Author: marketing

Future Trends In Dental Human Resources

Date Posted: 1999/10/30

There are 2,000 dentists in Ontario over 50 years of age according to the Royal College of Dental Surgeons of Ontario (RCDSO). There are 1,200 that are over 55. That equates to roughly 150 to 200 retiring dentists per year over the next 10 to 15 years, assuming that most will work until 60 years of age or more. This does not include death and disability rates.

And in the event that baby boomers choose to retire from the profession at a younger age than their predecessors, as seems to be the trend, the number of dentists leaving the profession will increase to 200 to 250 per year.

At my consulting firm, we have concluded that a manpower shortage is looming in Ontario that outweighs the current perception of manpower surplus. And there are other factors that could affect this trend. The typical dental graduate of the past few years has preferred to stay in or around a major urban centre, resulting in an oversupply of dentists in greater metropolitan areas. And the increasing proportion of female dentists that have entered the profession over the past 15 years will impact on the supply and distribution of dentists in Ontario. Female dentists simply do not stay in full-time practise as long as male dentists for a variety of reasons, which may include performing the bulk of the duties at home such as raising children. Several of my female clients have told me that the cumulative effect of these responsibilities can take their toll. I have represented dozens of female dentists in the past and their average age when selling is well below 50.

When all the pluses and minuses are tallied, we have concluded that these trends will result in a reduced number of full-time dentists in Ontario treating patients, which also leads to a positive trend in the ratio of patients per full-time dentist. In other words, there will be more patients per dentists in the future. However, this ratio will be at its greatest outside the major urban areas. According to our clients, this has already created a shortage of dentists in remote or northern regions.

All these equations then raise further questions. Who will replace the dentists that will be leaving practice? How many new entries are there into the profession from dental schools, the NDEB and other provinces? As some of you may know the NDEB has recently changed its examining criteria and there are a limited number of spaces available through only a few programs.

We have performed many different calculations to predict the future of dental practice values as well and the conclusions are very relevant to dentists who are 50 years of age and older. There will be an unprecedented number of dentists leaving full-time practice from 2002 to 2012. This means there will be a glut of practices for sale and if fundamental economics rears its ugly head, practice values will go down.

There is no crisis today so don’t get too concerned just yet. This process will take time. The beginning of this cycle of retiring baby boomers will not begin to develop until the year 2002. After that, I predict that the volume of retiring dentists each year will grow substantially. At that time, we may find that the graduation rates are too low to support the need for new dentists.

Ontario Dentist – October 1999

What are the Options for Owners of Remote Practices?

Date Posted: 1999/09/14

As I sit on the shore of a beautiful lake, north of Sudbury, watching people out on their boats enjoying this magnificent region, I realize how lucky the dentists are who have chosen to practice here.

In the course of my travels, I meet so many dentists who love regions like this, prospering financially and spiritually from community-oriented practices. While meeting with one such practitioner, we discussed his future plans and what actions he would take to sell his practice. It was determined that his practice would be appraised for a lower amount than one similar in a major suburb or city due, in part, to the lack of appreciation for the northern sensibilities.

I have studied the situation relating to medical doctors over the past five years. As you are likely aware, doctors are suffering from a massive shortage of human resources in some regions, especially the northern region of the province. As I see it, the same trend is now developing in the dental market and I predict that the shortage, also primarily in the north, will become a serious issue within the next five years. To understand the reasons for the decline, you must first address related issues.

What is the profile of the typical graduate from dental school these days? Is he/she likely to consider leaving the larger metropolitan areas? What policies are in place to ensure that dentists currently practicing in outlying regions will be able to find suitable replacements for their practices? What public policies should be considered when admission requirements are set by the dental schools? Does the public subsidize dental education?

These are just a few of the issues my client and I discussed in relation to his practice appraisal. We determined that his options are as follows:

Sell the clinic for the appraised value, provided a purchaser can be identified, and retire.
Work another two to four years, gradually reducing time and then shut the practice down. Keep in mind this raises the issue of patient abandonment for which the Royal College of Dental Surgeons of Ontario (RCDSO) has guidelines of which you must be aware.
Attempt to bring in an associate who would appreciate life in this area and hope that he/she will purchase the practice.

Each of these options has benefits to the owner, yet there are dangers with each of them:

Selling is the most “honorable” thing to do because patients would continue to be cared for and staff would continue to have a job; however, the dentist would immediately cease to earn an income. If the dentist is not quite ready to retire, he orshe may be able to retain a part-time position with the new owner to assist in the transition. Within six months to a year, however, the new owner will often be fully integrated into the office and may no longer require the services of the retiring dentist. Essentially, income is drastically reduced and then stops. In my client’s case, the sale price (roughly $155,000) would be quickly diminished by sales commission (10 per cent) and Revenue Canada’s share of the sale (30 to 40 per cent), resulting in proceeds of about $85,000. At five per cent interest minus income tax, the proceeds of the sale would earn about $300 per month. This is compared to a pre-retirement income of about $7,500 per month after tax.
The option of slowly reducing practice hours (including reducing staff hours and their respective wages) over a two- to four-year span and then closing down the practice would result in continued income over the period. While this may be a more economically sound decision, there is a moral issue at play. Patient abandonment is a serious issue, especially when there are fewer dentists to serve a stable (or growing) population.
Hiring an associate is a great idea, yet one is often difficult to find. And, once hired, an associate would likely expect a significant discount on the purchase price because of his/her contribution to the practice. Price is usually reduced when an associate has more or less kept the practice active and viable as the owner cuts back.

The options, as you can tell, are less than attractive and the ultimate decision will be a difficult one to make. It can take up to five years for the transition of this type of practice to a new practitioner, so my suggestions for those who own and operate such practices is to plan accordingly and well in advance. As I see it, the reason is the lack of appreciation of the lifestyle and the many benefits of developing a career in a remote town. I have written about them before and continue to be amazed that more young dentists don’t see what others can see.

Among the benefits are lower than average overheads, high regard or standing in the community, and time for family and hobbies in an unmatched environment. And these are just a few of the benefits.

I suggest that anyone who may be discouraged by life in the big city seriously consider these opportunities. And dentists who are practicing today should begin their exit strategy many years ahead, using the three options mentioned above as a guide. The choices are limited but, eventually, one must be made.

Ontario Dentist – September 1999

Selling A Share Means Banking On The Future

Date Posted: 1999/07/13

It has always been my philosophy that you should sell a practice when you are ready to sell all of it at once. If you want to continue in the practice, do so as an associate of the purchaser because selling a share can be more of a burden than a blessing due to the high failure rate of partnerships in general.

Some of my clients have told me that they would prefer to sell 50 per cent of their practice, then enter into some type of partnership or cost-share agreement with the new owner, with the hope of selling the remainder of their share in the future. While this practice is not uncommon, I caution my clients about the pitfalls of partnerships. In my opinion, the best agreement between vendor and purchaser dentists would be one of cost sharing – not an equity partnership. Essentially, this means that your gross billings and net incomes are kept separate and the two dentists agree to share only in the cost of the day-to-day operations. An equity partnership, on the other hand, means that each dentist shares both in the other’s profits and overhead. This is where the trouble can begin, particularly if one grosses more than the other. For example, as your partner, say I produced $40,000 per month and you produced $30,000; I would wonder why you should get one-half of the monthly profit (that I generated).

There are many formulas and many opinions; mine is simply this: Watch out for partners – and if you do have one, keep your financial matters as separate as you can. Sharing costs is easier than sharing revenues and profits.

If you are selling half of your practice, I strongly suggest that you set your asking price 20 per cent higher than one-half of its current appraised value. For example, if your practice has been appraised at $250,000, half that is $125,000; add a 20 per cent premium and your asking price should be at least $150,000.

There are two reasons for this premium. First, it reflects the risk that the remaining interest you own may be difficult to sell in the future. What if the individual you sold the first half to finds that they are busy enough in five years and decides not to purchase the rest? What if they say, “I just finished paying off the first half and I don’t want to get right back into debt again.”? Now you have one-half of the assets for sale and your own goodwill at its then current value. Your goodwill would be roughly 25 per cent – 40 per cent of your gross at that time. Remember, too, that you are now trying to sell some kind of partnership to a new third party. What if your partner complicates things? Remember that they have advisors too (lawyers, accountants, spouses, dental dealers, etc.).

When you sell the first half you can provide for a formula like the one above to determine the value in five years. You can also include terms in the agreement when you sell the first half stating that your remaining interest must be purchased in five years. You can predetermine price but that is not very practical as practice values will change over time. You could agree that the buy-out price would be subject to a new appraisal. But what if, for whatever reason, they find a legal loophole to get out of the deal? What if they just won’t cooperate? Now you have the problem of a partner that could really complicate the sale to a third party.

The second reason to ask for a premium is to reflect the value of everything you are going to do to teach, train, and assist the newowner in building his or her portion of the practice, possibly increasing its overall value. Introducing the new partner to referral sources is a key issue. Additionally, you are well-trained in patient marketing and relations and your business is well managed. The value of all you can teach the purchaser is tremendous and you should be rewarded for this somehow. The premium reflects your desire to be compensated to some extent for what you are going to do.

Many owners believe that splitting the business into two separate entities will then result in the development of each practice into two bigger clinics. In particular, most dentists believe that they could send many previously referred-out cases to the new candidate and they, in return, could cross-refer cases back to you. The result is separate practices that both gross more than one dentist can do alone. In the end, you may very well end up with the same size practice all over again. I’ve seen this happen before. Several years ago, we sold half a practice to a young dentist. At the time, the entire office was grossing $500,000. Now, both dentists are grossing over $500,000 each. However, one problem has occurred; the younger partner is so busy that he will not purchase the rest from the older partner who wants to retire. This leaves the retiring dentists with no choice but to find a third party to buy out his share, opening the door to potential strife.

In a nutshell, I suggest caution when selling a portion of your practice. Be aware and focused on the purchaser’s long-term interests and not just the sale of a share in your practice. Better yet, sell the practice as a whole and remain as an associate. But no matter what you choose, appraisers and brokers can be of further assistance to review the deal and the documents for “practical” issues, not legal. They can also work as the intermediary between the vendor and purchaser to keep both at “arm’s-length” to keep the spirit of the negotiations flowing smoothly.

Ontario Dentist – July 1999

Staff Issues When Buying or Selling a Practice

Date Posted: 1999/06/13

In the event that you are buying or selling a practice it is imperative to understand the mandatory requirements of notification that are owed to the staff under the Employment Standards Act (ESA).

Timing of staff notification is a critical issue and may have an impact upon legal obligations of the vendor and the future success of the transition to the new owner. The most important thing you must understand is that the ESA, administered by the Ontario Ministry of Labour, leans strongly toward the employee, and not the employer, in the event that a dispute occurs. Essentially, what this means is that, as an employer, you must obey the minimum requirement of the ESA, regardless of any future development regarding your staff’s continued employment.

Another thing I wish to make clear is that a vendor and purchaser cannot contract out of the obligations of the ESA and there are no legal loopholes or opportunities that can be used that will allow either party to avoid these minimum requirements. Each employee is entitled to a minimum of one week’s notice for each year of service, up to a maximum of eight weeks in pay or in notice or a combination of both. For example, say you have a receptionist who has been with you for 10 years. He or she is entitled to a minimum of eight weeks pay or notice or a combination of both. Any additional notice or pay you offer is voluntary. I highly recommend that you consider offering more than the ESA requires. This may demonstrate your respect for the employee’s many years of loyal service. As well, legal decisions have been made based on more than just time on the job.

Purchasers should be aware that the employee’s time of service (seniority) cannot be lost through the sale of the business. For example, that same 10-year receptionist is re-hired by the purchaser. He or she is a 10-year employee, no matter what you do. Unless the employee signs a release that eliminates his or her rights to seniority, which very few would do, you owe that receptionist the same minimum of eight weeks pay or notice, even if you terminate the position one month after you buy the practice.

Vendors and purchasers, whether using a professional practice broker or not, are strongly advised to seek legal advice about this issue before making or accepting offers to purchase. It is well advised to delay closing dates so that sufficient time is allowed for the vendor to give notice, introduce the purchaser to the staff and then close the transaction 30 to 90 days thereafter, depending on the number and seniority of employees. I always advise a vendor that they should never notify employees of the pending sale until all conditions of an offer have been removed. This prevents premature notification that may result in a reversal of the vendor’s plans, if the offer fails for any reason. Think of how embarrassing it would be to tell your staff you have sold, introduce them to the buyer, then have to sit them all down again and inform them that things are not going to change after all.

Purchasers should be permitted to meet the staff only after they have removed all the conditions of the offer they made. Once conditions are waived, the vendor should immediately deliver notice to the staff and the purchaser should be introduced very soon thereafter. Imagine telling your staff you have sold, then they are made to wait several weeks before meeting the new owner and discussing their employment with him or her. Your staff would be living in great uncertainty for this time and may even resort to seeking other positions and interviewing with other dentists in your area. Eventually, the pending sale would be common knowledge and patients and staff could leave if things are not handled properly.

Again, I stress the importance of using a broker or lawyer who understands both the practical and the legal side of this issue. Most brokers have suggested scripts of what to say and when to say it, as well as assisting in the timing of the introduction of the purchaser. The purpose of all of this is to protect both parties legally and to ensure the continued success of the practice for both the new owner and the past owner if associating.

In many instances, a vendor stays on as an associate of the new owner. Imagine the problems if the vendor did not respect his or her obligations to the staff and then had to work with them after closing.

There are many other situations that can arise when dealing with people’s livelihood. Please be very careful when proceeding on any matter related to buying or selling a practice with respect to the staff. They are paramount to continued patient retention and if not handled properly, could harm both the vendor and the purchaser economically.

Dos and Don’ts of Staff Terminations when a Practice is Bought or Sold:

DO allow plenty of time for the vendor to give sufficient notice prior to closing date.
DO NOT attempt to save money by telling your staff too late and then ask them to sign a waiver of their rights. This is certain to encourage them to seek their own legal advice and, after that, you are likely to be in a very weak position.
DO offer an extra period of notice or additional pay over and above the Employment Standards Act minimum. Remember that the staff have been loyal and deserve something more than the minimum (and case law often demands more). This could also be looked upon as insurance that the trust you have built would be honoured.
DO NOT introduce a buyer unless all conditions have been met.
DO introduce the purchaser very soon after the staff is notified of the pending sale to relieve their curiosity and take away the fear they may have about losing their position.
DO NOT attempt to slip in a legal document that waives the employee’s rights. This can lead to serious problems even if they do sign it and see a lawyer afterwards.
DO consult with your professional practice broker and/or your own independent legal advisor prior to signing any offer to purchase.

Ontario Dentist – June 1999

Taking Control of Your Practice

Date Posted: 1999/05/13

As a hobby, I collect old textbooks on dental practice management. I have just finished reading one such manual, published in 1916. Entitled Profitable Practice, by Dr. George Wood Clapp 1, it is by far the most interesting publication on the subject that I have read in a long time. Although it was taboo to use the terms profit and dentistry in the same sentence back then, Dr. Clapp went against the grain and spoke his mind.

I would like to share a few interesting passages from Dr. Clapp’s book with you, to show how relevant it still is today. Take, for example, the following: “If senior dental students were given a practical course in the economics of dental practice, they would be much better prepared to meet the problems of selecting a location, the equipment of an office, the development of clientele, the selling of service, the establishment of fees fair to the patients and themselves, etc.”

Does this situation not continue to hold true 80 years later? After recently delivering lectures on how dentists can improve the value of their dental practice to fourth-year students at the Universities of Western Ontario and Toronto, I asked some of them what they thought of my materials. Most students felt this was exactly the kind of information that should be taught in dental school. They also told me they aren’t generally given this type of advice. In fact, just the opposite is true. Bad news about the profession seems to flow downward to the students. Why don’t they hear more good news about the wonderful profession they will be entering? As a practice appraiser who works with dentists across Canada, I witness success stories every day.

This is not a criticism of the curriculum as it stands. I am not qualified to comment on what is best for dental students. However, based on the feedback I have received, I wonder if it isn’t time for the profession to respond to suggestions that dental schools should provide more fundamental business training.

What would be some of the benefits of economic training in dental schools? Well, according to Dr. Clapp, at the very least, “The false glamour (we see today) of many advertising practices would be torn away.” What Dr. Clapp is suggesting here is that business training might reduce the need for advertising. Remember that this was written in 1916! He also says that if business practices were taught along with clinical training, “It is probable that the average quality of dental service would doubtless be materially elevated.”

I find that Dr. Clapp’s ideas regarding dental practice management still hold true today. While there may be more materials and techniques on the market, the business of running a dental practice has not changed much over the years. In fact, what we often get these days is simply a new spin on an old system. Those who write about the dental practice of the new millennium are often simply repeating the same proven principles that have worked for more than a century. Personally, I am always amazed at how basic daily tasks such as tracking of hours worked, or of patient visits and cancellations, are twisted into a hi-tech practice management issue.

Dr. Clapp also wrote: “Dentists who have not kept record of their own income hours often form greatly exaggerated estimates of the amount of time they employ profitably, and consequently mistaken ideas as to what fees are profitable.”

And again: “Every dentist should carefully record the number of his (her) income hours for at least a year and preferably every year, in order that he (she) may know how many hours actually produce income.” I believe Dr. Clapp means chair time or chairside hours when he uses the term income hours. This should not be confused with office hours spent not producing income.

Keeping track of your activities is easy. It does not require as much time or expense as you may think. Most of the successful practices I have appraised use an appointment book or day sheets, along with some basic monitoring forms, to extract very useful information about their performance. These forms and systems are readily available from several reputable practice appraisers, brokers, or practice management consultants.

I also believe it is unnecessary to pay substantial consulting fees for the implementation of these systems. While third-party practice consultants offer valuable advice – and most business owners should consider consulting with one – it is not necessary to pay some of the hefty fees I have heard about, or to require consulting services for an extended period of time.

My suggestion to you is that you ask a professional practice appraiser, broker, or consultant what it is that purchasers look for when they are considering buying a practice. Then you should obtain or design a form to track this information. You will then possess very meaningful data that will not only answer some of your own questions about your profitability, but may also point to some areas of inefficiency. This information may help you to increase the value of your practice and to operate more profitably in the future. Some dentists have told me that understanding their practice better is a benefit in itself.

The bottom line is, common sense makes business sense. Even Dr. Clapp knew that in 1916.

References: 1. Clapp, GW. Profitable practice. New York: The Dentist’s Supply Co., 1916

Journal of the Canadian Dental Association – May 1999

North of the 401

Date Posted: 1999/04/05

I attended the Northern Ontario Dental Association meeting in Timmins last September and spoke with many of the dentists who are practising throughout the region. I mentioned to them that I wanted to submit an article to Ontario Dentist extolling the features and benefits of working “north of highway 401.” First of all, credit must be given to Dr. Jim Brookfield of Kirkland Lake who coined the term.

Dr. Brookfield also commented that he was challenged by the broad spectrum of treatments he offers due to the lack of nearby specialists and he believes it adds to his professional satisfaction. I spoke to many such practitioners while at the convention and each had a different reason for favouring the lifestyle beyond the GTA. Here are just a few examples:

Dr. Don Francis of Timmins, the meeting organizer, mentioned that the lifestyle, friendly people and cost of living were important issues for him;
Dr. Rene Boljkovac of Timmins spoke of the regular hours and that evening appointments were not necessary;
Dr. Jim Davis, also from Timmins, told me that he really appreciates the professional companionship of his peers in the dental community.

Many other practitioners with whom I have spoken over the years have considered practising in northern Ontario at onetime or another for a variety of reasons. After thinking it through, many conclude that it is too far from family and friends or the climate is not to their liking and they end up staying in or around Greater Toronto.

In my opinion, practising in Northern Ontario is a very rewarding experience that has allowed many dentists to grow both personally and professionally. It’s worthy of serious consideration by anyone looking to establish themselves in practice.

Let’s address the perceived setbacks to living in northern Ontario:

remote locations;
distance from home and family;
climate (if you don’t like winter).

The advantages are often overlooked and once you consider them, you may change your mind. And for a new graduate in dentistry, conditions are often ideal to purchase a practice.

Financial Considerations

Northern practices that are for sale today have an average gross similar to the provincial average gross. Many operate on a four-day week, working few evenings, Fridays or Saturdays.

Overhead is typically a little less than in southern Ontario practices due to lower rents. The resulting net income for these practices is marginally higher than the provincial average.

Housing prices and property taxes are lower than southern Ontario, resulting in a reduced cost of living.

Professional Clinical Considerations

The frequency and highly repetitive nature of treatments due to busyness leads to improved skills on a much faster learning curve.

Clinical skills expand rapidly due to the lack of nearby specialists and the necessity to treat a multitude of cases.

Hospital privileges and time are common and, in some instances, “expected,” and this results in association with other health care professionals.

The overall scope and responsibility of practise is very high and, as such, growth as a professional is rapid.

Other Considerations

An individual who wishes to be community oriented will thrive in a northern city or town as dentistry as a profession is usually very highly regarded. Lifestyle is attractive for outdoor enthusiasts and family-oriented personalities.

Facilities

Some townships can be very cooperative in providing modern facilities in which to practise (with very attractive terms and rents). Some practitioners share space with other medical professionals, which provides for professional companionship and a resource for clinical issues you may need to discuss.

Conclusion

Northern Ontario is not for everyone. I’ve appraised dozens of practices and have often met with relaxed and happy practitioners. Incomes are attractive and the lifestyle is unsurpassed.

I suggest that anyone who is dissatisfied with practise in the Greater Toronto Area may find Northern Ontario to be a wonderful alternative.

Ontario Dentist – April 1999

Letters Of Introduction When Selling A Practice

Date Posted: 1999/02/03

When a practice is sold, a letter of introduction and announcement is a very important part of the transition process. In my opinion, it is not always necessary for the past owner to continue to practice with the new owner. However, the letter of introduction is a key instrument to encourage the patients to return to the practice. Do not underestimate the importance of this simple process and how it will affect the patients’ acceptance of the change of ownership. Our experience, in over 600 sales, is that the letter is probably one of the most valuable tools to announce the new owner and encourage the patients to return to the practice. The letter could be signed by a spouse in the unfortunate instance of death or disability.

Key points that should be included in the letter

Will the past owner still be working? If so, what days/hours? See Tom Schramm’s article, Transitions – Are They Always Necessary?, in the May 1998 issue of Ontario Dentist to learn more about transitions.
The new owner should be mentioned with a brief description of his/her experience. It is important to display a sense of confidence in his/her ability in this paragraph with a sentence such as: “I have every confidence that he/she will continue to treat you with the same care as I have in the past…”
Will the staff remain the same? If so, mention their names. All staff should be retained by the new owner, as they are well known by the patients and offer a sense of familiarity.
I suggest that the new owner not make any major changes to hours and policies, but if they are going to do so, now is the time to mention them.

Things to consider before generating the letters

If you are computerized, the process may be a little easier. If you do not have a computer, most of the following points still apply but the process if different.

Can your computer generate a mail merge? This means that each printed letter has the patient’s name and address printed directly onto your letterhead. Envelopes can usually be merged as well.
Remember that it is only necessary to send a letter to the head of each household, not to every patient in the system. This will reduce costs substantially as there is no point in sending a letter to children. The parent(s) is all you need to contact.
Each letter should be personally signed, in blue ink, by the departing doctor. This demonstrates that you have taken the time to sign each letter. Do not photocopy your signature; it lacks personal attention.
If the letter has been merged with a salutation such as “Dear Mrs. Brown,” and you know the patient well, cross it out and change it to read: “Dear Sally,” with the blue ink. This is another nice personal touch.
If your computer cannot generate a mail merge, print or photocopy the letters onto your letterhead with the salutation “Dear Patient,” then cross out those you know well and hand write their names as above. Again, I stress the attention to detail and the patients will notice that you took the time to address them individually.
You may have the new dentist sign the letter as well, but I suggest it is best to have just the past owner sign. The new owner can do another mailing in the first year with his/her own message if so desired.
The letters should never be mailed until the deal has closed. Do not be too eager to make the introductions until the transaction is finalized.
There are a few guidelines about the content of a letter of introduction that are published by most provincial colleges. Check with your regulatory body if you have any questions about what must be said with regard to notifications.
If you do not have a computer, things will be a little more labour intensive. First of all, you must identify the head of each household and then personally address a letter to each of them by hand or typewriter. Use your own letterhead. It will be more work for you or your staff, but the letters should NOT include photocopies of your signature. Personally signed letters are far superior to copied ones.

Be Prepared – Another Reason For Dental Practice Appraisals

Date Posted: 1998/11/12

As seen in Ontario Dentist – November 1998

How many of us are aware of “Be Prepared” – the motto of the boy scouts/girl guides? While your boy scout/girl guide years have long since passed, the motto of being prepared seems to encompass many aspects of adult business and personal life now more than ever before.

Financial planners tell us to plan for retirement as soon as we graduate. Lawyers advise us to draw up a will as soon as we marry or even sooner. Governments recommend we consider a power of attorney for property and financial affairs as soon as we have assets of some value. And doctors recommend a power of attorney for personal health care very early in life.

What then of our dental practice, which can be one of the largest single investments that we will make relating to our dental career? Should someone not recommend that we consider a dental practice appraisal soon after we have built up a substantial patient base and own a large amount of dental and business equipment? Based on recent experiences dealing with dentists who have left the matter of obtaining an appraisal until the “last minute” (that is, immediately prior to retirement, change of plans due to ill health or even death, selling to an associate, etc.), it would appear that both vendor and purchaser would have been better served had an earlier dental practice appraisal been available for review. An update would then be done if it was felt major changes had occurred since the appraisal was carried out.

Purpose of an Appraisal

In addition to planning well before an actual retirement year is being contemplated or the possibility of ill health occurs without advance warning, an appraisal can be used to:

Assist in obtaining bank financing, loans or leases;
Determine tax allocations and classifications for taxation purposes;
Assist the courts in legal disputes for awarding values;
Obtain accountants’ opinions for financial planning purposes;
Permit registration and documentation of instruments for collateral for loans, leases and mortgages;
Determine fair market value of your dental practice and to assist in determining an asking price, if and when required; and,
Provide qualified parties with the required financial and necessary legal information.

Benefits of a Professional Appraisal

While dental practice sales are limited under the Real Estate and Business Brokers Act to qualified and registered individuals (or a lawyer acting on your behalf), dental practice appraisals can be done by anyone, including yourself, based on even a minimal amount of information on the practice. However, since an appraisal document can be the foundation for a factual presentation for numerous financial and legal issues, a professional appraisal should be considered for a number of reasons:

Many hours are required to identify, document and value the various goodwill factors and to accurately record the details (that is; manufacturer, values, serial numbers, age and condition) of all major assets.
Appraisal fees are tax deductible; therefore, if you estimate a loss of income due to hours spent by yourself trying to obtain information and compare this to the after-tax costs of having a professional appraiser provide a report, you are further ahead in engaging a professional appraiser;
The valuation of a dental practice is an extremely intricate process requiring specialized training and specific experience. Without this skill and knowledge, it would be a very frustrating exercise (not to mention the likelihood of an inappropriate result); and,
A professional appraiser’s accreditation and standards, with absolutely no conflict of interest, will assure the dentist of quality work and complete confidentiality.

Contents of an Appraisal

A dental practice appraisal report usually consists of over 50 pages, including appendices and photos. The contents include:

A complete detailed description of the practice, types of treatment, patients, fees, systems and personnel;
Location of facility, plans, premise lease options, renewals, restrictions and area demographics;
Dental practice and management company financial statements, expenses, analysis and cash flow;
A recording of all assets, leasehold improvements, clinical equipment and administrative furniture, instruments and materials, liabilities and accounts receivable;
Details of all major assets including approximate age, condition, manufacturer and serial number with both market and replacement costs; and,
Goodwill calculations and market comparisons with supporting rationale.

Conclusion

A dental practice appraisal is an opinion of fair market value done for the purpose of, and having the contents of, the items discussed above. The key to an opinion of fair market value should be based upon actual arm’s-length sales used for comparative analysis and with supportive rationale.

There are a number of professional appraisers available to carry out an appraisal of your dental practice. When making a choice, remember that the value of an appraisal is directly related to the appraiser’s qualifications, thoroughness and accuracy.

It would appear that the concept of having a dental practice appraisal has joined the ranks of having a will and powers of attorney well before the need for these becomes evident. As with many aspects of business and personal life, “Be Prepared” stands as an excellent motto to embrace.

Chart Count – How Many Patients Do You Have?

Date Posted: 1998/08/07

Dental practices may be worth less in the future. Why? Demographics.

The number of charts in your practice is a very important measurement of how busy you will be. However, charts do not dictate the value of your goodwill. Why is this so?

Practice Philosophies

What’s your clinical philosophy – conservative or progressive? The philosophy by which you choose to practice will determine the revenue generated in your practice. I’ve seen practices with the same number of charts with gross billings that are very different (Chart #1).

Practitioner “A” graduated 30 years ago and follows a very conservative philosophy. He charges $65 for a 30-minute recall and believes that one visit per year is adequate. He performs all recalls himself (no hygienist) and refers out most complicated procedures. This practice would be classified as one with great potential.

Practitioner “B” is very progressive and she utilizes the services of a full-time hygienist and a preventative dental assistant who subscribe to a modern soft-tissue management program. Each patient returns at least twice per year and a 45-minute recall costs $125 on average.

Chart #1: Number of Patients

Practice A: Conservative Philosophy	Practice B: Progressive Philosophy
1,500 patients Average recall fee of $65 Recalls are 9 months Gross is $250,000 Net is $125,000 Older equipment Appraised: $145,000	1,500 patients Average recall fee of $125 Recalls are 3 – 6 months Gross is $450,000 Net is $210,000 Modern equipment Appraised: $245,000

Remember, both doctors have the same number of patients. Is their goodwill worth the same? Absolutely not! As Chart #1 indicates, the resulting billings and net earnings are dramatically different. No one can dictate the clinical philosophy you wish to follow. It’s a professional choice that you alone must make, but understand that the economic results of your choice will impact the value of your practice.

What is an Active Patient?

Another common misconception about patients is the definition of an active chart. How often must a patient return to be considered active? Every 12, 18 or 24 months? I suggest that before you can arrive at total active patients, you may wish to determine the total number of regular recall patients first (Chart #2).

By determining the total annual number of recalls performed by all producers and by calculating your average recall fee, you can easily calculate the following:

1. Number of patients on regular recall.
2. Annual hygiene production.
3. Number of actual recall examinations performed daily, weekly and monthly.

Most practices still attempt to follow the traditional recall cycle of once every six months. Insurance coverage, patient education, and your personal philosophy will all affect the frequency.

Chart #2: How Many on Recall?

A) 225 days worked X 8 patients/day (average) = 1,800 recalls performed per year

B) If the average frequency is twice per year than there are 900 patients on a regular recall program.

Once you know how many regular recall patients you have, you can determine the total number of active patients. Every practice has patients that return once every one or two years for treatment, yet they cannot be convinced to return for regular recalls. These are definitely active patients and they sometimes require extensive emergency, surgical or restorative work.

My conclusion, after reviewing over 500 appraisals, is that the following is typical:

Number of Recalls Performed (Annually)	Number of Patients on Regular Recall (6-month average)	Total Active Patients in the Practice
1,000 1,250 1,500 1,750 2,000 2,500	500 625 750 875 1,000 1,250	750 – 850 875 – 1,000 1,000 – 1,200 1,250 – 1,450 1,500 – 1,700 1,750 – 2,000

These are approximate figures only

How to Verify these Figures

1. Calculate total hygiene revenues per year: (total # of recalls x average recall fee). (If you track hygiene separately, this is a good cross-check.)
Note: Children and seniors are usually a lower fee.
2. Multiply total hygiene revenues by 3. (Most practitioners will generate twice as much revenue per patient as a hygienist.) This result should roughly be your total annual gross billings (+/- 10 per cent) – another cross-check.
3. Divide dentist revenue (total annual gross – hygiene revenue) by the total number of active patients (not recall patients). The result is your average annual dentist fees per patient. (Again, a good cross-check here is that the result should be twice the average recall fee.)

Conclusions

There are as many opinions about patient count and active patients as there are consultants in this industry. I would recommend that you do not follow any one formula, including mine, as they do not take into account your unique clinical philosophy.

How To Buy an Incorporated Dental Practice

Date Posted: 1998/07/01

Introduction

Dentists in a number of provinces have been able to incorporate their dental practices for some time. In these provinces, practitioners have tax savings that are not available to unincorporated practices. At the same time however, there are a number of additional complexities in the valuation and sale of an incorporated practice. The objective of this article is to provide an increased understanding of these complexities, as well as outline some standardized approaches for dealing with some issues that may arise when selling an incorporated practice.

Will I Be Buying Assets Or Shares?

In the sale of an incorporated practice there are two options – either the corporation sells assets to the purchaser or it sells shares of the corporation.

An asset sale from a corporation is very similar to that of an unincorporated practice and the conventional approach to valuation can normally be applied.

However, with the “enhanced capital gains exemption” (which has a limit of $500,000 and applies when shares of a qualified small business corporation are sold) incorporated practices pay little or no income tax if shares are sold. For this reason, it is the experience of the authors that the majority of sales for incorporated practices, involve the sale of shares.

How Does a Share Sale Work?

A useful way to look at a corporation is illustrated in Fig. 1.

Fig. 1: Financial breakdown of a corporation

As illustrated, a corporation has two types of assets: practice and other assets. As well, there is the “visible” debt. Buying shares of a corporation means buying all the assets and debts.

Practice Assets

Practice assets are normally sold in the sale of unincorporated practice. The methodology for valuation of these assets has been established over many years and is generally well understood.

Other Assets

An important point to note is that when buying shares, accounts receivable are also purchased.

While the receivables will be open on the corporation’s books for a certain amount of time, the “fair value” of the receivables should be assessed. In particular, two factors may decrease the book value of the receivables:

Some receivables will be uncollectible.
The administrative costs (staff time, postage, etc.) to be paid by the purchaser in order to collect and process the outstanding receivables.

Valuation of accounts receivable is tricky. Therefore, one approach might be for the purchaser to pay the vendor for receivables over time, as the money is actually collected.

In addition, a corporation may also have cash, investments and other assets at the time of sale. In most cases, these “redundant” assets are removed by the vendor before the sale. If not, the purchaser normally will not pay for these assets since, once they are purchased, there is no tax consequence if removed from the corporation.

If redundant assets remain with the corporation at the time of sale, the purchaser’s tax advisor should make a determination of after-tax value.

Visible Debts

When purchasing a corporation, in one sense, the new owner assumes responsibility for the corporation’s debts. This does not mean that individuals owed money by the corporation can make claims against the purchaser personally. (Unless the purchaser has signed a “personal guarantee,” which should be avoided whenever possible.) However, repayment of debts will diminish future withdrawals from the corporation.

For a purchaser, this normally means that the purchase price is reduced by the amount of the debt held by the corporation. Of course, this debt must be measured at the actual time of the sale. The corporation’s last year-end financial statements are not reliable because debts fluctuate on a daily basis.

It is also customary for the purchaser to hold back a portion of the purchase price for several months, in case debts surface that were not identified at the time of sale.

Loss Of Future Write-Offs

Another impact of buying shares versus assets, is that the purchaser may be able to claim less depreciation in the future. Frequently, goodwill and equipment have a market value higher than the amount carried on a corporation’s books. If the assets are bought directly, the assets go into the purchaser’s books at market value and are subsequently depreciated from the amount.

However, when shares are purchased, the equipment has not changed hands. It is still owned by the corporation. Therefore, the future depreciation does not increase with the change in ownership. But, the depreciation over time can be considerable. Table I illustrates the rate of depreciation.

Table I: Illustration Of Depreciation Rate

Assumptions
Market value of equipment	$100,000
Value on books of corporation	$60,000
Depreciation rate (half in year of purchase)	20%
Future depreciation
Year	Buy assets	Buy shares	Lost deduction for year
1	$10,000.00	$12,000.00	($2,000.00)
2	$18,000.00	$9,600.00	$8,400.00
3	$14,400.00	$7,680.00	$6,720.00
4	$11,520.00	$6,144.00	$5,376.00
5	$9,216.00	$4,915.00	$4,301.00
6	$7,373.00	$3,932.00	$3,441.00
7	$5,898.00	$3,146.00	$2,752.00
8	$4,719.00	$2,517.00	$2,202.00
9	$3,775.00	$2,013.00	$1,762.00
10	$3,020.00	$1,611.00	$1,409.00

From this example, the purchaser loses tax deductions totaling $34,363 on the equipment. When multiplied by the corporation’s tax rate (usually 20 per cent), the difference is substantial.

A standard formula for evaluating the loss of this “tax shield” is to calculate the depreciation for seven years after the purchase of each depreciable asset. Take the “present value” of these amounts (in other words, discount them based on an assumed interest rate). The result is then multiplied by 35 per cent, representing the average of the corporate and personal income tax rates, to calculate the value of the lost tax shield that should be considered in the purchase price.

One caution should be added. If the corporation bought assets (particularly goodwill) from what Revenue Canada calls a “non-arms length party” (in other words, when the dentist sells his own goodwill to the corporation), the amount of eligible depreciation is often lower than what is shown on the company’s books.

For example, assume a corporation has a goodwill on its books for $80,000 and this goodwill was bought from the vendor with a book value of $20,000 at the time of transfer to the corporation. In this case, the corporation’s depreciation base (from which the lost tax shield is calculated) is $20,000 not $80,000. This difference is sometimes overlooked by accountants in the purchase of a corporation.

Summary

Fig. 2 summarizes the process for valuation of the shares of an incorporated practice.

Value of practice assets
less
Adjustment for uncollectibility/administration of accounts receivable
less
Discount to value of cash and investments (if any)
less
Amount of visible liabilities
less
Present value of lost “tax shield”
equals
Purchase price

Fig. 2: Summary Process For the Valuation Of the Shares Of a Practice Corporation

As is evident, the purchase and sale of an incorporated practice is more complicated than the purchase of an unincorporated practice. If costly mistakes are to be avoided, it is essential that both parties be assisted by knowledgeable advisors.

The material provided here is for information purposes only and should not be construed as advice for a specific set of circumstances. It is recommended that this information be provided to your financial advisor.

Co-authored by David Harris

Practice Management – July/August 1998