Practice Alternatives Presentation
FAQ
The information contained
herein is the opinion of various individuals associated with the orthodontic
community. The AAO does not verify or certify the accuracy or opinions
expressed by any such individuals. You are encouraged to seek the advice
of your own counsel and advisors prior to making any decisions based on the
material set forth herein.
The Council on Orthodontic
Practice asked several practice transition consultants for their input on the
most frequently asked questions during the Practice Alternatives Presentations.
Below you will find a short biography on each of the consultants as well as
their extensive answers to the questions.
1) Dr. Tom Ziegler is an orthodontist and an attorney. He founded Ziegler
Practice Transitions, Ltd. in 1995. ZPT does Appraisals of orthodontic
practices, Associate Employment Agreements and Purchase and Sale Agreements in
all 50 states. Dr. Ziegler graduated from
Tom has been the Practice
Transition lecturer at 3M Unitek Bottom Line Seminar for residents annually at
regional locations since 1997 and is now the Practice Transition lecturer for
3M Unitek’s five (5) Annual Regional Summits. In addition, he has lectured at
the AAO Annual Sessions in
Ziegler Practice Transitions,
Ltd.
www.ZieglerPracticeTransitions.com
Email:
Tom@ZieglerPracticeTransitions.com
Telephone:
(513)271-0053
Fax:
(513)271-8253
2) Mr. Richard Collier
is a practicing attorney with over 35 years of experience representing doctors in
all aspects of practice transitions and the business aspects of their
practices. He has a law degree from the
Collier, Sarner
& Associates, Inc.
216-765-1199
Web site: www.csanews.com
Email: newsletter@csanews.com
3)Dr. Gary Wiserearned a Master of Business Administration degree by the Temple
University Fox School of Business and Management in 1995. He maintained a
superior grade point average concluding with his election to Beta Gamma Sigma,
the honorary national business society. He graduated from
Wiser Managementis a management consulting organization
providing services limited to dental practitioners; appraising and
selling practices, forming associations, partnerships and mergers, and
instituting prudent internal management systems. Dr. Wiser is the
President and CEO of the corporation.
Contact Dr. Wiser via email wisermgt@mac.com
Call him toll free @ 1- 888 -
22WISER.
4) Bentson Clark
exists to assist orthodontists who are involved in any change of ownership
transaction. They perform orthodontic valuations, construct transitions
plans (including legal documents), consult for both buyers and sellers, and can
assist in locating a buyer or seller. They work in all fifty states, and
deal exclusively with orthodontists. Bentson Clark publishes two free
quarterly publications, the “Bentson Clark InSight” electronic newsletter for
residents and recent graduates, and the “Bentson Clark ReSource” for
orthodontists who may be considering any change of ownership, either buy-out or
buy-in. Principals of Bentson Clark include Dr. Jerry Clark, Chris Bentson
and Doug Copple, CPA, CVA. More information about Bentson Clark is
available on their website at www.bentsonclark.com or they
can be contacted at 800-621-4664 or e-mail at chris@bentsonclark.com.
Bentson Clark
1. How do I know if the asking price is
fair and reasonable for the practice I am seeking to purchase?
Thomas Ziegler - One rule of thumb to quickly determine
if the Seller’s asking price is reasonable is to take the contracts
receivable total and divide it by 0.7 and that should give you an
approximate Fair Market Value. (CR ÷0.7 = FMV). I would strongly
recommend a formal professional appraisal be done because there are many other
factors to consider, not the least of which is the tax allocation. For a quick
check, however, this is one of the best methods.
Contracts Receivable
are the fees yet to be billed on current active patients for work to be done in
the future. If you look at the summary page of the aging report and
subtract from the total contract balances, the accounts receivable
(money past due 30, 60, 90, 120 and 120+ days) that will give you the contracts
receivable total. Simply divide that number by 0.7 to get approximate FMV under
this method. This may show the buyer that the seller has not pre-collected too
many fees. Gross and net figures could be inaccurate if the seller
pre-collected fees, artificially elevating gross and net numbers. CR ÷ 0.7 is
based on the seller charging an initial fee of 25% and billing the balance over
twenty-four months.
Richard Collier - No matter how a practice valuation is
calculated, it must pass the ultimate test that the price is affordable to the
buyer. I would test it by requiring that
even if I could only make 80% of what Dr. Seller had been making, the price
permits me to pay off the acquisition debt within seven years and still earn a
decent living while doing it - at least what I would have been earning as an
associate.
Gary Wiser - You should have a comprehensive practice
valuation performed by a recognized transition specialist. Do not follow “rules
of thumb” based on a percentage of gross revenues or a multiplier of pretax net
income because finding a fair and reasonable purchase price is more complicated
than that. There are many variables that need to be considered when calculating
a fair price for the practice.
Office Location
Staff;
training & motivation
Fee Schedule
Patient
Scheduling
Office Design & Layout Patient
Flow Pattern
# of Active Patients (2 years)
# New Patients / Month
# Years Practice Established
Services Offered
% Managed Care
Patient
Demographics
Collections Ratio (A/R)
Case
Acceptance Ratio
Recall System Efficiency
Practice
Development Programs
Lease or Own Facility
OSHA
Compliance
Hrs/wk patient Tx
Managerial
Capabilities of Owner
Computer
Expertise
Please use valuation methods that are primarily income driven because the
practice income is what you are buying for yourself and your family. Also, it
is usually not reliable if the purchase price is determined by a “friend” of
the seller or his/her accountant. You need to avoid a vested interest in
finding the practice value.
Bentson Clark – The best way is to make sure an independent
valuation has been completed by a qualified expert, experienced in the
valuation of orthodontic practices, who holds some type of valuation
credentials, such as Certified Valuation Analyst (CVA), Accredited Senior
Appraiser (ASA), Accreditation in Business Valuation (ABV), etc. An individual who has earned such credentials
are bound by strict valuation and reporting guidelines which ensure the
valuation has been properly prepared in accordance with accepted valuation
methodologies. In addition, these individuals must comply with continuing
education and recertification requirements in the valuation field. Most local CPA’s don’t hold those
credentials, so be wary of the seller’s personal CPA providing a value for the
practice. This may point not only to a
conflict of interest, but to a valuation that is not grounded in valuation
methodology. Also beware of accepting a
valuation that uses a rule of thumb to derive value, like a certain percentage
of collections, or a multiple of earnings.
The value of a practice must take into account many factors, and
ultimately it is the practice’s benefit stream or the owner’s income that you
are purchasing.
A reasonably priced practice will allow the purchasing doctor to earn
enough money from the practice to both repay the purchase price over a
reasonable period of time and make enough money for his/her personal expenses
during the buy-in. This should be proven
by having financial projections and cash flows prepared to illustrate to the
purchasing doctor what his/her net cash flow from the purchased practice will
be after paying all practice operating expenses and debt related to purchasing
the practice.
Eric Ploumis – Cash flow and profitability are very
important considerations. If the practice generates enough income to allow you
to service the debt and live comfortably, the price is fair and reasonable. A
young buyer may have to accept that he or she will continue to live like an
associate for a few more years. The big payday comes when you grow the practice
and/or pay off the note.
2. How can the financing be handled so I
can afford to buy this practice?
Thomas Ziegler – When a fractional sale is involved, as in
the case of a junior doctor buying-in to a 50% interest at the rate of 10% per
year for 5 years, a form of Seller financing is used. Most orthodontic
practices are incorporated. The unit of transfer in a Professional Corporation
is Stock. Proceeds from the sale of Stock are taxed at the favorably reduced
Capital Gains rate (15%) compared to the higher Ordinary Income tax rate (35%).
However, the payments for Stock are not deductible by the Buyer. Therefore, we
try to keep the amount of the purchase price allocated to Stock as low as
possible. The majority of the buy-in price will be paid through an Income
Differential or Management Fees being transferred out of the Buyer’s portion of
net income into the Seller’s portion of net income. This allows for the
majority of the payment for the buy-in to a 50% ownership interest to be done
pre-tax, advantaging the Buyer.
In the case of a 100% sale (Asset Sale), a small amount of the purchase
price is allocated to the tangible assets of the practice with the majority
being allocated to the Personal Goodwill of the Seller. Third party financing
is usually available for the Buyer to borrow money to pay for the practice. In
cases where the Bank will not loan 100%, the balance is owner financed. The tax
allocation for Goodwill means the Seller pays the reduced Capital Gains tax
(15%) whereas the Buyer must amortize those expenses over 15 years (deductible
at the rate of 1/15 per year for 15 years). The best way to mitigate potential
ill effects to cash flow would be to repay the loan over a longer time frame
(i.e. 10 years as opposed to 5 years).
Richard Collier - Specialty lenders and some (not many)
local banks may lend what is needed to purchase a practice if they see that the
practice is sensibly priced and Dr. Buyer does not have problems in his/her
credit history. They will generally not
lend for the purchase of a partial interest in a group practice. In that latter case, typically the current
owner(s) finance the buy-in. Once again,
for the price to be a fair one, Dr. Buyer has to see that he or she can afford
to make the payments and still have enough income left over to make a decent
living.
Gary Wiser - If you are purchasing less than the
complete practice, bank financing may be more difficult to obtain and seller
financing becomes paramount. Commonly, this is known as “internal financing”
and the purchase payment is shifted to the seller over a period of years.
Internal financing is usually advantageous to the buyer from an income tax
standpoint. Unfortunately, it may increase the taxes paid by the seller, so
most often the purchase price is increased to help the seller with the potentially
larger tax burden.
When purchasing 100% of the practice, bank financing is more available. In the
Bentson Clark - If you are in a partnership, it is very
difficult to get outside financing. The
lending institution will have a difficult time figuring out which half of the
x-ray machine to repossess in the event of a default. Likewise, most lending institutions shy away
from “stock” purchases. Therefore, most
partnerships are financed by the selling doctor using some kind of income shift
for payment (adjusted to include interest on the repayment).
In an asset sale (100% buyout), most lenders will participate, but
often not for the full purchase price.
This decision is usually made after considering the strength of the
practice, the agreed upon price, and the creditworthiness of the purchaser,
among other items. However, don’t be
afraid to enter into a large practice just because you have a significant
amount of school debt. If the practice
is financially healthy and the post-purchase cash flows are healthy, there is
usually financing available for the purchase of most any practice, regardless
of size. Often the seller will finance a portion of the sale price and there
are a number of options on how this is paid to the seller. In any event, if the practice value and
purchase price are reasonable, the purchase debt can be repaid over a
reasonable period of time, and third party lenders, including the seller, often
allow various repayment options that will meet the buyer’s financing needs.
Eric Ploumis - One option is seller financing. Many
sellers prefer not to do this however. As an alternative, there are plenty of
specialized lenders who extend generous credit to practice-buyers. The rate is
usually slightly higher than a conventional bank, reflecting the lack of
marketable collateral, but the terms are usually structured to allow you to
live comfortably (but not extravagantly) while you pay off the note.
3. If I decide to start my own practice
how can I calculate my break-even point?
Thomas Ziegler - When starting up on your own, the
calculation of the break-even point must consider two things – income and
expenses. The expenses side is easier to determine. It is the sum total of all
known expenses (i.e. rent, utilities, staff costs, supplies, and monthly
payment on loan for leasehold improvements and dental equipment plus office
equipment and furniture).
The income side can be estimated on an excel spreadsheet using your
total fee broken down into a 25% initial payment followed by the balance being
charged over 24 months. Usual projections would be based on five starts per
month for the first year; then, ten starts per month for the second year; then,
fifteen starts per month for the third and fourth years; then, twenty starts
per month for the fifth year. These numbers can be adjusted for what actually occurs,
but it is a good place to start.
Once monthly income equals monthly expenses, you are at break-even. In
my experience, that is usually somewhere during the end of the second or start
of the third year. Naturally where you start up (practice location) makes a
huge difference.
Richard Collier and CPA, Mark Pesavento - The use of break-even analysis is a very powerful financial tool when properly applied. A good first step is to segregate fixed and variable expenses. Fixed expenses are expenses that will not vary with patient volume in relevant ranges. Examples are rent, utilities, most insurances, monthly loan payments, non-clinical wages, etc. Keep in mind that fixed expenses will increase in steps when patient volume increases dramatically. Variable expenses include professional supplies and drugs, ortho lab fees, clinical wages, etc. In most ortho offices variable expenses will be approximately 23% of gross receipts. The contribution margin is 77% (100% minus 23%). To calculate your break-even point, simply divide your fixed expenses by your contribution margin. Add your desired minimum salary to your fixed expenses to calculate your break- even point excluding starvation! For example, if your monthly fixed expenses are $30,000 then your break-even point is $38,961.
Gary Wiser - The break-even point is when your practice
revenue and practice expenses become equal. As the revenue exceeds the
expenses, you will produce pretax net income for yourself. In most start-up
orthodontic practices, the overhead expenses not including repayment of student
loans, will approximate 55% of the total revenues. One way to estimate practice
revenue is to start with a small number of new patients entering your practice
each month and increase the number of entries conservatively for the first 2-3
years. Use a 25% initial fee payment and the balance to be paid over an 18 -24
month basis. This should indicate the number of patients you will need to have
enrolled in the practice and the months or years until the break-even point is
achieved.
Bentson Clark does not work with start-up practices.
Eric Ploumis – An important factor in determining the
break-even point is when your income exceeds you expenses. It is a good idea to
work with your accountant to figure out your expenses. In a start up, your
expenses will likely include the cost to construct and equip the office as well
as the ongoing costs to run the office. Next, add up the number of patients you
need to see to pay those expenses. This is probably your break-even point. The
problem is, you have to get the patients. While you are waiting for your
appointment book to fill up, you will need to work as an associate in other
offices until you not only reach but significantly exceed the break-even point.
4. Who can I go
to help me with a business plan for my own start-up practice?
Thomas Ziegler - Help with a business plan for a start-up
practice can come from most practice transition firms, some supply house reps,
or some orthodontic supply reps, as well as accountants. Banc of America
Practice Solutions is a national lender that specializes in financing dental
practices acquisitions and start-ups. As part of their start-up financing
services they provide doctors with a guide to developing a business plan
detailing what information BofA would need to see in order to approve financing
for the plan.
Richard Collier and CPA, Mark Pesavento - Certified Public Accountants, especially those with depth of experience
in the dental profession, are able to help with the business plan. Many CPAs are adept at integrating the weekly
and monthly internal controls necessary to monitor the actual operations
against the business plan. CPAs with
dental practice knowledge may be able to share ideas on marketing the start-up
practice. A question to ask a CPA is how
many dentists does the CPA work with and after the initial meeting who will the
dentist be working with. A CPA with over
25 dentists in their accounting and tax practice and who has been practicing
for 15 or 20 years will likely have the depth of knowledge and experience to
help keep you on track.
Gary
Wiser - Transition
specialists trained in finance and business issues can be consulted to help
formulate a comprehensive business plan. Another good source is an accountant with
a large percentage of dental and orthodontic clients. Ask your faculty members
for possible accountant referrals with orthodontic experience.
Bentson
Clark does not work with
start-up practices.
Eric Ploumis - The best person is probably an accountant
who is familiar with start-up dental practices. Many of the specialized lenders
will also help you with a business plan. They want you to succeed so that you
can pay back the loan.
Be cautious about accepting advice from advisors who don’t know enough about
both finance and orthodontics. There are many extremely talented people who are
very accomplished in their field but may not be able to provide you with the
advice you need for the uniquely specialized issues a start-up practice will
entail. Successful entrepreneurs, faculty members, franchise owners, even
established orthodontists may be able to provide sound business advice but it
may not be appropriate for your start-up practice.
5. What is an
acceptable transition period for the selling orthodontist to stay with me before
leaving the practice? How is his/her compensation to be calculated?
Thomas Ziegler – Probably, the ideal transition period during
which the seller turns the practice over to the buyer is one year or less.
Transition can, however, be done as fast as two patient visit cycles (i.e. 2x6
weeks). The essence of the transition of the patients is that the buyer and
seller meet personally with a parent and the patient. They need to assure the
parent and the patient that the buyer is qualified and familiar with the
appliances and no appliance changes other than in the normal course of
treatment will be needed. Furthermore, finances need to be agreed upon as to
what the parent has paid and what they will owe the buyer to complete treatment
– again no changes. Finally, an estimated completion date for treatment needs
to be reiterated.
The essence of referring dentist transition occurs through meetings
between the seller, buyer and individual dentists wherein the seller introduces
the buyer. Naturally the buyer must frequently continue to communicate with
referral sources to maintain them.
The third area of transition involves the staff and learning
the business. The seller needs to spend time teaching the buyer how things
have been done. A smart buyer will approach each staff member individually and
tell them the following: “Even though I am the doctor, I am not familiar with
how we have been doing things around here. Can I count on your help to keep
things running as is? I do not want to change anything.” That is music to the
staff’s ears. They hate change. Now, after the buyer has been in the practice
for six months to a year, gradual changes can be eased in.
In the usual one year transition, the buyer is an associate for six
months, then purchases 100%, after which the seller is employed by the buyer
for six months. Usually at this point the seller works for the buyer only a
couple of days per week at the request of the buyer (2 days per week for 6
months equally 50 days at the per diem rate).
Richard Collier - After a sale, Dr. Seller typically is paid
a per diem amount. Where it is a
particularly profitable practice, we might calculate what Dr. Seller’s per day
profitability had been (annual profit divided by clinical days worked). There is no standard period for post-sale
work. This is negotiable between the
parties. Often Dr. Seller wants to exit
as quickly as possible and agrees to stay and work part-time for a period of
months to satisfy Dr. Buyer’s anxiety level.
Other times, Dr. Seller wants to work part-time for a period of
years. Dr. Buyer definitely wants the
time period covered in the contracts.
For example, it might provide where Dr. Seller wants to work for a long
time that Dr. Seller has the right to work for “X” days per year for “Y”
years. After that, it is with the continuing
consent of Dr. Buyer. Where it is a particularly
profitable practice, we might calculate what Dr. Seller's per day profitability
had been (annual profit divided by clinical days worked), and he or she would
be paid a fraction of that prior daily earnings rate.
Gary Wiser – The usual minimum transition period for orthodontics
is six months; longer if it is possible for the seller to remain in the
practice. This is largely dependent on there being sufficient funds within the
practice to pay the debt service for the buyer, a salary to the seller, and a
reasonable income for the buyer after all other expenses are paid. The lengthy
often complex treatment required in orthodontics, learning the business aspects
of the practice, and gaining confidence in the practice administration all
point toward an extended transition period whenever possible. Employing the
seller in the practice may create a valuable asset for the buyer.
Bentson Clark - In most orthodontic practice sales, the
largest portion of the purchase price is personal or corporate goodwill (i.e.
owner’s earnings). For this reason, it is advisable to have a true transition
period. The customary association or
transition period ranges from six to eighteen months. This transition period
allows the senior doctor to introduce the buyer to patients, referring parties,
and the community and effectively transfer the goodwill to the buyer. The
transition period may either be before or after the purchase occurs, but most
often, the buyer will work as an associate for the seller for six to twelve
months before ownership transfer occurs. The buyer’s introduction to the dental
community and patients will take place during the association period. If the
senior doctor remains after the purchase, they are typically paid a per diem
that is negotiated based on the size of the practice and the buyer’s need for
assistance. Whether the buyer works as an employee for the seller prior to the
purchase, or the seller works as an employee for the buyer after the purchase,
it is advisable to have both parties working in the office together for at
least a few months to ensure the goodwill is adequately transferred to the
buyer.
Eric Ploumis - For a specialty practice, seller should
probably stay for six months to one year. Anything less may not fully introduce
buyer and allow for the transfer of goodwill. Anything longer may prevent the
buyer from assuming the mantle of primary-orthodontist in the practice.
One guideline for seller’s compensation is to pay seller what buyer was
getting paid when buyer was the associate. Many sellers tend to overestimate
the value of their services and ask for too high a compensation after the
transition. The primary asset buyer is purchasing is usually the seller’s
goodwill. Seller should not expect buyer to pay twice for that goodwill in the
form of a high associate’s salary for seller after the transition.
6. How can I intelligently
evaluate associateships, partnerships, group practices, buying a practice,
etc?
Thomas Ziegler
- In order to intelligently evaluate associateships, partnerships, group
practices, or buying a practice, you will likely need the assistance of an
orthodontic practice transition firm. These are people with years of experience
in the field of orthodontic transitions who should be able to work with the
seller and buyer to arrive at a price and terms that make sense. The
advantages/ disadvantages to one party or the other may be easily determined
and only need to be balanced for fairness.
Richard Collier - First, one of the most important lessons
to learn is this: More important than the deal is the person in the deal. So first size up the practice owner you will
be dealing with. If you are not sensing
fair treatment, then move on. It is
advisable for associateships to include a pre-understanding of whether a
practice purchase or buy-in is part of the future. If so, the major terms should be agreed upon in
advance and written into a “future arrangements” section of the associateship
agreement. Of course there would be
a trial period during which either could say the relationship is not
working. But once that period is over,
then the pre-agreed terms get written into the buy-in or practice purchase
agreements. The idea is that the
associate does not want to leave those discussions to a later time when he or
she has little bargaining power. If the
practice owner is unwilling to discuss the future arrangements in detail as
mentioned above, that is a terrible sign and I would not count on being able to
work out the points later on.
Gary Wiser - To evaluate buying a practice, buying into a group
practice, a partnership, or an associateship for a relatively inexperienced
orthodontist will likely require third party help. This question truly
defines the role and the function of a transition specialist. You need to have
all of your concerns and questions answered clearly when you interview a
prospective transition specialist since there are no licensing guidelines in place
to assist you in this critical search.
Bentson Clark – A good method is to engage the services of
an advisor(s) to ensure the purchase price is reasonable, the tax effects to
both parties are addressed, and the legal documents are drafted to protect both
parties. You will likely want to f
Eric Ploumis - Surround yourself with knowledgeable
advisors who have handled many practice transitions. Expect to pay for the
advice you get. Ask advisors for references and check them. Buying a practice
is one of the three biggest investments you will ever make. Don’t cut corners.
Similar to my answer in question 4, be cautious about accepting advice
from advisors who don’t specialize in transitioning orthodontic practices.
There are many extremely talented people who are very accomplished in their
field but may not be able to provide you with the advice you need for the
specialized issues unique to orthodontics.
7. What
information do I need to evaluate whether I can set up my own practice?
Thomas Ziegler - What you need to evaluate regarding whether
or not to set up on your own involves consulting with all of the potential
referral sources in the area. You need to determine if the area has enough
young dentists willing to send you patients. Older dentists generally refer to
older orthodontists who have become friends over the years. Secondly, you
should determine where the growth in the area is occurring (new homes, shopping
centers, middle schools, etc). This is where the young families with children
will probably be going. Third, find out where the pediatric dentists are and go
in near them if possible. You will need to find a professional space available
to lease. Most of the time, the easy part is ordering equipment and supplies.
Consult the bank with a business plan – budget of projected expenses and income
showing initial shortfall so that you can obtain start-up financing.
Richard Collier and CPA, Mark Pesavento - I recommend first ruling
out whether there may be a quality practice to purchase. There are many sources for practice set up
information. They include local dental finance companies such, dental supply
company reps., government population statistics, local chamber of commerce,
etc. Meeting with local potential referral sources is a good idea.. After
determining that the location can support the practice you wish to build you
should probably include your dental advisor team comprised of dental
knowledgeable professionals: Attorney, CPA, lender, consultant, etc. to assist
you with a business plan and financial projections.
Gary Wiser - When establishing your own practice it is vitally
important to visit with the probable referring general dentists and pediatric
dentists to get a sense of their willingness to welcome you into the dental
community. It is also advisable to consult with local business people in the
area to learn the prospects for future growth. The future growth of the area is
a primary ingredient for successful practice establishment because you will
want to invest the next 30+ years located in the selected community. In the
present demographic setting, with the increase of single parents, and parents
working longer hours, your office location requires easy access, adequate
parking, and practice hours compatible with the parents’ ability to make their
child’s appointments.
Bentson
Clark does not work with
start-up practices.
Eric Ploumis – Almost anyone can set up his or her own
practice. However, unless you have an indulgent parent or spouse, most recent
graduates will need to work as an associate in another practice while their
start-up starts-up. You need to be realistic in how soon you expect to generate
positive cash flow and compare that to the risks and benefits of buying an
existing practice. In some parts of the country starting your own practice may
be folly, in others it may be a ticket to rapid success.
8. What do I
need to prepare for the business aspects of practice?
Thomas Ziegler - The business aspect of the practice
involves selecting an entity (i.e. S-Corp, LLC,. Selecting an accountant is
very important. It is advisable to work with an accountant who will allow you
to customize the “Chart of Accountants” so as to comply with IRS regulations.
“Live below your means and above the line” – in other words, try to find
a business deduction for as many of your expenses as possible. You’ll need to
see that your accountant gets a copy of the business bank statement each month
and you’ll send the accountant a copy of each check stub with a number from the
chart of accounts applied to it (i.e. #1 utilities, #2 telephone, #5 repairs,
#12 dental supplies, #20-#30 various code name categories for travel and
entertainment). You’ll probably need a practice attorney with a strong tax
background to run the day to day legal work involved with running a practice.
Ask other doctors in the area who they use. The business aspects involve staff
job descriptions and office manuals so everyone knows what is expected of them
and how to do their job.
Richard Collier and CPA, Mark Pesavento - Books are written on this question, but to cut to the chase there are
certain considerations that are very important:
Gary Wiser - For most of us, the business aspects of an orthodontic
practice can be quite daunting. If you have employment as an associate prior to
purchasing or establishing your own practice, it can be a very beneficial
experience to learn how another practice accomplishes the business side of
orthodontics. Often, you can learn some excellent procedures to follow as well
as procedures that are not good business practice. The good news is that a lot
of help is available! Transition specialists and knowledgeable accountants may
be able to assist you in formulating solid marketing plans that you are willing
and able to implement. They may also be able to teach you to read and
understand the financial statements your practice will generate. Many CE
courses, seminars, and professional meetings are presented each year for your
educational expansion and many books have been written to help with the
business side of orthodontics.
Bentson Clark - There are several business concepts you will likely
need to understand (1) understand the business aspect of the practice, which
includes being financially literate in reading the practice’s financials,
managing overhead, and understanding the financial transactions that occur; (2)
understand the marketing aspect of the job, which includes getting to know
referral sources, patients and their parents, and being involved in the community; and (3) managing people and staff, or delegating to
someone else who can. The senior doctor
from whom you purchased the practice may be the best resource to help you learn
the non-clinical aspects of running a practice.
There are also numerous consultants within the orthodontic community
that can assist you and your staff in specific non-clinical areas of the
practice, such as marketing, staffing, scheduling, practice management,
etc. In the practices we value, we
generally see that, all things being equal, a practice that invests in practice
consultants over the years will be more profitable and valued higher than a
practice that does not.
Eric Ploumis - Ask and hire good people to advise you,
but your number-one ally in preparing for the business side of an orthodontic
practice is probably an accountant who works with a number of orthodontic
practices.
9. Do I need an
accountant, lawyer, transition specialist, insurance agent, etc?
Thomas Ziegler - You will need an accountant and a lawyer
for day to day operations. You may need a practice transitions firm to assist
in any practice appraisal, etc. If you are starting on your own, a practice
transitions specialist is less important. You may need an insurance agent who
can coordinate business and personal insurance needs.
Richard Collier – Yes, most likely, for accountant, lawyer, and
insurance agent. I’m not sure what a
“transition specialist” does that the first two don’t do.
Gary Wiser - Yes, you may need to establish your own team
of a transition specialist, an attorney well versed in dental and orthodontic
issues, an experienced accountant with a large percentage of dental and
orthodontic clients, and a dependable insurance agent to guide you along the
way. The AAO provides some excellent insurance policies in the areas of
professional liability and practice continuation that you should investigate.
Bentson Clark - Yes, you will likely need a Certified
Public Accountant and an attorney to help you with the purchase of a practice
to ensure all legal and tax aspects of the transaction are properly identified
and accounted for. Many orthodontic
transitions companies have these resources available in one shop. You will also need, in most cases, an
insurance agent to provide adequate coverage and protection for you in the
event of death and disability. If you
are using a lender, they may require certain insurance coverage to finance the
purchase.
Eric Ploumis – You will likely need an accountant. A
lawyer you will use episodically throughout your career; an accountant you will
probably need every week. You may need an insurance agent when you first get
started and occasionally after that to check on your policy needs.
10.
What is the future for the profession of orthodontics
in the
Thomas Ziegler - The future for orthodontics is very
bright. Of the ten thousand or so practicing orthodontists in the
Richard Collier - I can only speak to the
Gary Wiser - In the
Bentson Clark - The future certainly looks bright in the
Eric Ploumis - I have been an orthodontist for 27 years,
a faculty member at NYU ortho for 19, and an attorney for 17 years. During that
time, the “future of orthodontics” has varied widely. The bottom line is that
the profession seems to be thriving and will likely always have its ups and
downs but I believe that there is no better job out there in terms of satisfaction,
control of your destiny and remuneration.
11.
Is it necessary to be involved on both private
practice and political levels to ensure that the best patient care delivery
systems will be available for our future generations of orthodontic patients?
Thomas Ziegler - Political involvement is what has carved out
what the orthodontic profession is today. We each owe a large debt of gratitude
to the past orthodontists who helped our precious profession. Each of us needs
to accept the duty to be vigilant and participate in the preservation of the
profession for future generations. The fee for service private delivery system
needs to be preserved.
Richard Collier - Will the system fail if you (one
person) will not get involved? No. Will the system fail if most every individual
feels that way? Yes. It’s amazing how dentistry thrives by the
involvement of its members. Dentistry is
the envy of all the other professions in that sense. So get involved. I have…and I’m not even a
dentist!
Gary Wiser - It is extremely important for younger orthodontists to
become involved with the dental organizations in their area and the AAO at
every level to insure the continuation of successful specialty practice. As I
attend AAO meetings I am concerned with the predominant appearance of “gray
hair” and know we must have younger representation for the future health of
orthodontics. Contributions to the AAO Foundation and to the Political Action
Committee are important for us to prosper as a specialty group. We can not afford
complacency, to let somebody else do the job. The ultimate responsibility is
going to fall to you, the younger generation of orthodontists to continue what
the previous generations have achieved.
Bentson Clark - Our experience is that the best practices,
ones that deliver excellent clinical results and are financially healthy, are
constantly learning and evolving. This
usually means that the doctor is active in a study club and goes to state,
regional and national meetings and has some involvement in giving back to the
profession with service to one of these organizations.
Eric Ploumis - I have been involved in organized
dentistry at all levels since my graduation from dental school. At times it is
rewarding, at other times frustrating, but organized dentistry is our only
political voice as a profession. However, I do not feel it is necessary for a
practitioner to get involved if he or she prefers not to. Our dental and ortho
societies are headed by dedicated, competent men and women. If getting involved
is appealing, a young orthodontist should consider it but it is not a
necessity.
12. How
residents should handle indebtedness?
Chris Bentson - Residents and School Debt: We routinely see residents coming out of their orthodontic program with greater than 200K in school debt. Our observation is that because most residents have incurred the debt over a number of years and it has allowed them to accomplish their objective of becoming an orthodontist, they have largely come to terms with it and are ready to move on. Orthodontists selling their practice often have more concern with the size of their school debt than the new orthodontist holding the debt. We find that the national lenders for orthodontic practices understand school debt as part of the process and money is still available for practices that provide adequate cash to cover practice acquisition debt, school debt, taxes, and reasonable living expenses. This is why buying out or buying into a large practice that is efficiently managed does not need to be feared. The cash flow of the practice, not the debt of the buyer, will largely determine whether most transactions make sense. If you put the debt in perspective, it is usually in-expensive money with very reasonable pay-back terms. With some exceptions, the interest is also a tax deduction under the current tax code. It should be viewed as perhaps the best investment, in terms of return, they may ever make. The two musts for students are that they should definitely consolidate their loans, and they should definitely always make timely payments after they graduate. Most will pay off their school debt early and will find that the financial rewards of the profession are afforded to those that focus on providing quality care to their patients, treat their staff fairly, and are willing to put in the effort required, especially in the early years of their career, to receive the trust of the community they serve.
Eric Ploumis - There is good debt and bad debt. My involvement with orthodontic residents as a faculty member for the past 19 years has shown me that successful graduates tend to have good debt—that debt necessary to finance their education. Investing in your career is as blue chip as you can get, yielding an incredible return-on-investment.
I work with a number of finance companies that help fund start-up practices or the purchase of existing practices. They all say that students who graduate with good debt are rarely a risk. The finance companies are always ready to fund these types of graduates. Orthodontics is such a great field that the finance companies know that, despite carrying a lot of debt upon graduation, success if virtually certain.
One the other hand, I have seen residents get funneled into poor career paths due to the acquisition of bad debt. These residents do more than finance their education with borrowed money, they finance their lifestyle. Without getting into the psychological motivations, they feel entitled to a doctor’s lifestyle while still a student or a recent graduate. High credit card debt, leasing a fancy car—these types of extravagances are frowned upon by lenders and lower the credit-worthiness of the resident when he or she graduates. These graduates are forced into dead-end jobs at clinics or offices that pay well but don’t have a future. Bad debt becomes a ball and chain, hampering the ability to make prudent career choices based upon opportunity, not financial need.
These kind of spending habits follow many doctors throughout their lives. It is dispiriting to me, as an orthodontist/attorney, to work with a seller who is working out of financial necessity instead of career satisfaction. Their practices suffer, their patients suffer and in the end, they get a lot less for their practices.
My advice to the orthodontic resident is to assume all of the debt you need to complete your education but not one penny more. Yes, your college friends are all out making and spending money while you are still dining on Ramen noodles and treating your spouse to a pizza once a week, but you will blow past your old pals very quickly when you graduate. The career path you (we) chose requires patience and perseverance, but the payback in job satisfaction and economic benefit is immense. Debt you assume to further your career is the best investment you will ever make.
Tom Ziegler – Many orthodontic residents come out of school with large school loan debt. They have questions with regard to the deductibility of those loan repayments and the best way to pay off the debt. The general discussion of the subject begins like this.
The allowance of deductions for the costs of education is not specifically provided for in Internal Revenue Code Section 162. Instead, the allowance of deductions for such costs is provided for in Regulation 1.162-5. The general rule provided by this regulation is that a taxpayer can deduct, as ordinary and necessary business expenses, expenses for education undertaken for the purpose of (1) maintaining or improving skills required in his/her employment or other trade or business; or (2) meeting the express requirements of his/her employer or the requirement of applicable law or regulations imposed as a condition to the retention by the taxpayer or an established employment relationship, status or rate of compensation.
In Revenue Ruling 74-78, the IRS ruled that expenditures incurred in taking post-graduate studies in orthodontics by a dentist engaged in general practice are deductible under Code 162. The dentist returned to dental school on a full-time basis (while continuing his practice on a part-time basis). After completing his/her training, he/she limited his/her practice to orthodontic patients. This ruling is still a current ruling to be relied upon.
Generally speaking, expenses can only be deducted against income in the year income is received and expenses are incurred.
Three (3) additional requirements must be met. First, the taxpayer must be engaged in the trade or business prior to attending post-graduate school and should continue during the period the courses are taken. If the taxpayer is not employed during the period of study, the deduction may be challenged by the IRS. IRS has permitted deductions if the cessation of employment is merely temporary (one year or less) and the taxpayer resumes employment in the same trade or business (Revenue Ruling 68-591).
Second, the courses of study must be related to the taxpayer’s trade or business.
I take the aggressive position that orthodontic training is for improving skills required in your employment in dentistry and you entered the profession upon graduation from dental school. Since IRS has in the past permitted deductions if the cessation of employment is merely temporary this gives me my reasoning as to why I would think the repayment of these loans could be business expenses.
Most residents earn income while in school but use that to live on. Therefore, the actual repaying of the loans will not begin until they are in practice. Once a graduate purchases 100% of an existing practice, any risk that business deductions could be disallowed by IRS becomes his/hers alone. When financing the purchase of a practice, lenders often lend, in addition to the purchase price, up to 10% for start-up costs (working capital). This gives the practice a golden opportunity to apply that money toward paying down the school loans. If additional money is needed to pay off the balance it could come from practice proceeds as a business expense.
Alternatively, if the new graduate is buying a fractional interest of a practice (e.g. 50% at the rate of 10%/year), the practice might repay student loans out of the perquisites portion of the Buyers portion of net income. In such a case, the Seller would insist on a guarantee that if the IRS were to disallow such a deduction to the employer, the Buyer would be responsible for any costs to the practice related to penalties and interest. This method is subject to the Senior Partner’s threshold of aggressiveness related to deductions claimed.
During a period as an associate I have seen some practices pay off student loans for an associate as part of their compensation. The employer makes the loan repayments for the employee and deducts the payments as a business expense of the practice. At the same time, the employer subtracts those expenses against the associate’s salary. For example, if the associate’s salary were $120,000 annually and the pay off on the student loan was $20,000 annually. The employee’s salary was $100,000 for income tax purposes. In reality, IRS would likely claim the salary was $140,000 including the $20,000 benefit.
I would suggest the employee, personally, make only the minimum payments required during the associate period. Then, implement the more aggressive plan of repaying the student loans as a business expense once the new graduate becomes an owner. I suggest the plan works best in cases where the graduate has either started up on his own or purchased 100% of a practice. Whenever taking a deduction, remember to be prepared that IRS could disallow the deduction and penalties and interest could be imposed.
There is a “fear factor” among residents when they get out of school regarding adding additional debt to the amount accumulated during school.
The good news is that whatever the amount of new “business debt”, it will ultimately lead directly to income to reduce debt. A start-up is the scariest scenario because the new graduate has added hundreds of thousands of dollars in debt with no patients yet and, therefore, no income. This is the entrepreneurial risk most orthodontists had to take during the ‘60s, ‘70s and ‘80s; in part, because there were not many orthodontic practices for sale.
Now, half of the 10,000 orthodontists are over age 55, therefore, there is a good supply of very well run practices that can be purchased by a new graduate. The purchase of an orthodontic that was valued properly is the easiest way to reduce debt, not add to it. The sales price is based on the cash flow available to pay off the debt. In other words, the net income will provide not only enough money to pay off the business acquisition debt service, but provide immediate income to reduce school debt and live comfortably. Purchasing an existing practice is the best way to eliminate the “fear factor”.
The other alternative is to buy-in to a 50% interest in a practice and become a partner with an existing orthodontist. This too is a great “fear factor” quencher. In these buy-ins, the new graduate pays a small amount for stock (in incorporated practices) and the balance is paid as a salary differential for management fees. This method allows the new graduate to buy-in and still have enough left to live on well and repay student loans without borrowing any additional money.
Gary Wiser - The initial step for managing student debt is to develop a life style that keeps your debt to an absolute minimum. Plan a monthly budget for your necessary expenses and then do your best to stick to it. The years of your residency and your first few years in orthodontic practice are not when you should purchase high cost items; new cars, homes, extensive vacation trips, etc.
The type of debt is also an important component for residents to understand. Credit card debt carries an extremely high interest rate, compounding on a monthly basis, and the interest paid is NOT tax deductible. In general, loans you can receive from university related financial institutions carries lower interest rates and can be more flexible if the need arises for refinancing the principal amounts during the term of the loan.
Upon graduation from your orthodontic program debt consolidation is usually a very wise course of action, especially if the newly negotiated interest rate is lower than the present loan rates you will have to repay. Quite often, a lower interest rate can be negotiated at this time, and the length of the loan pay back period can be adjusted to make your first few years in practice more financially rewarding.
Please remember that even in the best of times, paying back your student loan debt can be a difficult task and must be approached with initial self restraint during the borrowing phase and debt consolidation at graduation.
Randy Berning – Most
orthodontic residents confront money management and debt early in their
educational career. It often is a continuing fact of early professional life as
well with the move from an educational setting to being an employee, partner,
purchasing or starting a practice. With significant consequences present all
along the continuum from early professional education, through residency and
into early practice, knowing how to manage debt is a necessary life skill to
acquire.
Tips
While a Resident (and beyond!)
Watch your payment history on all credit
cards, auto loans, utility bills, phone bills, etc.. Payment history is 35% of
your overall credit score. Late payments are simply not acceptable and hurt you
significantly not only on your FICO score but future interest rates offered.
See the excellent site at Credit.com for detailed information.
Don't max out your credit cards. A major
portion of your credit score takes into account your debt ratio, known as
Revolving Utilization. If possible, keep your balances low, or ask for increased
credit limits to help lower your ratio - but DON’T use the extra credit.
Limit the number of credit accounts you have.
Opening and running up balances on a lot of accounts can drop your credit score
when you will need it most. However, if you pay off a credit card account DO
NOT close the account, just put the card away and do not use it. The unused
credit limit will help lower your debt ratio and reflect better on your score.
Mark your calendar and get your free credit
report annually. This allows you to check for possible identity theft and avoid
errors. Go to AnnualCreditReport.com. Also see Credit.com.
For more information check out our Pointers On Debt Management For Younger
Professionals, Special Report at BerningAffiliates.com
Tips
On Entering Practice
Be open with your financial situation
regarding educational debt and any significant other personal debt if you are
about to enter a practice partnership. It can be helpful for the firm or professionals
helping to structure the deal to know your situation and be creative in working
with it. We, and other practice transition firms, use a variety of approaches
to move younger professionals into equity ownership including, low interest
owner financing, rising payments over the loan term, balloon payments that are
amortized over a longer term and many others. Ask about all your options when you
meet with the owner and any advisory firm.
Keep in mind the benefits of being cautious on timing your major expenditures. For example, it is often ill advised to purchase the car or condo before making plans for the equity purchase or practice purchase you have in mind. Loading up on debt and then looking for financing for the practice financing is exactly opposite of what you should be doing.