analyze charts often only after an offer is proffered and accepted. The stated due diligence period allows access to this crucial information. The purchaser should be assured of an escape clause following due diligence. Consequently, the answer to the question, “How much more than the previously evaluated price should I offer in order not to lose this practice?” is complex and requires prudent consideration of location, professional consultation, and valuation. PA Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-ve years of knowledge and experience in the practice of general dentistry to the Professional Advisory. Large companies such as Patterson Dental, Ash Temple Ltd, Henry Schein Arcona, & the former Canadian Dental Co. have beneted from his insight. As owner of Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buy-ins, and business mergers. Dr. Weintraub can be contacted at (905) 470-6222 Ext. 221 or drronips@rogers.com.
GST/HST For Dentists DAVID CHONG YEN CFP, CA www. dcy.ca
The 2010 Federal Budget (announced on March 4, 2010) clarifies that any ‘cosmetic dentistry’ is taxable under the GST/HST regime. This is certainly not something new; but would the clarification mean that the government is paying more attention to this area?
Are you in compliance with the GST/HST legislation? Budget 2010 proposes to clarify that GST/HST applies to all purely cosmetic procedures, to devices or other goods used or provided with cosmetic procedures, and to services related to cosmetic procedures. Taxable procedures would generally include surgical and nonsurgical procedures aimed at enhancing one’s appearance such as veneers for re-alignment or colour change and teeth whitening. A cosmetic procedure will continue to be exempt
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if it is required medical or reconstructive purposes, such as surgery to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease. As well, cosmetic procedures paid for by a provincial health insurance plan will continue to be exempt. Who must register for GST/HST? Dentists must register for GST/HST if the total annual taxable and zero-rated services are $30,000 or greater. Examples of taxable services include cosmetic dentistry, (i.e., services for appearance purposes that do not require treating pathology, improper form or function), consultation services and other business activities, i.e., rental of excess space or sale of electric toothbrushes. Examples of zero-rated services which you are not obligated to register - but have the option to register - could include orthodontic devices, full or partial dentures, fixed bridges, full and partial crowns, veneers and osseointegrated implants. Once registered however you must collect GST @ 5 per cent (HST @ 13 per cent effective July 1, 2010) on all taxable items and will be eligible to recover some or all of the GST/HST paid. What if you failed to register when you were supposed to? Review your situation with your accountant to determine your tax exposure. Who is entitled to recover GST/HST paid and on what? The conditions are: 1. you must be a GST/HST registrant; 2. revenue from the taxable and zero-rated supplies that exceed 10 per cent of total revenues; 3. supplies of the artificial teeth and orthodontic appliances must be identified separately on an invoice to the patient, i.e., not a lump sum for both artificial teeth and exempt dental services GST/HST paid on general expenses, for example, rent, utilities or professional fees that are not directly related to any specific services can only be claimed based on a certain percentage. Those who have the option to register should weigh the following pros and cons before jumping to a conclusion. Pros Possible eligibility for GST/HST refund
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Cons Must charge/collect patients GST/HST on cosmetic dentistry and other taxable goods and services. Potential loss of patients as patients may go to a dentist who does not charge GST/HST. Invoices to your patients must segregate those goods/ services that are subjected to GST/HST from those which are not. Additional bookkeeping i.e., segregate GST/HST paid on certain expenses and filing periodic GST/ HST returns. Identify on suppliers’ invoices what the materials are for i.e., orthodontic, regular or cosmetic dentistry in order to support your refund claim. Not eligible to claim GST/HST on the equipment unless it is used for >50 per cent in orthodontic or cosmetic dentistry. e.g., Cerec 3D or E4D. PA David Chong Yen, CFP, CA, of DCY Professional Corporation Chartered Accountants, has completed the CICA In-Depth Tax Courses and has been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca. www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.
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Balance Creates Value In Your Practice DAVID LIND www. ppsales.com
A few issues back in Issue 41 of The Professional Advisory I described some of the value drivers in a dental practice and concluded that “Patients and Profit make Value”. And that is certainly true. However, the value of any practice is enhanced if it is in balance. In this article I will explain how balance works to create value in your practice. The dictionary defines balance as “a state in which various parts form a satisfying and harmonious whole and nothing is out of proportion or unduly emphasized at the expense of the rest”. In your practice you should try to achieve balance in the following areas: • Gross billings: Patient This ratio is important because it reveals a lot about the practice. Is there work to do? Do patients accept your case presentations? Are you providing comprehensive dentistry? Are you able to meet the demand for your services? In this category we like to see the amount in the $500/Patient range. It is hard to reproduce if you are significantly above that level so any variance should be below that level. • Assets: Gross Billings If you want to sell your practice for a million dollars it has to look like a million dollars. That does not mean you have to spend a million dollars on your equipment and leasehold improvements but you really need to keep this in balance. If you have too little invested in your facility your practice value will suffer as in the example Practice 1, below. Conversely, if you overspend on assets you will end up eroding the goodwill value because market value first goes to assets and then to goodwill. If you are in balance you maximize your overall return. • Goodwill: Total Value As I illustrated in the assets: billings ratio of $500/
Patient, goodwill is what is left of market value after deducting the value of your assets. Please note goodwill is measured against total value as opposed to assets that are measured against total billings. • Gross Billings : Hygiene Billings The hygiene ratio indicates how well managed your recall program is along with how your patients accept your (or your hygienist’s) recommended recall frequency. Additionally, a strong hygiene program is generally viewed as a way to enhance productivity in the restorative side of the practice. It also contributes bottom line profit with minimal time invested by the dentist. Dental Practice Investors place a real emphasis on strong hygiene production for good reason. • Top 4 Expense percentages (Staff, Lab, Supplies, Rent) Industry averages are 25.2 per cent for staff, 6.5 per cent for rent and 6.8 per cent for supplies. It would generally be said that the lower the better applies for these three expense items. Lab is a flow through expense that is an indicator of how much crown and bridge work is being done in the practice - therefore a low number is not generally the goal. Also with lab, if you are much higher than the industry average of 7.9 per cent, it may be reasonable to conclude that much of the crown and bridge work in the practice is already done. Here again, balance is the key. Examples of Balance Practice 1 Gross Billings $1,012,000 Billings: Active Patient $613 Assets: Billings 15% Goodwill: Total Value 83% Gross: Hygiene Billings 45% Top 4 Expense % 39% Practice Value $867,000 Value as a % of Gross 86%
Practice 2 $1,048,000 $265 21% 82% 32% 32% $1,347,000 129%
Target $500 25% 78% > 30% < 46%
These examples illustrate how the numbers work together to create value. In Practice One, if the dentist had invested in assets at the target amount of 25 per cent it would have enhanced the value by over
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$100,000 with more enjoyment working in a modern updated facility. In Practice Two, the dentist enjoys good value relative to the gross; however the per patient production is low so there is no benefit from a strong hygiene or restorative program. Value would be enhanced further by balancing this ratio. Most dentists do not have enough statistical data at their fingertips to determine these ratios. If you do not, a Valuation of your practice will reveal where you
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stand in all of these critical areas. If you don’t have the information available, compare your practice to the two actual examples above and to the target to see how balanced your practice is. PA David Lind is a Partner in Professional Practice Sales (Ontario) Ltd. (www. ppsales.com), which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: david.lind@ppsales.com
Purchasing A Practice In Stages DAVID ROSENTHAL BA., LL.B. Recently I attended a round-table discussion with other lawyers and professional advisors regarding purchasing a dental practice in stages, often called a ‘sequential buy-in’. A sequential buy-in occurs where the owner of a dental practice (Vendor) and a dentist purchaser (Purchaser) agree to transfer the practice from the Vendor to the Purchaser in at least two stages over a period of time. This transaction is used where the Vendor is not prepared to sell his entire dental practice but both parties want to enter into a long term plan that is clearly set out. A sequential buy-in is not the typical arrangement for a buy/sell transaction. The more usual route is the Vendor sells 100 per cent of his practice. Where the Vendor still wants to remain after the sale, he or she does so as an associate of the Purchaser. An associate agreement is entered into with the Vendor as the associate and receiving 45 per cent of collected billings. While the norm is 40 per cent for associate remuneration, since the Vendor provides mentoring and assistance in the transition of the practice to the Purchaser, 45 per cent is usually the remuneration level. In a sequential buy-in, the Purchaser is typically already an associate of the Vendor and has worked
with the Vendor at the dental practice for a number of years. The parties have worked well with each other. The Vendor wants an exit strategy but still wants to work and enjoy the fruits of ownership of the practice. The associate wants to buy the practice and is happy to do so over time. Why? Having the Vendor remain as a partial owner of the practice is often an excellent support for the Purchaser. The Vendor may have far more experience in dentistry and has run the practice successfully for many years. That wealth of experience can be invaluable to the associate. Having a mentor on an ongoing basis is a huge comfort and resource to the associate. The arrangement often works as follows. The parties enter into a purchase and sale agreement whereby the Vendor sells an undivided interest in the dental practice assets. The percentage sold is less than 50 per cent so that the Vendor still retains control of the practice. The Vendor and Purchaser become partners for a period of time until the buy-in is complete. A detailed partnership agreement is the primary document governing their ongoing relationship. The partnership agreement will provide that the Purchaser agrees to purchase the remaining portion of the dental practice from the Vendor at a future specified date for a specific price. The price may be a formula that is sufficiently clear that the parties will easily be able to determine what the price will be for the next stage of the purchase. The agreement should include provisions that the
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buy-out date for the Vendor’s remaining interest in the practice will be accelerated in the event of the Vendor’s disability or death. To ensure the Purchaser will be able to fund the buy-out in such events, the Purchaser is required to obtain life insurance and disability insurance policies on the Vendor, with the Purchaser as beneficiary. Similarly, the Vendor should take such insurance on the Purchaser. If the Purchaser dies or becomes permanently disabled before completing the final stage of the purchase, the Vendor should have the right to re-purchase the Purchaser’s interest in the practice at a specified price. Insurance issues can be complex and require careful tax planning to ensure the proper results will be obtained for all parties. It is critical the parties retain an insurance advisor who has specialized expertise in advising dentists. Such an insurance advisor will understand these issues and be able to provide appropriate expert advice to the parties. Insurance policies should be arranged early in the process to ensure appropriate buy-out funding is in place. In the right circumstances and with the proper legal agreements, a sequential buy-in may be an excellent arrangement for both Vendor and Purchaser.
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However, sequential buy-ins are complex and require careful planning. And to do that you should retain professional advisors who focus on advising dentists. As my former colleague, Barry Spiegel, Q.C. used to recommend and I still do: Surround yourself with experts in their field, they will serve you well. PA David Rosenthal is a senior lawyer with Spiegel Rosenthal Professional Corporation whose practice is devoted to corporate, commercial and business law, with special emphasis on advising and consulting for the dental profession. He can be reached at (416) 865-0736; or fax to (416) 203-8592; or e-mail to david@drlaw.ca.
The Dentist’s Investment Strategy MARK McNULTY BA, CFP, CIM www.yournumber.ca
Several years ago we had the pleasure of Dr. John Smith and his wife Mary (not their real names) joining us as clients. John was 51 years old. He owned a productive and profitable practice and wanted to plan his transition/retirement for his late fifties or age sixty at the latest. While John had enjoyed a significant income for most of his practice life, a review of his financial affairs did not reflect this. The RRSPs owned by he and Mary
were not significant. There was comparatively little in the way of non-RRSP investments, and they had a fair amount of debt for their age. It was difficult to figure out where all the money had gone. They had a nice house, but it wasn’t out of line for a family in their tax bracket. Did they overspend on lifestyle? Give the money to charity? Gamble it away? No. It turned out the problem came from investing. As we talked about their finances, it became clear that over the years significant amounts of money had been lost on illconsidered investments. John had unsuccessfully “played the market,” and had also bought a number of tax shelters, some of which had not only lost significant amounts of money but had also been reassessed by the tax department. In addition to that, at the time of the “tech bubble” John’s stock broker advised them to borrow money to invest in “new economy” stocks.
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These funds had dropped precipitously once the bubble burst. John and Mary’s situation is not unique. One of the key differences between dentists and their employed counterparts is that they do not have an institutionally managed pension plan. We often speak with dentists who envy teachers’ pension plans. Structured properly, however, most dentists, in our experience, have the opportunity to enjoy a higher retirement cash flow than any teacher (with the right investment strategy!) The fact is that the investment objectives for your retirement portfolio are no different than that of the teachers’ pension plan: to provide an after-tax, inflation indexed cash flow to fund your retirement lifestyle costs. However, in the more than ten years that I have been in this business I have never once seen a dentist’s investment strategy structured in a way similar to that of an institutionally managed pension fund. Why is that? Dentists are entirely responsible for the management of their retirement capital. However,
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like John and Mary they have little training in investment management as compared to the portfolio management team in charge of the teachers’ pension fund. To be fair, they are not expected to. In addition, John and Mary face an investment industry that, in my view, can be intimidating for the uninitiated. What is the solution? Contrary to popular opinion, investing is a science. The first step in capitalizing on the opportunity you have to meet your retirement goals is to identify how much money you will need per month to satisfy your lifestyle costs. Once you have this figure, have your financial advisor calculate, given your current capital, the average rate of return you require in order to meet these cash flow objectives. Once you know that return target, you (or your advisor) can identify an Asset Allocation Model which historically would have achieved the required rate of return with the least amount of risk. Studies show that your asset allocation decision is responsible for as much as 90 per cent of your investment return. Finally, select investments that accurately reflect each asset class and that have low management fees. And consider paying your advisor fees - not commissions. This is a formula we have successfully employed for numerous dental families to help them achieve their retirement goals. PA Mr. Mark McNulty BA, CFP, CIM, is a nancial advisor with Raymond James Ltd., Independent Financial Services - Member CIPF. This article is for information only. Its opinions are those of the author, not necessarily those of Raymond James Ltd. He may be contacted at 905-470-6222 ext 209 or mark.mcnulty@raymondjames.ca.
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”.