Author: marketing

The Dental Office Emergency Plan

Date Posted: 2003/03/14

One of the most difficult realities for any dentist to face is that death and disability can strike without warning. Many dentists become aware of a disability in advance and plan accordingly, but most have not made adequate preparations for such situations.

My research indicates that dentists rarely leave a set of written instructions for the benefit of the staff. Yet an Emergency Plan is an essential part of a dentist’s planning. The plan should set out clear procedures to be followed in a crisis situation. If implemented quickly, these procedures can preserve the ongoing viability of a dental practice, and may ensure that the business retains its viability, its saleability and the employment of the staff. Additionally, an issue that is often overlooked is that the patients will be able to return to a familiar environment for their continued care.

In the event that your staff is called upon to act in a crisis, their value to the practice, the owner and his or her family may be more than you realize. You may find it valuable to keep the information in this article with your office manual and your will.

  The Dental Office Emergency Plan

1. The first priority is to secure the practice and maintain the appointment schedule. This begins with an immediate search for an interim dentist to attend to the patients and keep the practice running. This initial step will ensure that income will be generated to pay for both overhead and the temporary dentist. The search for a locum dentist is much easier now than in the past. There are many resources available to find locum dentists, including the classified section of Ontario Dentist. As well, the ODA offers a listing of locum dentists, professional locums in times of immediate need. Most brokers are familiar with dentists who have sold their practices specifically to offer their services as a locum dentist. They are willing to assist on very short notice.

2. I recommend that you avoid having your patients treated by other local dentists. While they often offer their help sincerely in this time of need, they may inadvertently and innocently lure your patients away once contact has been made. If other practices are nearby, patients may choose to transfer of their own volition, adding to the potential patient exodus while the disabled owner is recovering or while a new owner is being identified. I also recommend that an experienced practitioner or locum dentist be selected to treat your patients. Younger dentists, or dentists who have not worked under these circumstances before, often do not have the experience to successfully manage a transition of this sort, leading to serious patient retention difficulties. I believe a professional locum, who is experienced in these matters, is the best choice.

3. Patients scheduled for upcoming appointments should be notified of the situation as soon as possible. A phone call is all that is necessary. The script could read as follows: “I’m calling to inform you that Dr. ______ has had an accident (or other) and he/she will be away from the office for (mention the time of recovery if known) a period of time.” If the owner has passed away, you may begin with: “We are very sad to inform you that Dr. ______ has passed away.” Follow either one of these opening statements with: “We assure you that the office will remain open and your appointment(s) will be honoured. We have made arrangements for a qualified dentist, (locum name), to attend to your ongoing dental care. As in the past, our regular staff (mention some names) will continue to be here to assist Dr. (locum name) with your dental care.” Phone calls should be made only once the locum is secured. Conversations that lack specific information may unnerve the patient and lead to unnecessary rumours.

4. It is not necessary to place a notice in the paper or to send letters to the patients. The new owner (if applicable) should do this to explain the situation carefully when he or she takes over. A telephone call is usually enough in the short term.

5. The outgoing message on the office answering machine should not be changed until the facts are known. In the case of a sudden death, change the message only when the locum dentist’s name is known. This eases the patient’s mind and demonstrates that the practice is organized.

6. In some instances the practice must be put up for sale, and this process should commence at the same time that the locum search is commenced. In some instances, a buyer can be identified within weeks and the crisis could be over quickly if these actions are taken immediately.

7. If the owner has arranged for standing orders with hygiene appointments, they can carry on as scheduled while the locum dentist is being identified. Patients should be notified of this circumstance in advance so they know that their regular dentist will not be there for the recall examination.

8. Maintain regular office hours. A reduction in hours may cause valuable staff to seek other opportunities. This also displays a sense of normality, thus adding to the overall objective of keeping the practice viable. There are always a few long overdue projects, such as recall program updating, to keep the staff busy.

9. A positive attitude when speaking with the patients is essential. Assure them that the practice will continue to care for them even though their regular dentist is not available. When communicating with patients, I recommend avoiding negative terminology such as “The Doctor is no longer here” – or – “The Doctor is very sick”. This implies a loss and patients may focus on only these words. Use words such as, “Dr. ______ will return soon and Dr. (locum name) is a wonderful person.” Show that you are confident in the temporary dentist’s ability and be clear and concise. Long, rambling explanations confuse patients and they may sense a lack of organization and seek another dental office.

10. In the event of death, the spouse, lawyer or accountant is typically called upon to manage the practice’s affairs. They should arrange for an appraisal to be performed and the practice should be immediately put up for sale.

If a dentist suffers a tragedy, this emergency plan will help to keep the practice viable by preserving the employment of staff, the patients’ ongoing care and the value of the business.

Practice preservation is the will for your dental practice. It is the process that allows for you to prepare for the unforeseen. If you have a will, why shouldn’t you have an emergency plan for your practice?

Ontario Dentist – March 2003

Freedom 55? Who are We Kidding?

Date Posted: 2003/01/30

The advertising slogan “Freedom 55” was introduced by the London Life Insurance Company in the 1980’s.  It suggests that it is possible to exit your full-time career, more or less at the age of 55, and enjoy an exotic lifestyle, or a second, part-time career and live happily ever after.

In my father’s instance, this is definitely not the result.  My dad has just commenced his 55th year of working within the dental industry.  For him, “freedom 55” means a career length of 55 years of service to the dental profession, and not the age at which he will exit that career.

While there are many opposing views about what early retirement really means, and when it should occur, I predict that the entire concept of retirement will become a defunct lifestyle option for the baby boomer generation.  I have consulted with hundreds of dentists over the past 10 years about what they plan to do with their lives.  The most interesting and emerging trend is that retirement is not relevant to many baby boomer dentists.  I believe there are a number of reasons for this.

Firstly, and most importantly, boomers are a generation of lifestyle people, with expensive lifestyle habits.  Retirement is a word that is usually equated with the immediate cessation of paid work.  Again, I believe that this will become a defunct concept for many professionals and that they will continue to work, long after the age of 55.  Once we choose to exit full-time work, we can always work part-time – sometimes for life – without actually “retiring.”

Next, witness the emerging trend towards part-time dentistry for life, which I have informally studied for several years, and you will see that more and more dentists think that complete and full retirement is a thing of the past.  Additionally, full-time work is also a fading concept as more and more dentists seek a part-time career.

It is my opinion that in the very near future, we will see a dramatic increase in the number of dentists working part-time and a decrease in those dedicating a full-time effort to dental practice.  The term retirement will fade away, and we baby boomers, as a generation, will simply say that we are still working – just less than we did when we were younger.  My father is a living example of this trend, as he continues to work – albeit only a few hours each week – yet work it is.  He continues to be remunerated for those efforts, so he has not effectively retired.

Let’s reconsider the freedom 55 concept for a moment.  What would you do if you actually quit dentistry – immediately – and let your dental license lapse?  Do you have a plan?  What hobbies can you participate in from the age of 55 until the end of your life plan?  Many return to work for lack of an answer.

I propose that we shift our thinking to enjoy both a modified lifestyle and income, and work forever!  I believe I will live to 100 due to the advances in medicine and that my career has another 60 years to go, since I turn 40 in 2003.

I will never retire. What an absurd, out-dated concept that is.

Ontario Dentist – January 2003

Managing Your Suppliers

Date Posted: 2002/12/05

Dental supplies are typically the second or third-highest dental practice expense, next to staff wages and laboratory. Do you have a thorough understanding of your dental suppliers’ services and skills? Do you know what aspects of dental practice your suppliers are most suited to help you manage? What areas of your practice are they not fully trained to advise upon? This article is about specialization and why nobody should attempt to be a master of all trades.

In the 1960s, dental suppliers were fighting a fierce price war and most companies were developing new services to offer their clients. The objective was to capture a greater share of the dental market and to preserve profit margins. It became necessary for the owners and managers of dental supply companies to supervise and direct their sales force to focus upon the many strengths related to their firm’s core business, namely supplies and equipment.

In an effort to discourage salespeople from providing advice to dentists in areas they knew little about, a list was prepared and circulated at the Associated Dentists Cooperative (ADC). This trend continues today in the dental industry and in many other businesses I have studied. I’ve reproduced the original list here (Table 1).

Table 1.  Strengths and weaknesses of dental suppliers

SERVICES WHICH DENTAL DEALERS BEST QUALIFIED TO OFFER
Advise on locations, practice opportunities, associateships, etc.
Draw preliminary plans and final detailed dental plans.
Supply manufacturers literature and equipment specifications.
Spot chair, centre units, supply plumber and electricians with information.
Assist in selecting equipment and supplies.
Demonstrate products, equipment, and how to use.
New product information, and supply availability.
Information, ideas, practices and customs gleemed from field.
Deliver, install and repair needed supplies and equipment.
Extend reasonable credit, and terms.
Support, assist conventions, clinics, advertisement.

SERVICES WHICH MANUFACTURERS BEST QUALIFIED TO OFFER

Knowledge, in depth on their companies products and services.
How to best use, mix, helpful tips.
Serious complaints on equipment or product problems.
Supply first hand technical information.
Follow up problems your dealer is not able to handle.

SERVICES WHICH DENTAL DEALERS AND MANUFACTURERS NOT QUALIFIED TO OFFER

Professional advice on long range plans, goals.  Type of practice, facilities, build or rent.
Financing, borrowing, leasing repayment and tax implications.
Interior design, colours, decor total environment.
Appraising practice worth, goodwill, organizational cost, leaseholds.
Personnel practice, interviewing, wages, benefits.
Policies for office, staff, practice, manuals and training.
Procedures, business office, reception, telephone collection.
Accounting systems, bookkeeping, income tax returns.
Patient education, preventive programmes.
Solo/group clinic practice, partnerships, constitutions.
Management service corporations.
Taxation, deductions, exemptions.


I believe the list was first typed in 1961 or 1962 by my father, Roy Brown, and distributed to the dozens of salespeople reporting to him. He created it as part of his duty as the General Manager of the ADC. Like most other dealers at the time, he discovered that his employees were extending themselves into areas of dental practice in which they had limited experience.

Commissions on dental equipment and supplies were dwindling due to the extensive competition of the day, and the salespeople were concerned about losing their regular clients if they did not appear to have complete knowledge of a dental practice and all its workings. Sales managers were concerned that legal action could be the result of advice being administered to dentists by unqualified or untrained salespeople.

I have not changed a word in the list you see. It’s typed exactly as it was then.  My father found it in his archives, and we possess hundreds of original documents similar to this one. You may recall that I have written about how things never really change, and I suggest that this list proves the theory correct, yet again.

Once you have read the list, consider the climate in the dental industry today. Have times changed that much? My father’s comments were made about 40 years ago, but I think they could easily have been written yesterday.

Many developments in training and product support have increased the ability of your supplier to advise you and to assist your practice. In my opinion, the best advances have been made in those aspects that are closely related to the “core” products of the supplier. The same observations can be made of dental practice. Those general dentists who focus upon strengthening their core business, preventive and restorative, seem to gain a more thorough competency and then prosper the most. Research indicates that dentists who switch from one new procedure to another, trying to be all things to their patients, lose their focus and may “drop the ball” on the fundamentals.

In the cycle of any small business such as dentistry, the business will occasionally enter a downturn and the owner will attempt new procedures to increase client traffic and income. We continually uncover these cycles when gathering the data necessary to appraise general dental practices. Specifically, we ask dentists to identify which services they perform in their practice and which services generate the highest income. We concluded that sub-specialty services are growing as a percentage of total income, as many dentists are taking extensive continuing education courses. The effect of this emerging trend is that dentists now refer out fewer cases that, in the past, were typically sent to a specialist.

This is the same trend now occurring in the dental supply industry, namely the expanding of services to increase income. Sometimes, the expansion is more than the business can handle, and the dental suppliers may find themselves spread too thin.

This is not a criticism of progressive business people who expand their business. To be fair, appraisal companies have developed new services in the last five years. However, the most success is being achieved by those firms whose strategy is to focus on their core business (appraisals and brokerage) while they design new services centred around them.

Specialization is a time-proven method for owning and operating a profitable business, including a dental practice. Our advice for the general dentist is to focus on your core business, preventive and restorative.

Once we learn to manage our own core business, we can learn to manage our suppliers.

Ontario Dentist – December 2002

A Brief History Of Dental Practice Brokers

Date Posted: 2002/12/01

When my father started his very first job in the dental supply industry in 1948, the dental practice sales marketplace did not exist. When a practitioner decided to retire or relocate, the norm was simply to discontinue operations and close the door.

The usual result was that a few of the busy neighbouring colleagues would take some of your patients into their already overbooked practices, with the equipment and furniture often ending up in storage or in the garbage.

The Evolution of Dental Practice Brokers

During the 1950s, only a few dental practice sales transpired, usually involving a couple of thousand dollars for the equipment and the customary one dollar for the goodwill. It was at this time that graduating dentists began to recognize the value of a “turnkey” dental business system, versus setting up from scratch. However, the abundance of patients meant that the value put upon such a business system was merely a token payment, mostly out of respect.

Throughout the next three decades a series of major changes took place in the key dental practice marketplace indices, and as such, practice values have steadily increased. The most significant change was to the dental manpower ratio when expressed as the number of dentists to patients. My research, which incorporates Stats Canada data and RCDSO listings of licensed dentists, indicates the ratio has decreased such that it now favours the owner dentist, with an active patient base – and not the associate dentist, who has a limited number of patients to rely upon.

Essentially, the shortage of available patients increases the business value of the operating dental business system that treats those active patients. In my view, purchasing the many components that make up the asset known as goodwill, along with records of these loyal patients, has proven to be one of the most economically sound decisions a young dentist can make.

The cost of building and equipping a new dental office has increased from about $25,000 in the 1950s, to approximately $250,000 today. The price paid for goodwill has increased from the token amount of one dollar, to values that exceed half a million dollars in some recent sales. In fact, the majority of the price paid in some of those sales was for the goodwill. Equipment values also continue to rise, as the technology employed in a typical dental office is more costly than what was used 50 years ago, which, in turn, raises the average selling price even higher.

If we perform some basic calculations, it is easy to demonstrate the rapid growth of this relatively young market. As well, we can prove that the investment made by dentists to buy or set up a practice anytime throughout the ’60s or ’70s is probably one of the greatest they ever made. Compare the amount spent to set up versus today’s selling prices, and we see double-digit rates of return over 20 or 30-year periods. This is unheard of with most other investment vehicles.

Today’s Marketplace

The necessity for regulation and licensure of dental practice brokers became evident in the 1970s, when some dubious transactions garnered the attention of provincial Registrars. Accordingly, each provincial regulatory body has since developed a set of ethics and standards that regulate the individuals who have obtained a license. This arrangement is similar to the various provincial dental regulatory bodies. A dental practice is now defined as a business, carried out for profit, under the Real Estate and Business Broker’s Act. A dental practice, under the various definitions, may include leaseholds, business fixtures, dental equipment, stock, goods or chattels and most importantly, goodwill.

Most provincial Acts contain some variation on the following: “no person shall trade, which includes disposition or acquisition or transactions in real estate by sale, purchase agreement, lease or attempt to list such, or to act, advertise, conduct or negotiate directly or indirectly, unless they are a Licensed Broker or a Licensed Salesperson employed by the Broker.”

These types of regulations stipulate that accountants, lawyers, dental dealers and others who are not licensed brokers are restricted from arranging dental practice transaction for a commission ÷ a common occurrence many years ago in the unregulated era. This regulation has also assisted in the rapid growth of the specialized business brokerage service.

“the decision to use a business broker for the sale of your practice should not be based upon the profit motive alone.”

Alternatively, it is legal for an individual to sell his or her own business. Some practitioners I know have the energy, skill and time to represent themselves successfully. Some do not.

An informal survey of my clients indicates that the decision to use a broker was typically not influenced by skill and time alone, but also by the cost. How best to utilize personal time is a decision that many of us struggle with whenever we make changes to our professional lives that involve the need for expertise. When we are young, we often have the time to learn many new tasks, such as buying our own stocks and cars. As we age, we often retain a broker for the more complex task of disposing of major assets, such as a home or practice. Results can vary significantly when we measure those achieved by an inexperienced individual versus those of a professional.

My market data indicates that a dental practice transaction, arranged through a broker, will usually produce a higher sale price. This is not necessarily favourable to the buyer, but in todayâs sellers’ market it is the reality of the supply and demand cycle that they must often accept.

However, I believe that the decision to use a business broker for the sale of your practice should not be based upon the profit motive alone. It is also important to consider your unique skills, energy and available time when deciding whether one is required or desired.

Dental practice brokers have been in existence for over 25 years in Canada. They are required to be licensed, participate in mandatory continuing education, and be accountable to a Registrar ÷ all of which serve to encourage a higher overall quality of service to the dental profession.

I foresee that the dental profession will continue to consume this very unique service for many more years, regardless of the market changes that are without a doubt on the horizon.

Predictions and Observations of the 2002 Market – Part 2

Date Posted: 2002/11/05

I have been rather harsh in my recent columns about partnerships, and a few of my clients have let me know that they are in partnerships where my dire predictions of them have not proven to be true. In fairness to those who are partnered with other dentists, I clearly recognize the many benefits you enjoy and I compliment you on combining your skills to extract the merits of this particular dental care delivery system.

However, my telephone rarely rings with someone on the other end who is calling to tell me that everything is just fine. I usually receive quite the opposite type of call, where an appraisal is immediately required due to dissolution of the partnership.

On the other hand, every dentist I know who is currently in solo practice and was once was in a partnership, tells me that they will never enter into another dental partnership.

Why Some Partnerships Succeed

Another recent observation about partnerships is the trend towards those that were specifically formed to “exploit” the unique skills of each individual. I have discovered that in the partnerships that do succeed, each of the partners will have been trained in a different sub-specialty, such as implant surgery. Typically, each dentist has no interest in the other’s specialty, not wanting to compete with his or her own partner. And further, my observations I show that partnerships in remote areas are typically not as competitive and enjoy an abundance of patients to be treated, thus eliminating the potential for conflict.

It then becomes obvious to me that dentists who don’t compete for the “bread-and-butter” work will have a better-than average chance of survival in the form of a partnership. As well, those situated in remote or northern communities where specialists are lacking have somewhat better odds of survival, due to the necessity of referring some treatments “in-house” to their sub-specialty partner.

In fact, I recently appraised a number of large group practices, scattered around Canada, where the owners have clearly found a method of managing their practices in the spirit of compromise and co-operation. Unfortunately, these practices often exhibit a higher overall operating overhead. I suppose the resulting net income is sacrificed in order to achieve more personal freedom.

Today’s Buyers

Clients who are listing a practice typically ask this question: “What will be the profile of the buyer of my practice?” The answer is that this is not an easy question to answer, but in general, there are some prevailing characteristics, namely that they:

  • are roughly 50 per cent female;
  • hail from all over the world;
  • range in age from late 20s to early 40s, but mostly in the late 20s to early 30s;
  • are servicing substantial debts, usually in the six figure range;
  • are seeking “lifestyle” practices that are not dependent upon too many evenings and weekends; and,
  • wish to be busy, quickly, without paying the long and hard dues of their predecessors, and they are prepared to pay for that privilege in the form of goodwill, like never before in the history of the dental practice marketplace.

Conclusion

The market is ever-changing; sometimes in ways than I could not have foreseen. That’s what makes this area so interesting and challenging. I intend to periodically submit these updates and observations, in the hope that they will help to guide you through the sometimes difficult process of timing your eventual exit from dental practice ownership.

Ontario Dentist – November 2002

The Top Five Factors Affecting Dental Practice Values

Date Posted: 2002/09/14

On a daily basis, I am asked by accountants and lawyers to comment on the methodology that we use to appraise dental practices.  They ask me to explain what factors affect practice value the most.  While a professional appraisal should consider hundreds of items, I believe there are five key elements that impact practice value the most:  cash flow, gross income, asset value, patient profile, and location.

Cash flow

The most significant item, when determining practice value, is the annual cash flow produced. Purchasers look at cash flow with more interest than any other factor.  Accountants, credit officers at lending institutions and reputable dental consultants also pay the most attention to this figure.

A banker recently told me that annual cash flow, while the purchaser is servicing a debt load equal to 100% of the sale price, is the most important figure when he is reviewing a loan application.  A study of the last 100 appraisals I have personally signed, indicates that a typical dental practice will have a cash flow of 40% – 60% of annual gross income.  This figure has been adjusted for “non-practice” expenses such as spousal wages, non-dental supplies, excess travel and continuing education and non-reoccurring expenses.

Gross income

Annual gross income is the second major determinant of value, as it indicates how busy the purchaser will be.  Gross income will indicate the number of days and hours that are required to produce these fees. The fee guide used, and the types of treatments performed will affect gross income and purchasers will ask many questions about the practice modalities to understand the dentist and hygiene production figures.

I recently sold a practice that chose to use a fee guide that is 30% higher than the suggested fee guide.  This produced average hourly billings of $600 and annual billing of $550,000 on 850 hours per year.  This is a classic example of how gross income in relation to fee and philosophy can create a very profitable practice on a relatively easy workweek of 24 hours.  This particular owner took 12 weeks of holiday as well.

While not every practice has patients who will be receptive to this type of fee structure, it certainly shows why purchasers who only want to work a 3-day week must be specific when looking at the style of practice and not just how much cash flow they will make.

Some dentists have a “psychological barrier” when looking at the size of practices, and as such, gross income is the second most important factor in calculating value.  In summary, purchasers use the practice’s gross income to determine their ability to sustain the practice and to identify if the practice meets their personal and clinical needs.

Asset value

Asset value, also known as “net tangible assets”, has a significant bearing upon practice value.  I recently had a debate with an accountant who believed that it didn’t matter what the equipment was worth and that the only number that counted was cash flow.

Two practices with the exact same cash flow and gross income can have drastically different equipment value.  For example, the practice mentioned above had a total appraised value of $58,000 for the equipment and leaseholds.  I recently sold another practice that had the same cash flow and gross income.  However, the second practice used three rooms of very modern equipment, along with intra oral cameras, panorex x-ray, an elaborate computer imaging system and several other high tech items valued at over $250,000.  The sale price was roughly $200,000 higher for the second.  If we had relied solely upon a simple formula based upon the cash flow or gross income to value the practices, as the accountant had suggested, one of the dentists would have sold their practice for well below market value.

Patient profile

When I use the term patient profile, I refer to the ability of the patients to understand and accept treatment planning delivered by the dental office.  In other words, some patients are more educated and possess the financial resources to pay for un-insured services, while other patients may be totally dependent upon insurances or social assistance to pay for their dental care.

A dentist cannot change the social structure of his patients, but he/she can change the way a patient learns about dentistry.  I am a large believer in visual demonstrators for patients and I believe the dentists who focus on patient education, as a cornerstone of their practices are likely to gross higher fees, and earn higher annual cash flow.  This was commonly referred to as the patient centered practice by consultants back in the 1960âs and it still holds true today.  Look at most of the continuing education gurus who charge large fees to learn their secrets.  The common denominator in most of their messages is to be both a teacher and a treatment planner and the patient will uncover the benefits by themselves, resulting in higher case acceptance.

Location

The last key element impacting value is location, location, location.  I just sold a five-year-old practice that was averaging 45 new patients per month.  The plaza is very busy and has been fully leased from day one.  The owner had actually attracted more patients than she could handle because she chose to work only 30-32 hours per week.  The result was a practice with almost 2,000 patients who were receiving very basic restorative care and little more.  The annual billings were about $450,000.  This equates to just over $200 per patient, per year in fees.

The owner was doing all the new patient exams herself, a very nice gesture, but this consumed two hours of her day on average.  The hygienist (two on some days) saw one patient every 45 minutes.  This location was fabulous but the owner ran out of time to do all the potential patient treatments.  The new owner will be expanding the hours and I believe this practice will produce fees of $600,000 + per year in no time at all.  This example of a superior location demonstrates my position that gross income alone is a very unreliable method for valuing a practice.

Summary

As of this fall, my company has over 150 qualified dentists looking to buy an established practice in the Greater Toronto Area (GTA).  The fundamental law of supply and demand will dictate that the more purchasers there are for available practices, the higher the selling price will be.  I predict that thriving practices in the GTA will continue to enjoy very high value for another two to three years.  I also predict this demand may drive values even higher for those profitable practice selling that have combined the 5 most important factors into an efficient and profitable practice.

When it is necessary to determine the fair market value of a dental practice, the five factors should be the very minimum that are taken into account by the professional appraiser.  Every dentist employs a unique practice philosophy.  Therefore, appraised fair market values may vary substantially, yet these factors will address the key issues that all dentists should understand.

IBA – September 2002

Incorporating Your Practice?

Date Posted: 2002/09/02

With the news in this year’s provincial budget that dental professionals may be allowed to incorporate in Ontario, I have been asked by many clients to comment on the practical issues related to selling a dental practice to a newly formed company. While I am not licensed to offer legal or accounting advice, I consulted with several leading experts in these matters and here pass on their advice.

First of all, it is important to understand that the legislation permitting incorporation has not been approved at time of writing. As well, it may not be approved at all, so do not attempt anything until this is legal. In the event it does become legal to incorporate, you are well advised to seek both legal and accounting advice prior to proceeding. Several experts have told me that the initial set up cost can be $5,000 to $10,000 and annual fees to maintain a corporation can be $1,500 to $2,500. These costs alone make it impractical for some to incorporate as they offset the possible tax savings you are trying to achieve.

Any dentist who has already formed a technical services company or hygiene corporation has likely achieved many of the benefits of incorporating and will find that it is not viable to incorporate again. One reason why incorporation is attractive in some provinces is that dentists can sell shares to family members. However, in Ontario, the only person who will be able to own the shares will be the dentist. This eliminates many of the benefits as it removes the ability to pay dividends to family members.

A few situations where it may be practical to incorporate include dentists who are owners of the real estate in which the practice is housed and those dentists who have associates. Speak with an accountant and lawyer to understand these issues better.

Dentists in Nova Scotia received permission to incorporate in 1994. Over 150 did so and Revenue Canada (now Canada Customs and Revenue Agency (CCRA)) reviewed every file. It was concluded that many dentists overstated the value of the assets transferred to the new company (goodwill in particular), which resulted in a deemed transaction (sale of goodwill) at a lower price. This reassessment of goodwill could trigger income taxes payable by the dentist even though no money actually changed hands. Penalties may also have been applied if the reassessment was significantly less than the amount used by the dentist. CCRA discovered that many dentists had used a simple letter from dental suppliers estimating fair market value – opinions that were disqualified completely. The suppliers are not at arms length and they have a direct conflict of interest as they sell other products to dentists. Additionally, CCRA more or less stated that the lack of detail in the letters, and the use of an overly simplistic formula of $X per chart, was not acceptable to substantiate goodwill value.

In order to defend themselves against these reviews, 19 dentists in the Maritimes requested that I perform an appraisal of their practice. My associate, ODA member Dr. Roger Ellis, and I faced the challenge of calculating the value of their goodwill as of 1994 even though it was five years later when we performed the office inspections. The methodology used to appraise in these circumstances, called forensic appraisal, is more complex and therefore more costly. The additional cost may have been prevented had a professional appraisal been done back in 1994.

CCRA had a substantial interest in proving that goodwill was worth a lower amount than what the dentists claimed because, in some instances, it could charge taxes on the amount the goodwill was over-estimated. Some of the more significant problems arose when dentists withdrew the money tax-free. I met with one young dentist, operating a modest family practice, who had a tax bill for over $100,000 with interest and penalties adding up every day.

In most instances, we appraised goodwill at a higher amount than CCRA’s valuators. In the event that CCRA concludes that enough errors were made in the incorporations in Nova Scotia, I’m certain it will be keeping a close watch on developments here in Ontario.

I am also led to believe that dentists in British Columbia and Alberta who operate Professional Corporations and/or Family Trusts may be contacted by CCRA about the appraisals they used if the Nova Scotia reviews are any indication.

This issue has the potential to be one of the largest debates about dental practice values we have ever seen. The resources to challenge the dental professionals who incorporate are readily available within CCRA offices across Canada and they would most certainly consult with their Nova Scotia offices to benefit from its experience. I am an adamant supporter of dentists and support any legal means of paying less tax. However, I caution you about acting too quickly and thus exposing yourself to the risk of a costly and time-consuming review.

Another issue related to incorporating is the ability to sell the shares of the company when you wish to sell the practice. This is opposed to the traditional sale of the tangible assets themselves in what is called an asset transaction. I have been selling shares in western Canada for some time and this has become the norm. The tax savings are significant for the seller, yet the consequences to the purchaser can be costly. While it is now customary for shares to be sold in some provinces, it took several years for the market to react to the taxation effects, especially for the purchasers, and prices went down for some time. Essentially, what happens is that the purchaser can buy your company yet he/she cannot depreciate the shares, which results in higher taxable income. Accountants call this a “lost tax shield” and they often advise the buyer to offer a price that is 10 to 20 per cent lower than the appraised value to reflect the lost amortization, depreciation, or capital cost allowance. It is important to remember that an asset sale does not trigger this price reduction. Furthermore, the capital structure of the company can have a big impact on the price of shares, such as the amount of retained earnings.

I caution you about incorporating if you plan on selling in the first one or two years after it becomes legal. The reason is that the purchasers may indeed buy your shares, yet they are certain to be discouraged by the reduced tax relief denied them when compared to other unincorporated practices. This will drive the value of incorporated practices down. Even though you pay less tax when selling those shares, you may end up in the same net after-tax position when it’s over. This reason alone may prevent dentists from paying the initial costs knowing the sale price will be reduced.

I predict that the market will become accustomed to share transactions after a few years and practice values will rebound but that will likely be the time that all the baby boomer dentists start selling their practices, which will increase the supply of practices for sale and reduce values due to oversupply.

If you plan on incorporating and subsequently selling your goodwill to this company to avoid future taxes, I strongly encourage you to retain a professional appraiser now and reduce the likelihood that you could face a costly review by CCRA later.

Ontario Dentist – September 2000

How To Successfully Manage Your Equipment Lease

Date Posted: 2002/09/01

During the normal course of my business, when gathering the data to prepare a professional appraisal of a dental practice, I frequently review the client’s equipment leases. In most instances, I perform a courtesy audit of these leases so that my client is certain to understand the facts and figures of the leases in the event the practice is sold. While performing such courtesy audits I have, on occasion, uncovered a discrepancy between the figures contained within the lease contract and those which my client says they were given to understand.

Why is this article necessary? To quote Henry David Thoreau, “The only obligation which I have a right to assume is to do at any time what I think right.” With this in mind, I have chosen to air my opinions of leasing because my company has been required, from time to time, to spend a considerable amount of time explaining leasing to its clients. This column may prevent this unnecessary, and unprofitable, use of my time from occurring in the future. As well, I hope to be viewed as an advocate for the dentists who supply my company with a means to earn a living. I encourage anyone who may have other information about leasing to write Ontario Dentist and express their views. I know the journal is interested in opposing views and a good debate.

Some of my clients – and even some accountants – readily admit that they do not completely understand the complex set of rules affecting their leases, as dictated by the Canada Customs and Revenue Agency (CCRA). With respect to the equipment leasing companies that serve the Canadian dental industry, it is my opinion that they have failed to fully educate dental professionals about the manner in which leases are calculated.

The greatest source of frustration reported by my clients when equipment leases are the topic, is that they do not know the true effective annual interest rate they are paying. I think this is due, in part, to a unique method of calculating leases, typically called rate factors, or the cost per thousand multiple, which was developed by the equipment leasing industry.

Rate factors were designed to assist dentists and equipment dealers to easily calculate monthly payments. These rate factors simplify the mathematics of leasing, yet they have an unfortunate side effect: a rate factor does not precisely identify the effective annual interest rate upon which an equipment lease is based. Rate factors “accidentally” began to allow for the figures of a lease to be presented, while inadvertently disguising the effective annual interest rate being paid. The use of these factors then prevents a traditional “apples to apples” comparison that most consumers perform when comparing varying financing options.

What information is required to audit a lease? Let’s start with the basics. There are five essential components of any lease:

1. the number of payments to be made, or the term of the lease;

2. the principal amount upon which the payments are based;

3. the final payment required at the end of the term;

4. the regular payment amount; and

5. the interest rate.

If provided with any four of these components, we can easily solve for the fifth. You will notice that the rate factor is not one of the five essential components of a lease. That’s because the rate factor is only a convenient mathematical tool designed by the leasing industry, yet it’s almost a totally meaningless number to the lease auditor or accountant. However, knowing the rate factor can assist in the search for the effective interest rate of a lease. In short, rate factors are an industry tool that is rarely used by the equipment lease auditor.

Some of the five components have been given other names that are unique to leasing. For example, the final payment can also be called the lease residual, the buy-out, the payout or the early purchase option amount due at the end of the lease. These terms, and many others that you may have encountered, are interchangeable and essentially mean that you must make a final payment, typically a percentage of the original principal amount, at the end of the lease term. Dentists often misunderstand the purpose of this final payment and they sometimes confuse it with other lease terminology, such as the “fair market value” option, that can also be found in leases.

The use of these various terms sometimes adds to the confusion surrounding leases. My advice with respect to final payment, or end of lease options, is this: Always exercise the final payment or early purchase option; i.e., 20 per cent of the original equipment cost after 36 monthly payments, and avoid things such as stretch leases, automatic annual renewals and fair market value purchase options.

Leasing companies sometimes ask you to pay them the “fair market value” of your equipment, even after you have paid back the entire principal amount – and the interest charges – during the term of the lease. Paying the fair market value of the equipment, after the term has expired, can be as costly as the total interest you’ve already paid. Another item that increases the yield, or earned interest, for the leasing company is to request the first and last payment in advance, versus the first payment only in advance, which I believe is best for the customer. I have also seen leases with various fees added into the total amount to be borrowed, such as Personal Property Search Act (PPSA) fees, and interim interest charges, among others. These are often agreed upon, and are fair fees, provided you are aware of them and how they are calculated.

Why do many dentists continue to lease most of their new dental equipment acquisitions, rather than purchasing it outright or using a line of credit or bank loan? Equipment dealers promote leasing because there are compelling economic reasons for doing so. Firstly, any equipment supplier, in any industry, will admit that the presentation of a low monthly lease payment, versus the much higher figure of the total purchase price, will reduce the likelihood that the customer will successfully negotiate a lower purchase price. In other words, by asking us to focus on the payment, not the price, profit margins typically become higher for the supplier. The most obvious example of this is the automotive industry. I’m certain you have noticed how most ads promote the monthly payment more so than the price.

Secondly, it has been a long-standing and customary practice for a leasing company to pay the equipment supplier a referral fee for introducing the customer to them. Many equipment dealers carry leases with their equipment order forms, which provides for a quick method of processing payment to the supplier. Some of my clients tell me that this is a simple and convenient process that eliminates the need to contact the bank, arrange an appointment, take time off work and go hat in hand to the banker.

What should you do?

Negotiate the lowest possible purchase price for the equipment with your supplier as though you were going to pay in cash. At that time – and only after you are certain that you know the lowest possible price – ask them to provide you with a written lease quote that contains the five components mentioned above. Quotes that only mention the number of monthly payments, or simply the rate factor, do not provide enough information to ascertain the effective annual interest rate.

Secondly, obtain one or two more quotations from other leasing companies. Now you can compare apples to apples. I suggest that you contact a Canadian chartered bank, trust company or credit union, as they are regulated by the Trust and Loan Companies Act. In some instances, you may find an interest rate, and therefore a monthly payment that is lower than those provided by your equipment supplier. Essentially, you are following the exact same process as when you buy a home. Namely, we negotiate the lowest possible purchase price, and then we go to another source (usually a bank) for the mortgage. Have you ever bought a home solely based upon the low monthly payments or do you negotiate the total price first? Negotiating the lowest purchase price first is prudent consumer behaviour. I encourage you to do the same with your next equipment purchase.

Another suggestion is to ask your accountant if he or she leases office equipment. If so, did they lease through the supplier, or did they negotiate the lowest purchase price first, then arrange the lease? I know some accountants who tell me they will never lease anything for their practice.

I wish to be clear that I’m not suggesting that dentists should never lease their equipment, as leasing is a useful and viable alternative form of financing, and it will be for many years to come. Just be sure you know exactly what you’re getting into before you sign.

It is my opinion that both the dental and accounting professions do not understand leases completely. This is witnessed by the reactions I receive when the results of my audits are measured. I also worked a short period with a leasing company, over 10 years ago, which helps me to understand the leasing business better than most dentists. It should also be mentioned that there is not a governing body that expressly regulates privately held leasing companies.

Send a copy of this column to your accountant, along with copies of your leases, so that a lease audit can be performed to verify the actual effective interest rate upon which your leases have been based. Leasing can be a little confusing, and it should not be this way. I hope this column will help.

Ontario Dentist  – September  2002

Selling a Practice – Part II

Date Posted: 2002/06/13

Most dentists will sell a dental practice once or twice in their career. This short column contains more issues to consider, in addition to last month’s suggestions, and they are intended for those who are placing their practice on the open market for sale, or for those who are looking at practices to buy.

After hours showings

Buyers often ask if they can observe you during working hours to see the practice functioning. This is a genuine curiosity and I understand why they ask. However, I recommend you not agree to this. It is an unnecessary interruption for staff and patients, and may lead to speculation about your plans. This is similar to the “Test Drive” theory and it should be avoided unless necessary. A visit to the office after hours is the customary procedure with which most buyers are familiar. Try to avoid office cleaner schedules, staff that may work after hours, associates, etc.

Day sheets and appointment books

Buyers usually ask to review the appointment books and day-end sheets. They make their decision to buy a certain practice in large part on the scheduling philosophy of the previous owner. Many times I have listened to a buyer say how they are impressed, or perhaps unimpressed, with the owner’s use of time, something which can attract or deter a buyer respectively.

If you use computer day sheets, open a binder and save them while the practice is for sale. Another tricky issue is that buyers love to see the upcoming appointments. Due to the prevalence of computers, this often presents a problem. It is not advisable to let your broker use the computer, as we do not know if they are familiar with the many different software programs. Therefore, it may be necessary for you to perform this at one of the after hours meetings mentioned above. It is almost always a requirement of the buyer’s inspection.

Premise lease renewals

Landlords have been known to modify, amend or renew a lease on short notice. If this occurs while the practice is on the open market, the buyer must be made aware of any new contracts with the landlord. We sold a practice recently where a lease was in full force and effect, and a renewal had been issued and signed; yet neither the broker nor the buyer was made aware of it. Luckily, the change was very minor, but the potential was there for accusations of withholding information deemed important to the buyer. Full disclosure of all meaningful business information is the only way to sell a practice.

Computer software contracts

Your computer software company will issue annual updates, such as the new ODA fee guide, and they occasionally change their annual fees. If an appraisal has been performed and the circumstances surrounding your software license change, it should be mentioned. The key issue with computers is continuity. The buyer wants proof that the staff can run the system efficiently after closing. A system that is not updated may need to be replaced, creating lost productivity time and higher overhead. That is absolutely the last thing a buyer wants to deal with his first year of ownership.

Continuity of all factors

If you have decided to sell and then allow your gross income to go into a state of decline – which is common – this has a modest, yet unfortunate side effect. Most appraisers will rely upon financial statements from the previous three years to determine fair market value. A buyer, on the other hand, is primarily focused upon the most recent year.

There is a school of thought within the valuation industry that relies solely upon future income streams in appraisals. A favourable report in this area may impress a buyer and entice him to purchase the practice, but a prudent and informed buyer will always want to know the most recent figures, not just the projected ones. Therefore, even if you only take a few days off, or reduce your overall effort modestly, the slight decline in gross may result in a lower selling price for your practice.

Conclusion

Buyers are looking for a meaningful issue to initiate a negotiation of sale price and the terms of sale. This is prudent behaviour and is encouraged by all professional advisors, within reason. However, it is also an ethical and proper business practice to prepare an asset before it is put up for sale. It is the duty of the owner to do so.

In the event that you contract the services of a professional broker to sell your practice, I suggest that you meet with them and review this column, and my May 2002 Ontario Dentist column, prior to commencing the presentation of your practice to third parties.

Ontario Dentist – June 2002

Selling Your Practice: The Fundamentals – Part I

Date Posted: 2002/05/13

I began selling dental practices in 1984, the year I obtained my real estate license. I performed my first appraisal in 1979, at the age of 16, as that service did not require a license. My father owned the only company active in appraisals back then, and a large part of my job was to show the practices we had for sale to interested buyers.

There were numerous showings at each practice and driving from one to another was a time-consuming element of the job. I spent many evenings and weekends listening to dentists express their thoughts as a potential buyer of a practice. I enjoyed the job but had to find a way to be more effective with my time. I soon discovered that the best method was to quickly identify each dentist’s specific needs, and then show them only one or two practices, versus taking them to every one we had for sale. I also discovered several common issues arose in the process and identified those most likely to affect the sale of a practice. The following are just a few of the many issues to consider, which may assist you when selling your practice. They may also help today’s buyers to better understand the practices they are researching.

Leaseholds and facility

One of the most overlooked events is the buyer’s first visit to the practice, which can sometimes prevent the desired, favourable first impression. The following is some very old advice that I heard my father offer many times, but it’s well worth repeating: walk through your office, or have a stranger do it for you, and critique it as though you are a prospective buyer.

Many business owners ignore the most obvious of shortcomings, sometimes for years, while in mere seconds, a third party can point out minor cosmetic flaws, space-saving ideas or inefficiencies. It amazes me when a dentist enters one of my client’s offices and points out something simple that even I failed to recognize. Presentation means much more than we think and a buyer is strongly influenced by a poor first impression. When your practice is for sale, the number one thing you should do is take some time to make it look its very best. Following this advice always produces a favourable result.

Sundries and supplies

Broken, obsolete or out of date supplies should be removed. For example, I was showing a practice to a buyer who found a few packages of expired anaesthetic in a storage cupboard. She assumed that the owner did not always use current materials. It was untrue, but this inaccurate and negative conclusion about the owner’s philosophy could have been easily prevented if he had thrown it away earlier. Buyers will always find these items because they are permitted to inspect the contents of most every drawer. They notice every single deficiency. I often find that business and private offices are not demonstrating an organized and efficient operation and suggest they be cleaned out, top to bottom, before allowing a buyer into the practice.

“(Buyers) are looking to purchase equipment that is in profitable use, not equipment that looks profitable.”

New equipment and office renovations

I recommend that the selling dentist resist the temptation to make too many last-minute changes to the office in an attempt to impress a buyer. Purchasing new technology solely to “prove” you are up to date is often a complete waste of money. I recently sold a practice where the owner had just bought a high-tech item to showcase his belief in a modern practice philosophy.

When asked about it, he readily admitted that the new “toy” was not in regular use and that they really didn’t know how to use it just yet. The purchase price was almost $100,000 and this was added to the asking price. This did not impress the buyer. These people are looking to purchase equipment that is in profitable use, not equipment that looks profitable.

The same goes for renovations. The owner of an office I just sold performed a total redecoration prior to the sale. The buyer loved most every aspect of the practice, but complained about the “awful colours!” A coat of paint can do wonders for the aesthetic appeal and the overall décor – just choose a neutral colour. I often see wallpaper peeling, loose toe and chair rails, wall scrapes from X-ray machines and chairs, etc., that may only require a couple of hours of handy work to improve at little or no cost. But watch out for the temptation to go overboard. You may accidentally overcapitalize the value of your practice.

“Test-driving” and meeting with the buyers

Most buyers ask if they can work in a practice for a short time, prior to making an offer. I do not recommend that an owner agree to this. Allowing more than one dentist to “test-drive” your practice will most certainly cause damage to your goodwill. Staff and patients can be easily confused if you allow these very curious dentists into the practice on a trial basis. Some owners do not inform staff that the associate dentist is also a prospective buyer. While staff is not always entitled to know such information, they often feel betrayed and hurt if they discover the secret plan. My experience as a business owner is that staff will almost always uncover secret plans, and it’s sure to reduce their trust in the owner.

While in some unique situations it may be necessary to allow a buyer to work in a practice, this is rarely the case with practices I sell. I have found that test-driving does not meaningfully affect a transition, and in most instances it will negatively affect negotiations. As a manner of conveying the uncertainty it evokes within my clients, I liken the test-drive theory to allowing someone to live in a part of your home, while you still live there, just to see if they are interested enough to make you an offer. More than that, you have to pay them to do it. It’s not entirely the same for dental practices, but it makes you think, doesn’t it?

However, it’s common for a buyer to request a meeting with the owner prior to making an offer. I suggest all owners agree to this, but only after a thorough qualification process of the various candidates has been completed. The meeting should be held at the practice, after hours, so that you can reference charts or materials to demonstrate your technique and philosophy. Staff should never be involved at this stage and they should not be encouraged to meet the buyer until after an offer to purchase has been accepted and made unconditional in all regards.

Staff changes

If you must issue new wages and benefits, or encounter a staff change or notice of maternity leave, you must notify your broker or the buyer. Full disclosure is the only way to sell a practice and it is advisable to inform the buyer of staff changes, no matter how insignificant they may seem to you. I have heard about situations where a small detail was not communicated and it created a sense of mistrust between the parties. An innocent moment of forgetfulness can subject other elements of your practice to greater scrutiny and suspicion. It is now essential that an appraisal be given to the buyer during their investigations, but the information contained within may become outdated if you have modified the practice in any way. Be certain that the appraisal is updated in these situations to ensure you are giving your broker or the buyer a full disclosure of all meaningful facts.

Hours of operation and holidays

Buyers always ask us about the days and hours of the practice. From time to time a client will make modifications in this area to better serve their lifestyle, staff availability and patient flow. Seasonal modifications such as “summer hours” are common, but buyers must know if they are part of the practice’s regular business operation.

Many dentists buy a specific practice in large part for the hours of operation (see my September 2001 Ontario Dentist column for more on this). If you decide to take more or fewer holidays than usual, and it is something likely to affect your gross income, it may alter the overall appeal of the practice. Buyers are on strict budgets, with substantial debts to manage at the early stages of their careers these days. Hours of operation and holidays are very important to them. Once again, if you change them, tell your broker or the buyer.

Conclusion

If you contract the services of a professional broker to sell your practice, I suggest you meet with them and review the issues raised in this article prior to commencing the confidential advertising and presentation of the practice to third parties. Preparation is essential to obtaining the highest possible sale price. The simple process of readying a practice for sale is usually a low-cost affair that will produce high gains in most every instance.

If you own a dental practice, it will be sold one day. It is inevitable. A study of the dentist – when acting as a buyer – reveals that the process can be simplified if the owner plans ahead. When your dental practice is being sold, it’s an exceptional practice to be prepared.

Ontario Dentist – May 2002