Author: marketing

Has Practice Management Changed Over The Past 75 Years?

Date Posted: 2001/01/30

This year, I’ll be writing about some of the most successful and simplified techniques for managing your practice and your patients. Seeing as we’re celebrating the Journal’s 75th anniversary, I think it’s only appropriate we begin by looking back to see what history can teach us.

How many times have we heard that saying “Everything old is new again?” Is this true, or is it just a saying that we all use to explain how things really don’t change that much?

After an informal study of dental practice management techniques over the past 75 years, I have come to the conclusion that, indeed, little has changed. For my research, I relied upon my father’s 50 years of experience and the interviews we have conducted with hundreds of dentists since I started working with him about 20 years ago. Many of the dentists we have represented are not active in practice now, yet we see many of them at the ODA convention each spring. A few that we speak with are 50-year ODA members. My most memorable conversation was with a 1930’s graduate, who shared some “old fashioned” advice he was given back then. He told me, “People are the practice, everything else is just paperwork!”

Another source of old wisdom is a textbook given to me by Dr. Bruce Glazier. It was written by George Wood Clapp, DDS, and is entitled Profitable Practice. It was published in 1916 by The Dentists’ Supply Company of New York. ( As you can imagine, the book is out of print, and my attempts to contact the publisher have been fruitless.)

The first thing that caught my eye was the word “Profitable” right on the cover. I think it was taboo to use the words “profit” and “dentistry” in the same sentence back in those days. Profit did not have a place in the language of a medical professional in 1916! However, I believe Dr. Clapp was a pioneer in his writing, and he had some controversial views about practice management.

One of the most significant paragraphs in his book reads:
“Men (and women) practice dentistry to earn a living and a competency. This object has been so confused with manner of such earning that it has often been lost sight of and violent discussions have raged about the methods employed, and left the principle untouched.”1

These words were written in 1916. I was so taken by them that I now refer to this 85 year-old text on a regular basis. Another significant statement runs:
“Truth carried to an extreme may become an untruth, and some of the speakers and writers who have grown up within the pale of the Code have carried some of its principles to nonsensical extremes which have been very harmful to dentists who have been misled thereby, and to the profession as a whole.”2

The common sense advice found in this book, and that of the “old school” dentists is simple; when it comes to dental practice, the most important thing is your patient.

Many of today’s dental practice management “gurus” talk about the “patient-centred practice” as though it were a new idea. Is the patient the most important aspect of dental practice? Are there other, more important issues we should examine? The answer is simple; without patients there would be no income and the practice would not exist. So why do we expend so much time and money on techniques to manage information, when patient management is the most difficult challenge in running a practice?

I agree with Dr. Clapp’s analysis that the business of earning a living in dentistry has become so complicated, that many times, the actual principle of being a dentist and serving patients is left behind. For example, I have heard about one-minute treatment plans and 30-second hygiene checks. These patients are your most valuable practice assets. Don’t they deserve more attention than this? I know the temptation is strong to increase production and keep up with the “movers and shakers” of the profession. You see these top producers on the lecture circuit every month. They claim to be able to produce huge fees in record times and can teach you their techniques.

We set goals and budgets in any business – this is common sense. The hundreds of other “pearls of wisdom” and management statistics we are told to use are purely optional. Do not forget to speak with your patients and listen to their needs. Do your very best dentistry for them and the economic results will follow.

Consider this comment from Dr. Clapp:
“The law holds a dentist responsible for knowing as much as the average dentist of his time and locality, and for exercising ordinary skill and care, but the conscientious dentist will hold himself responsible for far more than that. He will recognize his duty to inform patients as to whatever is necessary to the welfare of the mouth and for the proper performance of the functions of speech… The dentist is under no obligations to quote regular patients lower fees than will permit him to perform an operation well… if patients cannot pay the fees customary with the dentist, he may refer them to practitioners whose fees are lower, or alter the form of the work.”3

A more recent commentary about management is the identification of a trend towards “smart talk.” I read an article in the Harvard Business Review that coined this term. Essentially, it stated that many consultants talk up a storm and sound really important. They talk a lot about taking action, yet rarely do. One humorous discovery was that, while hundreds of consultants were using the phrase “new paradigms,” they could not produce an accurate definition when asked.

Another recent relevant quote from a veteran executive comes from Jack Welch, the infamous CEO of General Electric, who just announced his retirement. He was asked what his greatest skill was during his career with one of the world’s most profitable companies. He answered “The ability to get along with people.”

Is Welch’s job any different from yours or mine? Is there any magic to this fundamental principal? Dr. Clapp wrote this in 1916: “He profits most who serves best.” Think about that for a moment.

The patient or client-centered practice theory has been around for at least 75 years in dentistry, and for thousands of years in the field of economics. However, it is so simple that many have seen fit to leave it behind for the “new and improved” practice management theories of the new millennium.

It is understandable that professionals will require advice at certain times. When you need counsel about an issue relating to your practice, I suggest you look to the old techniques and focus upon your patients first.

Remember the practice management advice of that dentist I mentioned earlier: “People are the practice. Everything else is just paperwork’.”

References

1. Clapp, George. Wood, DDS. Profitable Practice. The Dentists Supply Company of New York, 1916, 11.
2. Ibid., 13.
3. Ibid., 15.

Ontario Dentist  – January 2001

 

The Locum Lifestyle

Date Posted: 2000/12/14

In my business, I receive telephone calls every week from dentists who are seeking a change in their career. Many say they still enjoy dentistry, yet the day-to-day management is no longer a challenge, and in some instances it’s become a psychological burden.

The first question they ask is “Should I hire an associate to relieve the patient load and/or stress?” My answer is always “Absolutely not,” because associates rarely assume management duties and usually only add to the stress level. So how do you reduce responsibility and continue to practice dentistry? I suggest you consider the “Locum Lifestyle.”

There are several companies that specialize in arranging for established and capable dentists to attend a practice in times of need, such as holidays, a leave of absence, maternity and sabbaticals. This service offers dentists a new opportunity. You can now sell your practice and continue to practice dentistry in other locations, giving you both freedom from the daily hassles and continuing income – two highly sought-after objectives. It is for this reason that I believe the locum service will grow rapidly.

So, how can you accomplish this?

First, consider the Agreement on Internal Trade (AIT). Dr. Jim Shosenberg wrote about this in the June 2000 issue of Ontario Dentist. Basically, the AIT will make it easier for dentists to practise anywhere in Canada. There may be a few conditions attached, but they are sure to be far less restrictive than those in the present system. With the enhanced freedom to travel coast-to-coast and perform dentistry, your options for work and lifestyle choices will definitely increase.

Second, think about the growing trend towards the use of a professional locum tenens, and you have the best of both worlds. In our dealings, we find that many dentists must operate their practice for many more years than previously, and that selling is not always an option. As well, many dentists fear leaving a younger, less-experienced dentist in their practice while they are absent, yet they still need to take a break from work. Another concern is shutting down for weeks on end, while the overhead eats up your savings or line of credit. Furthermore, you may return from holidays to find emergencies went untreated, or that your patients have made arrangements with another dentist.

Why would you want to be a locum? In two words: lifestyle and freedom. Other issues are the ability to travel, visit with colleagues in other regions, earn an income, and remain anonymous in the community in which you are practising.

Dr. John Wilson of Whistler, B.C., reports that becoming a locum has changed his life. He has now worked in over 15 different dental offices and has thoroughly enjoyed meeting the new patients, staff and people of the community each time. He receives his cheque at the end of each week and agrees to stay only for as long as he wants. In most instances he works full-time for two or three weeks, then goes home.

John also admits that his anonymity in the community comes as a relief when compared to his days of always being the “dentist about town.” For example, he no longer has patients chasing him down in the bank, grocery store and movie theatre to discuss their dental problems.

However, there are setbacks to the “Locum Lifestyle” as is the case with any career choice. An obvious one is reduced income. Most locums earn between $2,000 and $3,000 per week, certainly much less than the dentist incomes I regularly see through my business dealings.

Another concern is the various and unfamiliar equipment you are required to work with, although this is typically mitigated quickly, as the staff will be there to guide you through office policies and procedures. You will also find that the dental supplies and hand instruments you are accustomed to may not be readily available.

I have to say though, from what I’ve heard, many locums love their choice and would never go back to ownership. But be prepared when contacting a locum tenens for an interview; they could be in some far away dental office having fun, so they may not call you back right away!

I am certain you will be hearing a lot about the Locum Lifestyle in the future, simply because it offers the best of both worlds to those who seek adventure and a stress-free life.

Ontario Dentist – December 2000

The Top Five Factors Affecting Dental Practice Values

Date Posted: 2000/11/14

I am frequently asked by accountants and lawyers to comment on the methodology we use to appraise practices. They ask me to explain what factors can affect practice value the most. While a professional appraisal should consider hundreds of items, there are five key elements that can impact upon value the most.

1) Annual Cash Flow

The most significant item when determining business 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 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 per cent of the sale price) is the most important figure when he is reviewing a loan application. A study of the last 100 appraisals I signed indicates that a typical dental practice will have a cash flow equaling 40 to 60 per cent of annual gross income. This figure has been adjusted for non-practice costs such as spousal wages, non-dental supplies, excess travel and continuing education, and “one-time-only” expenses.

2) Annual Gross Income

Annual gross income is the second-highest determinant to value, as it indicates how busy the purchaser will be. This income will indicate the number of days and hours required to produce these fees. The fees charged and types of treatment performed will affect gross, 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 structure that produced average hourly billings of $600 and annual billings of $550,000 on 850 hours per year. This is a classic example of how gross, in relation to fees and philosophy, can create a very profitable practice on a relatively easy workweek of 24 hours. This particular owner took 12 weeks of holidays as well.

While not every practice has patients who will be receptive to this type of fee structure, it certainly shows you why purchasers who only want to work a three-day week must be careful when looking at the style of practice, and think about more than just the cash flow generated. Some dentists have a “psychological barrier” when looking at the size of a practice and, as such, gross income has become the second most important factor in calculating value. In summary, purchasers use gross income to determine their ability to sustain the business and to identify if the business meets with their personal and clinical needs.

3) Asset Value

Asset value, also known as net tangible assets, has a significant bearing upon final price too. I recently had a debate with an accountant who said it doesn’t matter what the equipment is worth – the only number that counts is cash flow. However, two practices with identical 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; but this practice used three rooms of very modern equipment, along with intraoral cameras, panorex X-ray, an elaborate computer-imaging system and several other high-tech items, together valued at over $250,000. Consequently, the sale price was about $200,000 higher than that of the first practice. If we had relied solely upon a formula based on 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.

4) Patient “IQ”

When I use the term IQ, I am not referring to the standard definition, but simply the ability of a patient to understand and accept any treatment planning delivered by a dental office. Most practices include patients from a wide variety of backgrounds, and it is in a dentist’s best financial interest to ensure they all have a solid understanding of any dental services performed.

In this regard, I am a firm believer in visual demonstrators for patients. Dentists who treat patient education as a cornerstone of their practice are likely to have higher gross revenues and higher annual cash flow. This philosophy was commonly referred to as the “patient-centred practice” by consultants in the 1960s and its tenets still hold true today. Look at most of the continuing education gurus who charge large fees to disclose their secrets: often, the common denominator in their message is to be both a teacher and treatment planner. The theory here is that, in doing so, patients will discover benefits by themselves, resulting in a higher level of case acceptance.

5) Location, Location, Location

Just to emphasize, I’ll offer an example using a five-year-old practice I recently sold. It was averaging 45 new patients per month, and the plaza where it is located is very busy, the space being fully leased from day one. The owner had actually attracted more patients than she could handle because she chose to work only about 30 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, which equates to just over $200 per patient/year in fees.

The owner was doing all the new patient exams herself; a very nice gesture, but it consumed two hours of her day on average. The lone hygienist (two on some days) saw one patient every 45 minutes. Overall, this location was fabulous but the owner simply did not have the time to treat all the patients. The new owner will be expanding the hours, and in my estimation, this practice will soon produce fees in excess of $600,000 a year. This example of a superior location adds to my position that gross income alone is a very unreliable method for valuing a practice.

What’s Your Practice Worth?

As of this fall, my company alone 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 practices, the higher the selling price will be. I predict thriving practices in the GTA will continue to enjoy very high values for another two to three years. I also predict that purchasers will continue to drive values upwards for those practices that have combined the five most important factors into a smooth-running practice.

If you want to know if your practice measures up to the most valuable ones in terms of these five factors, I suggest you hire a professional appraiser, who will place a monetary value on them for you. If there are any opportunities to increase the value of your practice, a thorough appraisal will identify any areas for improvement. In addition, consultants can assist with the day-to-day implementation of a plan to reach the goals you may have set following an appraisal.

Ontario Dentist – November 2000

Mid-Practice Crisis: Where Should You Invest Your Time & Money?

Date Posted: 2000/10/05

According to 1999 data from the Royal College of Dental Surgeons of Ontario (RCDSO) detailing the distribution of dentists in Ontario by area and age groups, the greatest number of dentists (2,071, nearly one-third) are 41 to 50 years old. This article is directed towards those practitioners: ones who have been in practice 15 to 20 years and may be experiencing a loss of enthusiasm and/or motivation towards their practices and dentistry.

If you set up a new practice years ago, you should be proud, for you have built a successful practice from scratch, found a location, secured a premise lease, designed, built and equipped the office, hired and trained staff and financed it. Plus, you have rendered thousands of hours of service to your patients. You have accomplished a great deal – but are you a little burned out?

The responsibilities of owning a practice can be demanding. Perhaps you find you need a longer rest than your standard one or two weeks; a sabbatical or just a chance to rejuvenate and return to your practice invigorated. Practically speaking, this is difficult to accomplish when you consider the need to find a suitable locum, trust your patients to another dentist, live on a reduced income for a while and accept all the other unknown risks and concerns when taking a leave from your practice. The idea of time away is very appealing yet it presents a personal and/or financial problem for many.

There are several options to consider. Selling your practice and retiring to pursue other interests or business opportunities is a temptation for many. However, it is practical only for those who have the courage to give up the highly predictable income that their dental practice currently delivers. After consulting with hundreds of dentists about this dilemma, and when the final results are tallied, my recommendation is to invest your time and capital into your dental practice and not into an investment scheme that you know little about. Such a project can have many benefits for you, your staff and your patients (interest breeds interest). Half the battle is to commit to it.

After all, the smartest investment is the one about which you know the most. Your facility, equipment, systems and decor may need refurbishing and you understand them well. You spend 30 to 40 hours per week at the office and at this stage of your career you deserve an attractive, well-equipped place to practice your profession. New technology offers many opportunities for exciting clinical applications such as lasers, air abrasion and implantology equipment. Patients education techniques are far superior today with intraoral cameras, CD-ROM programs and other computer-generated imaging, for example. Purchasing a new charting system will introduce new ways to gather data and integrate it into a computer system for better patient marketing (newsletters) and recall/recare effectiveness.

There are many reputable seminars that can introduce you to these concepts at minimal cost. Why not take a look first hand and then decide?

Whatever you choose, your plan should be customized for your practice – not every practice can support or justify some new technologies. The gross fees, size of the office, location, quantity and profile of your patients are all important factors. Another issue to consider is timing of your premise lease renewal. Perhaps there may be some extra space adjoining your suite. For example, a new location could be considered; high visibility and ample parking can attract new patients.

Chart A
Three Plans to Invest Your Practice		 Gross Investment
A. Same location, size and staff. Add a new operatory and redecorate. $300,000 $40,000
B. Same location, expand by 300 sq. ft., add a new operatory and redecorate. $400,000 $60,000
C. New location of 1,000 sq. ft., 2 new operatories, furniture and décor. $500,000 $150,000
Chart B
Capital Investment Plan		 A B C
New operatory(s) $30,000 $30,000 $60,000
Central clinical equipment 0 10,000 10,000
Office furniture and equipment 4,000 5,000 20,000
Interior decorating 6,000 8,000 20,000
Leasehold improvements (minimum) 0 7,000 40,000
TOTAL $40,000 $60,000 $150,000


Chart C
PLAN		 A B C
Term of Financing at 7.0%
Principal Amount:		 5 years
$40,000		 5 years
$60,000		 10 years
$150,000
Monthly principal and interest 729 1,188 1,743
Annual payments 9,508 14,263 20,916
Total payment over term $47,540 $71,316 $209,160


Chart D
INCOME TAX EFFECT		 A B C
Investment Amount   $40,000 $60,000 $150,000
Your current annual gross 300,000 400,000 500,000
Current annual expenses (60%) 180,000 240,000 300,000
Current net before tax (40%) 120,000 160,000 200,000
Taxes payable on current net income 41,000 61,000 80,000
Current net income after taxes 79,000 99,000 120,000
Net after tax with investment deductions 76,000 93,000 108,000
Projected net with a 5% increase in gross 80,000 98,000 113,000
Projected net with a 10% increase in gross $85,000 $109,000 $117,000

Notes: Federal and Provincial taxes 1999; marginal rate: 48.75 per cent. These estimates assume $10,000 of personal deductions is claimed. Estimates include the interest, depreciation, increased rents and salaries required in each plan.

Because you have an established patient base the risk is considerably less when compared to starting from scratch. In nearly every situation, the government will pay for about one-half (50 per cent) of your total investment through tax deductions (depreciation, CCA and amortization). Charts A, B and C contain example plans based on current gross revenues, estimated investment, financing costs; Chart D shows the resulting tax effect. In most instances, interest paid is 100 per cent tax deductible that year (principal is not deductible).

However, the cost of assets are 100 per cent deductible over an allowed schedule on a reducing scale (equipment and furniture: 10 per cent in year one and 20 per cent each year thereafter). Leasehold are deducted over the first term and first renewal contained in the lease. For example a 5+5-year premise lease means 10 per cent per year.

The challenge of a worthy project can stimulate your interest in dentistry. It has been said many times that the best motivation is self-motivation. Involvement in the planning and investigating the latest equipment and furnishings can heighten your interest to improve yourself and your practice. The benefits you personally receive are rewarding for yourself, your family, staff and patients, with the after-tax dollars being well spent. The investment can also increase the value of your practice because:

  • your total asset value is now higher;
  • goodwill increases with any increase in gross and net incomes;
  • the saleability increased with the rejuvenated facility and modern equipment;
  • purchasers prefer to buy practices that are stimulated and growing rather than in any state of stagnation or decline (results in higher sale prices in most instances).


Whatever you choose to do, appraisers, brokers and consultants can assist you in determining the most appropriate actions to take.

Co-authored by Roy Brown

Ontario Dentist – October 2000

The Top Five Questions Asked Of A Dental Practice Appraiser

Date Posted: 2000/07/14

Thank you to the many ODA members who stopped by our booth at the ODA’s Annual Spring Meeting in May. It is gratifying that so many of you read my column and I thank you for the compliments and feedback. One suggestion that was offered to me was that I make a list of the most commonly asked questions that appraisers and brokers hear. So I compiled a top five list with responses.

Number Five: “How do I sell half my practice to my associate?”

Don’t sell any share to anyone at any time. Sell 100 per cent – and only if you are physically unable to practise, tired of practising full time, or financially secure. Hang on to your practice – it is a great source of cash flow.

This is tough advice for some, but I highly recommend that you follow the most successful type of dental practice over the past 50 years: sole proprietorship. My experience is that dentistry is best delivered in this time-tested model and it will continue to be the best delivery system for the next 50 years. This has been proven through the thousands of practices that my firm has professionally appraised over the past 25 years.

Cost-sharing, group practice, partnerships and other forms of dental practice are interesting, challenging and can be successful for the right personalities. However, according to statistics, 73 per cent of all practices are still sole proprietorships and there is a reason for that: it works best for most dentists.

Number Four: “What can I do after I sell my practice?”

Giving up ownership of a practice does not mean giving up dentistry!

There are numerous opportunities for part-time associates and locums for experienced and capable dentists. Many of your colleagues take extended holidays, pregnancy leave, short-term disability, and some just want to enjoy more lifestyle options. There is a growing trend towards less work and more play in the baby-boomer generation. These dentists are very concerned about the effects of shutting down for weeks on end. They would prefer to temporarily leave their practice in the hands of someone who has owned and practised for 20 years or more. Think about it: who would you prefer to “hold the fort” while you’re away? This is also an opportunity for baby boomer dentists who may want to sell at a young age. After all, the most valuable asset dentists have is their ability, not in the facility in which they practice.

Number Three: “When should I sell my practice?”

Only if you are physically unable to practise, or tired of practising full time, or financially secure, should you sell. Until then, hang on to your practice. It is the best investment you have!

Number Two: “Should I hire an associate?”

No. The advantages may be numerous yet I believe that the disadvantages outweigh them.

Associates may relieve you of extra patient load, freeing up your time for vacations, family, etc. Associates can work extended hours that may attract new patients. If these are your goals, you will need to give up some patients to get them started, but be prepared for a reduction in your income for a while. And if the associate leaves, be aware of the consequences up front.

Appraisers will tell you that the effect of an associate on the value of a practice is often minimal – and in some instances, a liability. Some practices I have represented may have sold for more if there had been no associate at all.

This is a very contentious issue and one I am asked about daily. My advice is to hire an associate only if you want to slow down or if you absolutely must hire another dentist to treat your excess patient flow. But, do not expect to earn much profit from an associate. Budget to earn five to seven per cent of the associate’s gross billings as profit. And be prepared to assume numerous new responsibilities in return for this.

I recently met with a dentist whose associate moved on to new opportunities. She then encouraged several hundred of her patients to seek treatment elsewhere, as she did not have enough time to treat them. She is now happier, stress free and earning about as much as before. The office no longer opens on evenings or weekends, staffing is reduced, less costly and easier to manage, and the risk of losing patients to a departing associate is gone.

…And the number one most commonly asked question: “What is my practice worth?”

Not as much as you think or as much as I would like to sell it for. The reality is that purchasers will only pay so much. Many owners are disappointed when they see the conclusions found in a professional practice appraisal. But quite honestly, appraisers would like to sell practices for higher amounts because they are paid on a commission basis. An appraiser’s duty, however, is to measure the actual open market value.

Many owners can earn as much – and sometimes even more – if they slowly close a practice down and cut staff, patients, costs and responsibility, when compared to selling a practice outright. There are no magic formulas for saving taxes or deferring a purchase price that will make it less costly to sell your practice. If there were, appraisers would know about them.

I know several dentists who are purposely slowing down to eventually close their practice rather than sell it at any price. The reasons are simple: he will earn just as much money; he continues to have a place to go each day and work for another two or three years; and he avoids excessive capital gains taxes, income taxes and the other costs associated with selling.

However, the main reason dentists put their practice up for sale is pride. It is a very difficult decision to purposely set out to close or “deconstruct” something that you have built up over the years. And it goes against your training to let patients go because you spent years trying to attract them to your practice.

Ontario Dentist – August 2000

How To Assume An Equipment Lease

Date Posted: 2000/05/01

Used dental equipment is bought and sold on a daily basis across Canada. In many instances it is common for the purchaser to assume all or some of the existing leases of the previous owner of the equipment. Equipment leases are an excellent source of financing, yet it can be confusing when one dentist assumes the leases of another. Therefore, there are several reasons to exercise caution when considering assuming the lease of dental equipment.

Leasing companies may charge a penalty to terminate a lease prior to the intended expiry date. These penalties are reasonable because the leasing company had a contract stating that a certain amount of interest was to be paid to them over a specified time period. If the lease is terminated prior to its expiry date, that interest is lost. This is the same as a mortgage company charging three months interest to break a mortgage.

When a dentist joins a practice as a partner (associate buy-in), it is impractical for the owner to cancel leases then have the purchaser borrow the funds from another source (sometimes the same source) the same day. The result is that the owner cancels one equipment lease and then enters into another. This can be costly, time consuming and an inefficient use of legal and accounting resources.

Existing equipment leases can be considered “in-place” financing and are a form of credit that may be required by a purchaser to afford a transaction.

There are several methods of calculating an equipment lease assumption amount. Typically, this amount is applied as a credit on closing towards the purchase price. In other words, if you agree to pay $150,000 for a dental practice and the equipment lease assumption amount is $50,000, you only need to deliver $100,000 on the closing date. Here are some methods of determining the assumption amount:

  • The sum of the remaining payment – This means that the total of all the outstanding payments to be made under the lease is credited towards the purchase price. This is very favourable to the purchaser and the most costly method for the seller.
  • The present value of the payment stream – This is usually calculated using the effective rate of interest of the equipment lease. This is a middle-ground approach that could be considered a compromise as it gives the vendor a little credit for the present value of the money owing in the future.
  • The present value of the remaining payments calculated at the purchaser’s current borrowing rate – This is usually a lower interest rate as a buyer is typically requesting $100,000 or more to buy a practice. Therefore, the purchaser is entitled to a low interest rate when compared to leases of $50,000 or less which would be at a higher effective interest rate.

In order to calculate the amounts described above, the following information is required:

  • the original amount financed on the lease NOT including any taxes;
  • the total number of payments that are to be made (usually 36, 48, or 60);
  • the number of payments that have been made, up to and including the closing date of the transaction;
  • the monthly payment amount, early purchase option amount or lease residual amount payable at the end of the original term of the lease (these three terms mean the same thing). The amount is usually expressed as a percentage of the original amount financed, such as 20 per cent for a 36-month lease, 15 per cent for a 48-month lease and 10 per cent for a 60-month lease. Some leases are written to what is called a “stretch” term. The stretch term is usually seven months added on to a 36-month lease resulting in a 43-month lease; six months added on to a 48-month lease resulting in a 52-month lease; and five months added on to a 60-month lease resulting in a 65-month lease. Your leasing company can explain why this is necessary to qualify for tax exemptions.

Once you have this information, it is possible to calculate the equipment lease assumption amount using the methods described above. Unfortunately, there may be other variables as well. In some instances, GST and PST can be factored into a lease assumption and sometimes not, depending on the purchaser’s or vendor’s tax liability on the sale of the leased assets. For example, equipment is PST taxable if sold to a purchaser, whether leased or not. Leaseholds are not usually GST taxable. Other exemptions exist on certain transactions of which your accountant may or may not be aware, so please copy this article for future reference or contact the author for further information.

This is necessary technical information because this issue arises in at least half of the transactions I have seen. It can become a serious problem when there are two dentists, two lawyers, two accountants and a leasing company involved in the calculations. A great deal of time and effort can be wasted on this one issue alone, frustrating all parties to an otherwise simple transaction.

If you have used a professional appraiser or broker, he or she should understand this information completely. This is another reason why you may consider retaining those services. My suggested formula, which I believe is fair to all parties when assuming leases, is this:

  • Calculate the present value of the remaining payment at the borrower’s present lending rate. This favours the buyer.
  • Include on PST in the calculations, not GST. This works in favour of the vendor.
  • Buy-outs, early purchase options and residual payments should not be included if you are calculating the present value to the stretch term (that is, 43, 52 or 65 months).
  • A purchaser should not assume a lease that is more than 75 per cent paid off. I suggest that the seller pay it out altogether.

This article is not to be relied upon as professional legal or accounting advice. Please consult with your advisors before signing leases at any time. You may wish to copy this article and file it with your equipment lease information. I also recommend sending a copy to your accountant if you have any leases that are likely to be shared with another dentist now or in the future.

Ontario Dentist – May 2000

Top 10 Issues To Consider When Purchasing A Dental Practice

Date Posted: 2000/03/14

Ontario Dentist – March 2000

The purchase of a dental practice is a time-consuming and demanding process, and complex beyond most other purchases made in one’s lifetime. This article is for those who have decided that it is time to look at purchasing a practice rather than setting up those who will be selling a practice in the future as it offers insight into the buying philosophy of the potential purchaser of your practice.

But, even before you embark on an active search for a practice to purchase, there are preliminary steps you need to take to make the search itself as stress-free as possible.

Firstly, it is important to determine your geographic limits: considerations such as needing to be within 30 minutes of home because of family commitments, wishing only to drive against rush hour traffic, or wanting to be near family or friends. Many dentists are limited in their ability to relocate and this has prevented many from looking at the thriving practices for sale outside of Toronto. The sooner you commit to an area, the more precise your search will be. Driving all over the province to look at practices is very time consuming and it can be difficult to find a basis of comparison when evaluating practices in different regions. So – set your sights on one or two areas and stick to your plan.

Ask yourself how much debt you are prepared to incur – $200,000, $300,000 or more? Plan your finances ahead. Many new dentists have student loans, car loans, new families, mortgages, etc., and they do not wish to borrow a large sum of money for a dental practice at this stage in their career.

It is also important to decide how many days or hours per week you will want to work. Some practices offer part-time hours, which may be more suitable for you if you have other obligations such as parenting or another associateship. Others will demand that you work 50 to 60 hours per week plus some evenings and weekends. Think these issues through carefully. If you buy more than you can handle, you will essentially purchase a practice and watch it become smaller over time.

As well as deciding on the hours you want to work, be aware in advance of the procedures you are willing to perform in your practice; that is, what treatments you perform (endo, ortho, perio) and what must you refer out? Do not overestimate your skills. Problems can occur when dentists take on treatments that they should have referred out.

Once you have established your procedures, decide upon the number of operatories you would prefer to have. How many hygiene appointments can you check per day? What is your daily pace? How much full-time experience do you have? Then, look to the future. Will you be expanding your practice in the future to include other services, dentists or specialists? If you want to own a large practice, think well ahead. Relocating is very expensive and has the potential to be a serious disruption to practice income.

Once you have established this foundation, you will be ready to commence your search for the perfect practice.

And so, I offer my top 10 list of considerations when actually purchasing a dental practice.

  1. Begin with telephone contact with every broker in the business. Many companies can be found in the classifieds section of dental magazines. Call to let them know you are in the market and express your level of commitment to thoroughly investigate practices in the city or town you prefer. Please understand that brokers have more purchasers than practices for sale. In order to receive information quickly, you must make an effort to meet at their offices to get started.
  2. Each practice you consider should have a professional appraisal ready for your viewing. Most brokers ask that you sign a confidentiality agreement stating that both your personal information and the data supplied to you about the other dentist will be protected. This is usually done just prior to viewing the appraisal report, which should include an abundance of operational and financial data on the practice. If a proper appraisal is not available (complete appraisals are usually 50 to 75 pages in length) you are entitled to request that one be performed in order to gather the data you, your accountant and your banker will require to make an informed decision.
  3. A professional appraiser does not mind if you take their report to another appraiser for a second opinion as long as you inform him/her that you are doing so. You will likely pay a fee for this service, as the other appraiser party will not be involved in the sale.
  4. The next phase of your search should include a visit with your accountant. This is the most important step to determine your ability to manage the practice financially. Accountants will also prepare a budget for your personal living expenses and income taxes over and above the expenses of the practice.
  5. You will then be ready to view a practice. This is performed after hours in most instances. Most dentists do not tell their staff the practice is for sale due to the risk of damaging the goodwill you are thinking of buying. Staff and patients have been known to leave practices when rumours about an owner are started because people think the owner has personal, health or financial problems.
  6. You would be wise to verify the information found in any appraisal or report given to you. For example, counting charts in a practice is something you should do. Chart counts will determine how busy you will be in the future; however, it is an unreliable way to value the goodwill of a practice. The revenue earned from patients is a far superior indication of value.
  7. Brokers usually work for, and are paid by, the seller. Accordingly, their duty under agency law is to represent the seller exclusively. This does not mean the buyer goes without representation. You have an accountant, lawyer, banker and other advisors who work for you. It is rare for two different brokers to be involved in the sale of dental practices.
  8. Once you have seen the practice and you have performed your own verification of charts, appointment books, etc., its time for an offer to be drafted. Most brokers use a form that has been reviewed by many lawyers for both sellers and buyers; however, you should seek legal advice before signing anything. Remember that the document is designed to be fair to both parties as most brokers want your business in the future too. Under agency law you are entitled to “full disclosure” of all meaningful business facts about the practice you are purchasing.
  9. The broker will perform most of the negotiations between both dentists. He or she acts as the intermediary between the lawyers, accountants and the financial institution if necessary. This saves the dentist a great deal of time.
  10. Be certain that you have investigated the entire process prior to signing the final offer. If you are not sure, walk away. Do not act too quickly or be put under pressure by anyone who threatens that you will lose the practice. Be absolutely certain that you are ready to act or let it go. There will be many other practices for sale in the future. Do not compromise your career for a poorly made decision.

What Does The Future Hold For Today’s Dental Graduates?

Date Posted: 2000/02/14

There are so many issues to consider in today’s business climate that some new graduates are puzzled as to what direction to take.

I have studied the work of several leading economists and have concluded that the aging population will have a considerable effect on the dental economy. And there are several factors contributing to emerging trends in dental manpower ratios that will significantly affect the set-up versus purchase decision for new dentists.

It is easy to predict trends when you have the benefit of the past with which to compare. Markets are typically cyclical in nature and the supply and demand of dentists and the need for dental treatments is not unique. The future needs of patients as they age and the pending retirement of baby boomer dentists will have a substantial effect upon the supply and demand of dental services. New dentists must now consider these factors in order to succeed. They should understand these trends prior to making any decision about setting up a new practice, purchasing an established office or entering into associateships and/or post-graduate/academic studies.

Setting Up A New Practice

There are many advantages to setting up a practice of your own after graduation or when leaving an associateship. Not only do you have the opportunity to buy the latest equipment but you can design and decorate your practice how you would like and in a location of your own choosing. As your practice grows, integration of business systems can be handled with relative ease.

And as I discussed in my column in the October issue of Ontario Dentist, there will likely be a long-term reduction in the number of full-time dentists. Coupled with an aging population that will demand more dental treatment, this will lead to increased patient flow and favourable long-term prospects for a new practice today. That increase in patient flow should be seen by 2005.

Though the advantages are numerous, bear in mind that setting up a new practice has its downside as well. Unless you have developed a strong patient base prior to setting out on your own, you will see very few patients in the initial stages of practise. In order to attract new patients, you will likely need to work hours that established dentists often don’t – that is, evenings and weekends. And patient retention may be a problem if you find the need to work elsewhere to subsidize your overhead, making yourself unavailable to your own patients at those times.

There is also a good chance that you will need to rely on a line of credit for the first one or two years to afford living expenses. You may have little or no cash flow, as overhead will exceed revenue. This can be complicated by the fact that bank financing is more difficult to obtain for start-up practices.

You will likely be required to invest 250 to 300 hours of unpaid time to investigate locations and demographics; negotiate a premise lease with the landlord; consult with a lawyer; interview, select and supervise contractors; advertise and interview candidates for staff positions; and create a logo, letterhead, signs, etc. These tasks are called the organizational components of goodwill. The time invested, also known as “sweat equity,” may be in excess of $25,000 (250 hours at $100 per hour). You will not receive any payment in return for it until the practice is sold many years in the future.

Buying A Practice

Unlike starting up a new practice from scratch, buying a practice that has already been established has some definite benefits. For example, a patient base will already exist, allowing you to not only keep busy but maintain cash flow. Because of the collateral, you will have easier access to financing should you need to renovate, upgrade, etc. And you will have an experienced staff that are not only familiar with the patients, but can help integrate you into the practice and assist in the transition. This is especially helpful if the previous owner has not remained for a time to assist with these matters.

What you may run into, however, is that an established practice often has older equipment – both clinical and business-oriented -that may need to be replaced or upgraded. When compared to the benefits of immediate cash flow, this is a minor problem.

As well, the majority of new dentists wish to be in the Toronto area where there is a limited supply of practices for sale. This could result in looking to buy a practice in a location that may not be desirable to you or your lifestyle choices.

In some instances, your clinical philosophies and your personality may differ significantly from your predecessor. This alone is a key reason why purchasers must consider far more than just the economics of a practice purchase.

Entering Into An Associateship

There are three main advantages to associating with another (established) dentist. At the top of that list is the fact that there is no financial commitment required. After years of student loans, the last thing some new dentists want to do is go into more debt just as they are launching their career. An associateship also offers an excellent learning opportunity with an established dentist who may develop into a cherished mentor. And if that is not the case, and you want to move on to new scenery, you have the freedom to relocate as you choose.

The downside, of course, is that as the “new kid on the block,” you will likely be required to work the hours the owner usually will not – often evening and weekends. You may see only the “simple” cases, as the owner may reserve the more complex treatments for himself or herself until trust and confidence are established.

Bear in mind, as well, that the owner also has control over patient flow and income, and you may even have limited job security. When and if you decide to move on, you may have restrictive covenants that limit the area in which you may practise. If you have left the practice to enter into ownership of your own, you may find that you had become comfortable with little or no investment or financial responsibility in associateship. Your income may be lower in the first year or two, making it difficult if you have established a lifestyle around your associate income.

Post-Graduate/Academics

Many new graduates in dentistry decide not to step out into the working world at all, opting to remain in school on a path to research or to earn a specialty certificate or degree.

If choosing a route towards a specialty, be sure to consider the economics. While the cost of post-graduate training is extensive, you put off investment in equipment and leaseholds (typically $175,000-plus), and a long-term premise lease committing to substantial rents.Then, when entering into a private practice as a specialist in another one to four years, you will usually have a higher earning potential. As well, by 2003, there will be more private practices available for purchase from the baby-boomer generation of dentists retiring.

Of course, staying in school also means extra tuition and many more hours of study and research, but these are often of the newest techniques and products. An important factor to be aware of is that, if you choose to remain in academics and eventually teach, there are limited positions available at most universities, a trend that does not seem to be changing.

Conclusion

Whatever you decide to do with the next phase of your dental career, no matter what stage of your career you are at now, you need to understand that the economy for dentistry is changing and the market is forever evolving. We can look forward, with some predictability, to see where the opportunities will be.

You need to look ahead and try to maintain a global “dental economics” perspective.

Ontario Dentist – February 2000

Hiring An Associate – Pros And Cons

Date Posted: 1999/12/30

I am often asked, “Should I hire an associate and, if so, what affect will it have on the value or marketability of my practice?”

There are many ways to look at associates. In my experience, I have found that most owners fail to carefully measure both the pros and the cons of the issue. I have observed many successful associateships as well as some failed ones. From these accounts, I have compiled some of my knowledge to share with readers and encourage you to carefully consider both sides of the equation.

Advantages

Utilizing the services of an associate can relieve you of extra patient load, which could free up your time for longer vacations, hobbies, family, etc. Associates often allow the practice to offer extended hours (evenings and weekends) which may attract new patients.

Some associates may be specialists qualified to perform treatments that you have been referring out in the past. Because patients prefer to be treated in familiar surroundings, this could help to increase gross revenue.

Assuming that you have extra or sufficient patient load, an associate will generate additional gross income for the practice and some economies of scale (reduced costs) can be realized with supplies, lab, wages, etc.

I have been in many offices where the facility could be better utilized if there were more dentists working more hours. If your existing facility and equipment is not being occupied as much as you wish, or if your present staff can manage more patient flow, an associate may improve upon your efficiencies.

Additional dentists in your practice also provide for clinical support and companionship, and allow for the sharing of ideas for complicated cases. If the relationship is successful, your associate may be a future purchaser for your practice when the time is right for you to relinquish ownership.

Disadvantages

Managing associates will add extra management responsibilities to your workload. You will be required to process payments and attend meetings to discuss office policies and marketing ideas. The new associate will require training and supervision until familiar with your procedures and clinical philosophy. Some offices have staff capable of performing this very important step in the integration while others rely solely upon the owner to do it. And you need to be aware of the hidden costs (or those you may not think of right away) of integrating a new dentist into your practice. Among these costs are new signs for your practice, printing of new letterhead, training from outside consultants if used, and legal fees for preparation of the agreement.

Most owners experience an immediate reduction in their own income during the initial phase-in of the associate, as they often give up some patients to get the associate started.

You may be required to perform extra patient management time (non-revenue) to introduce the new dentist, encourage patients to see him/her and to relieve them of any concerns about seeing someone new. Patients may also require extra attention from your staff as well (more non-revenue time) to address their concerns or complaints if there are any personality conflicts.

I have spoken with many staff members who have confided in me that they often have trouble adapting to new dentists in the practice and, on occasion, are confused about whose instructions they should follow, especially when the owner is away.

In the event you wish to sell your practice and the associate is not the purchaser, which is very common, prospective buyers may be intimidated by his or her presence in your practice. Purchasers worry about incompatibility and they reflect this concern by offering a purchase price that is often less than fair market value. Professional appraisers must factor this into the calculation of goodwill; if not, a purchaser may offer a lower price in most cases. As well, the purchaser’s accountant and lawyer will inform him or her of any problematic deals they are familiar with and suggest caution about entering into a purchase where associate dentists may leave and solicit patients away after the owner has closed the sale. So, while an associate may help increase total practice gross and increase the fair market value, you may still find that, in the end, you will sell for the same price as you would without an associate.

Another thing to keep in mind is that while associates usually increase total practice gross, they do not necessarily increase net income. I performed an analysis for several practices and found that most owners net only five to seven per cent of the associate’s gross billing on an annual basis. They then question the logic of taking all the risks associated with associates to earn so little profit. When you factor in the integration costs, it can take several years to recover your investment and, by then, your associate may leave.

As a broker of practices, hundreds of young associates have come to my office over the years and they confess their true intentions with regard to the practice they currently work in. Alternatively, when appraising practices, owners often confide in me their concerns with current associates. This information is rarely mentioned openly but it provides me with rare insight. Many dentists are afraid to share their opinions with their colleagues directly. Advisors, like myself, are considered a neutral party by many and we hear the truth. However, dentists who practice as an associate and dentists who hire associates should enter into frank discussions about their future plans and be honest with each other. This may save the trouble of painful departures between colleagues.

Conclusions

I believe that associates are a valuable addition to dental practices. Be certain to select the right candidate to work with and be aware of the pitfalls if the relationship within the practice fails.

Ontario Dentist  – December 1999

What Are The Characteristics Of The "Best-Selling" Practices?

Date Posted: 1999/11/14

In my experience and the experience of those with whom I work, the “best-selling” dental practices are those which are owned and operated on a solo practitioner basis.

When I use the term best-selling practices, I refer to the following common traits:

  • gross billings in the $300,000 to $600,000 range;
  • true operating overhead of 50 per cent to 60 per cent of gross (true operating overhead does not include “discretionary” expenses, spousal or family wages, or debt. Debt is not part of operating overhead, it is a capital cost of acquisition and generally will be eliminated over time.);
  • three to five staff members;
  • one full-time or two part-time (preferred) hygienists;
  • not necessarily retail or storefront;
  • no long-term associates;
  • no partnership contracts or cost-sharing partners;
    and
  • no ownership of buildings or complex real estate shares.

These are the most saleable practices selling for the highest value.

I have also noted that practices that are difficult to sell also display certain characteristics. They often have long-time associates. Written agreements are the norm these days, but we have all heard stories about non-competition clauses and the courts. The bottom line is that associates can be intimidating for the new practice owner and the actual open market dictates that your practice will be more difficult to sell. As well, arrangements in which there is shared space or overhead costs with another professional can complicate a sale because of the potential of future conflict. Human nature cannot be ignored.

Real estate ownership, while often a successful avenue for investment, can be detrimental when selling a practice. Buying a house or building and converting it to a dental office was very common in the past. Now I see many listings where the real estate must be sold or leased to the purchaser, adding a whole new set of negotiations to a transaction. Lawyers need to be particularly detail-oriented with leases, adding a great deal of time and expense for all parties. Transactions have failed solely on the lease alone.

Long-term staff that is highly paid can also make a purchaser look elsewhere. Purchasers realize that present staff is valuable and is retained in almost all of the practices I have seen sold; however, highly paid or long-term staff, though very important for patient retention, can intimidate young purchasers. Those purchasers often have big loans to pay off, household mortgages and/or children to support. They are going to try to reduce expenditures to maintain profitability but fear that by reducing wages and/or increasing hours they may lose important members of the team.

A prospective buyer might rethink purchasing an oversized office or a practice in a high rent location. What about slow times when high rents are still owed? Rents are typically three to seven per cent of gross and if your rent is higher, a buyer will be wary of the long-term risks.

Extravagant leaseholds and equipment may seem like a great idea while practicing, but when it comes time to sell, they could be a disadvantage. They are difficult to sell if the facility is designed to accommodate more than one dentist or to suit personal tastes. Purchasers appreciate large, ultra-modern offices with lots of high-tech equipment, but they don’t necessarily want to start off that way with all the resultant debt.

These issues have surfaced many times in the course of my career. Calculations I’ve performed support the theory that the best-selling practices will sell for the highest amount when considering alternative practices. And, in my experience, the owners of these practices are the happiest, most stress-free individuals I meet. They take more holidays than most, enjoy the lowest operating overhead and generally work longer in dentistry because of their happy, low-stress careers.

The choice is yours. Everyone has different philosophies. If you want to practice like a best-seller, consider starting or owning one of the best selling practices.

Ontario Dentist – November 1999