From Hy's Desk: Sleep When the Wind Blows
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A farmer is looking for a hired hand and a city boy, with no farming experience, makes the only inquiry. In the interview, when asked about his qualifications, the boy responds “I can sleep when the wind blows!” The farmer dismisses the lad, and continues his search. After weeks of no luck, he offers the boy the job. The boy works hard and learns quickly, satisfying the farmer.

A storm comes one night and the farmer tries to rouse the boy to secure the farm from the raging wind. Unable to wake him, the farmer proceeds to the farmyard where he
finds the animals penned, barn doors locked, hay tied down and implements secured. He remembers the boys comment, “I can sleep when the wind blows!” and finally
understands.

I retell this story, because shortly after I got my financial plan from my financial planner, I slept very well knowing that I had a plan in place that would meet my needs for
retirement.

I am always surprised at how many dentists have not had a formal, professionally prepared, financial plan. A majority of those I meet with regarding exit strategy have
some savings, possibly an IRA/401K, but have never had an actuarial financial plan.

As we continue in these uncertain economic times, we encourage you to prepare for the future and understand.

Very respectfully,

Hy Smith, MBA
Managing Member

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From Hy's Desk: Overcoming the Financial Barrier
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In our e-newsletter last month, we discussed the question of whether practice values were declining due to declining production and collections.We found that in many offices, patients are not declining treatment; rather they’re delaying it, most often due to financial constraints. This is a phenomenon that can be overcome, and in doing so, prove quite the boon to your practice.

It is estimated that between one-half (1/2) and two-thirds (2/3) of a practice’s annual revenue can be found in existing patient charts as treatment that has been diagnosed and accepted, but just not started. It is also known that most patients want to complete treatment, but may postpone recommended treatment in a down economy.

But consider another interesting statistic: ninety-nine percent (99%) of patients pay their bills.

So putting this all together, I have found that in a down economy, if a patient has treatment to be done and they have accepted the fact that at some point they will have the treatment performed, the outstanding concern left to address is their immediate need for cash conservation. However, with the proper verbal skills and a well designed and managed internal financing plan, this concern can be alleviated, meaning a lot of dentistry can be completed, and paid for.

How is this accomplished? First, a written financing agreement has to be developed and available for use by credit worthy patients. For all intents and purposes, your established patients will be excellent candidates for credit as they have an ongoing relationship with you and your practice. Not only should you know a lot about them and their history, but, due to their relationship with you, it is very rare that they will not honor their financial obligation if it is made manageable for them. Depending on the extent of the dentistry to be done, you can establish reasonable terms for as much as nine months to a year with an installment plan that is amenable and accommodating to both the patient and your practice. When properly setup and administered, history shows that you will collect about ninety-nine percent (99%) of the fees charged.

The reality is, even in the case of non-payment, most of the write-off is the cost of your time. The other major expenses related to the services are the associated lab and supply
costs. To mitigate the potential loss of these hard costs, it is also recommended that the one thing you absolutely get paid for up front is any laboratory or parts fee for the case. If explained that this is money that needs to be paid when you get the laboratory work back, this policy should be acceptable and understandable to the patient. If they cannot afford this relatively small “down-payment” for their treatment, then you should probably consider their credit worthiness.

For new and emergency patients, it is known that if a patient is in pain, they will pay to get relief. There is also a pretty good chance that if they are in pain, they have additional dentistry that needs to be done. Usually, this type of patient is less motivated to complete extensive dentistry, but if offered the opportunity, they will accept some treatment. If the treatment is started, these patients will return to complete it, eventually becoming active patients of your practice.

We know that if treatment is just diagnosed and even accepted only as needed, there is only a fifty percent (50%) chance that the patient will come back to start additional treatment. Accordingly, it is important to initiate as much dentistry as the patient will accept with terms that the patient will agree to during their initial visit. Again, if the lab fee is paid up front for dentistry started, the only out of pocket expenses are your time and minimal supplies. The odds of getting paid remain in the high ninety percent (90%) range.

It is acknowledged that your risk of non-payment is higher with new patients; but if you screen them carefully, even run a credit and employer check, you are still better off
with a full schedule of treatment than sitting around waiting for patients to walk through the door. All of your fixed overhead continues, regardless of patients coming in to the
office or not, which is the majority of your everyday cost of doing business.

This process is much more cost effective than ramping up advertising to attract the new patients who may only be shopping for the lowest price in town. It not only takes
advantage of time you’ve already invested in your patients, but keeps your overhead costs down, making every additional dollar of income more profitable.

The dentistry is in your charts, you just have to make it attractive to complete.

Very respectfully,

Hy Smith, MBA
Managing Member

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From Hy's Desk: Stop the Cycle
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It seems that cycles are a part of our lives.  Business cycles, weather cycles, economic cycles all seem to surge and wane.  In the past few months I have been dealing with partnership problems.  Whether it is the economy or the weather or some mysterious influence from outer space, partnership dissolution is front and center on my desk at the moment.

We have discussed the reasons for partnership failures in past newsletters, but I think it appropriate to provide our readers with ways that can possibly assist in avoiding the pitfalls that seem to lead to partnership problems.

As we have stated before, money issues are the leading cause of divorce and partnership problems.  Lack of good communication is the second greatest cause, and the list goes on.

Our first recommendation for successful partnerships is; COMMUNICATE.  This does not just mean having conversations, it means having FORMAL, REGULAR meetings where issues are discussed and resolved AND RECORDED.  The burr under the saddle that gets ignored causes the sore.

One of these meetings, each year should be to review and evaluate the partnership documents, whether corporate documents, LLC documents or regular partnership documents.  This can be done as part of the annual meeting (required by corporations and LLC’s).  This discussion should include:

1. The employment agreement provisions
2. The compensation agreements
3. A review of the succession provisions in the event of an unexpected departure from the practice by one of the partners due to death or disability
4. Income and Expenses of the practice
5. Budgets and future capital expenditures
6. Review of the life, disability and office overhead insurance policies
7. Exit strategy issues if appropriate
8. Practice Value

Unfortunately, the only time these documents are looked at is when they are removed from a file cabinet somewhere, dusted off and reviewed to determine how to handle the imminent problem that has arisen.

Often the value of the practice at the time of dissolution is required to compensate the departing partner or estate.  The provisions governing that value should be updated to reflect the intent of the partners and the value of the practice in order to avoid disputed opinions of value and methods of payment.

Remember, “An ounce of prevention is worth a pound of cure”!  Or, in my terms, a few minutes every year assessing your partnership documents will save you many thousands of dollars in consulting, mediating and potentially litigation fees.

Hy Smith, MBA
Managing Member

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From Hy's Desk: Transitions in Transition - A Sellers Market
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For the past months, we have seen the economy falter worse than any time in my past memory. At ADS Florida, because we have been in business for over 35 years (previously Professional Transitions, Inc.), we have been through these downturns before and have survived. Because we have been there before, we can react to these times in an appropriate manner and we know how they affect the transitions market place.

First, we recognize that often sellers extend their retirement plans, which reduces the number of practices that are available for sale. Interestingly, however, the same number
of dentists are graduating and looking for opportunities. In addition, some practices with associates slowdown and associates that have been employed begin to look for other opportunities. This creates a “seller’s market,” driving prices for the practices higher – even in a down economy.

This seller’s market provides an opportunity for sellers that are ready to retire to get the optimum value for their practice.

Second, even though lenders have tightened their lending policies, interest rates are often very low for those qualified buyers. Lenders are also affected by the reduced loan activity and are looking for good opportunities to lend money. The acquisition financing industry is still strong, though perhaps more selective in its approvals.

Dentistry does survive recessions! It is still the most lucrative profession in the healthcare field. There are opportunities for both sellers and buyers alike. But beware of
opportunities that are “too good to be true!” We see claims of unrealistic promises made by those that are in a panic to survive. This is the time to be cautious and conservative. Rely on reputation, not urgency or fast talk.

Let us help you through this period and see you out the other side stronger than when this all began.

Hy Smith, MBA
Managing Member

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From Hy's Desk: Forging Onward - Surviving Economically Rough Terrain
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2009! This will be a year to remember for very significant reasons. We will enter into a new era politically and socially, but more importantly we will be facing a very difficult economy. The recession that has developed is impacting all sectors of the economy, including dentistry. In some areas, it is a very deep impact, where in others it is less severe. But, it is affecting all of dentistry including the financing sector which supports the acquisition and refinance of dental loans, and also the financing of expansion of practices including new equipment purchases and lines of credit.

One of the major finance companies, General Electric Healthcare Services, a division of GE, as of January 9, 2009, has eliminated its dental acquisition financing department and will no longer be providing dental purchaser or start-up financing. Several years ago GE bought HPSC which was the original dental acquisition and equipment financing company in the country and GE initially proposed a very aggressive entry into the financing market.
The loss of GE is a big blow to our industry as GE was one of the big three or four lenders. Fortunately, GE sold its portfolio to Wells Fargo Bank which owns MATSCO Financial, a very reputable company, with whom we have been working for many years.

As of now, Bank of America, MATSCO Financial and Professional Practice Capital (PPC Loan) are the main players in the market place. There are other broker lenders that acquire their money from various sources, including the Small Business Administration. Hopefully, this economic fall-out will not further reduce dentists’ ability to secure reasonably priced financing.

As we face this critical time, now more than ever before, it is important to get your practice running fiscally responsibly with proper fee structure, cost structure (expenses) and management. As I’ve stated before, dentistry will continue to be needed, but now is the time to “get back to basics” and be pro-active in controlling overhead, including staff expenses, adjusting fees, working on internal marketing for new patients and controlling accounts receivable, especially with the insurance companies. It’s probably a time to
have a “State of the Practice” meeting with your staff and lay out specific plans to assure your profitable survival in economically rough terrain.

We, at ADS Florida, wish you all a very happy and prosperous New Year and remind you that you can call on us for any assistance or advice related to your practice. Our team consists of two formerly practicing dentists one of whom is an attorney and two MBAs. I think we can honestly say we ARE THE BEST, and we are very proud of it.

Hy Smith, MBA
Managing Member

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From Hy's Desk: Watch & Ward
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Last newsletter we spent time discussing taxes and concerns with potential tax changes that could occur in 2009. As a supplement to that discussion, we want to alert our clients and dental colleagues of disturbing information that has come to our attention.

Attorney Bill Prescott, a close friend and advisor, chairs the Closely Held Business Committee of the American Bar Association Section of Taxation, a tax forum with the IRS and tax attorneys discussing tax and legal issues that affect the relationship with the small business community and the IRS. Bill’s specialty is tax law and the preparation of dental practice legal documents, partnership and solo group structures and complex practice transition strategies. He is revered as one of the two top tax attorneys in the country for the dental community.

In recent discussions with Bill, he brought to our attention some disturbing developments that may very well impact our dental clients and we felt that it would be appropriate to share some of this information with you.

Hy Smith, MBA
Managing Member

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From Hy's Desk: Another Adage
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We’ve all heard the truism: “The only thing for sure is death and taxes.” Regardless of your political leanings, there, most likely, will be a tax increase next year. The most probable area of increased taxation will be the Capital Gains Tax.

At present the Capital Gains Tax is at 15% which was reduced from 28% during the Reagan administration. If implemented it is likely that the tax will be retro-active to January 1st, 2009. If so, any transaction that occurs after that date will be taxed at the higher rate.

This month’s feature article will give you an indication of how an increase of the Capital Gains Tax may affect the after tax income that a seller might receive when selling a practice. I am currently advising all clients that are considering selling within the next 18 to 24 months to review the potential impact of this change with their CPA or tax advisor, now, for the purposes of planning.

Hy Smith, MBA
Managing Member

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From Hy's Desk: Economically Speaking
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Rest Recently, I have been a “Chicken Little” about the economy. Fortunately the sky is not falling, but it seems the price of oil could be the economy’s back breaker. We’ve been through these times before and have survived, but it takes a good, aggressive approach.

The effect on the consumer’s budget is less disposable income to spend. The effect on the dental community is less elective spending, which affects hygiene checks, bleaching, implants, Invisalign, veneers, etc.

So it’s back to basics. It is estimated that a practice grossing $700,000 per year has over $300,000 worth of diagnosed, uncompleted dentistry in its patient charts. Now is the time to do a chart audit and encourage those patients to complete procedures for diagnosed problems. This may require “verbal skills” training which can come from role playing in office meetings.

The successful dentist will do something positive – develop a good offense.

Hy Smith, MBA
Managing Member

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From Hy's Desk: Your Team
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Rest assured, if we are thinking retirement, as discrete as we think we are being, our staff is sensing a change in our behavior.  So, when should we sit down with our team?  The answer is not the same for every office.  Some offices are like family and anything can be discussed, others require extensive re-assurance that things will be ok with a new dentist and in others it is best not to discuss anything until the sale is assured.

In any case, the important point to communicate is that the team is the most important factor in sustaining the continuity of the practice.  For some reason, team members feel they will lose their job when the new dentist takes over and, in most cases, this is farthest from the truth. In reality, the staff is relied upon to introduce patients, educate about systems and protocols and strengthen patient trust in the new dentist.

This issue covers staffing questions in a transition and managing your staff for greater profitability.  With these articles, we hope to address questions we hear regularly throughout the state.  Further, know that we like to hear from you, so, transitioning or not, please stop by and visit us at the FNDC (booth 302).  We are proud, long-time supporters of the FDA and FNDC and enjoy seeing old and new friends alike.

Hy Smith, MBA
Managing Member

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From Hy's Desk: Lawyers - Friend or Foe?
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Two major mistakes I see dentists make, on a regular basis, are: 1. Not using an attorney for the legal services and advice they can provide and; 2. Using an attorney that tries, as an advocate of the client, to protect the client at all costs.

I have seen many deals collapse because lawyers got involved after an agreement between the parties was reached and one of the lawyers began to re-write or re-negotiate that agreement. This reopened the transaction which resulted in two parties ending up spending a lot of money to get nothing in return except bad feelings and big bills.

Besides the advice in the following article, I suggest a couple of things:

1. Choose an attorney that has frequently worked with dental contracts and dental transactions. (We can help - we know who is good.)
   
   
2. Advise the attorney that you are making the business decisions and that he/she is to advise you of any legal, tax, or business issues that may impact the transaction, but that you will be making the ultimate decisions.
   
   
3. Request that they DO NOT re-write the contract or try to re-negotiate the terms and conditions. There is an innate “Pride in Authorship” mentality with some attorneys that can be very expensive to you.

Remember, “The most expensive attorney you can engage is a cheap lawyer.”

Hy Smith, MBA
Managing Member

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From Hy's Desk: Driving Through a Downturn
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The sky is not falling, but the market certainly is and the warnings of a recession are being sounded from all quarters. Unfortunately, in the 35 years of working with dentists, I have seen several recessionary periods and their effect on the dental profession. It’s sad, but dentistry is an early victim of economic downturns because in many cases dentistry is paid for with discretionary income and as discretionary income declines so do visits to the dentist.

In automobile racing, one of the rules when traveling at 200 MPH and a crash occurs with smoke and debris flying everywhere is to “drive through it”. More often than not, the driver comes out the other side unscathed.

So what do you do? This is a time to “Get Back to Basics” in your practice and life! The good news is that the experts project that this will be a relatively shallow and short economic slowdown. Stimulus measures are already in place and the ups and downs will eventually even out. For now, staying conservative, working as a team and adhering to fundamentally sound business practices will get you through this less than ideal time in excellent shape.

Just make sure you keep on driving!

Hy Smith, MBA
Managing Member

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From Hy's Desk: Raising Fees
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It’s that time of year again. We’re reviewing our efforts of last year, gathering our tax information for our CPA and hopefully, planning and projecting for a successful 2008. It is all too often that these year-end and first-of-the-year activities consume so much of our time we go year to year without keeping our fees current with our costs of doing business.

For the last few years dentistry has benefited from a greater than normal disparity between per unit charges for lab work and the fees that dentists have been charging. The lab fees have caught up! The rest of the costs in dentistry have also increased and to stay on parity, fees need to be adjusted accordingly.

A careful analysis of your fees can make a significant difference in your collections for the upcoming year. A 5% fee increase in a practice grossing $1,000,000 is enough to fund your retirement for a year! A 5% increase in fees will not be felt by your patients individually, but collectively it will make a significant difference to your practice as a whole.

Whether you raise your fees or not your costs will continue to go up. Now is the time to analyze and make the necessary changes. You will leave a significant amount of money on the table for every month you procrastinate.

Success to you all in 2008!

Hy Smith, MBA
Managing Member

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From Hy's Desk: The Cost of Negotiating
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Over the past 35 years, it’s amazed me at how often a buyer or seller loses focus on what’s really happening in a transition.

Recently, I completed a transaction that totaled over one million dollars. The practice is in a rural community and the deal almost fell apart because the seller would not pay the purchaser to collect the seller’s receivables after closing. If collected as anticipated there would be about $40,000 to forward. The seller was about to walk away from $1,000,000 for $4,000!

It’s worse for buyers, specifically those negotiating with a lender over an interest rate. The buyer spends months shopping to sometimes get a half-point lower rate. In one instance the savings equaled $2,100 over the loan’s seven years. Throughout this process, though, he is losing $50,000 of production a month. With an overhead of 60% the monthly net loss is $20,000!

This may look exaggerated, but it we see much worse. Perhaps it is that dentists work in a 3mm space and sometimes don’t see the big picture. As one client said, “You’re right, I am not seeing the big picture, but a 10% error in a 3mm space can be disastrous.” And he’s right! We want to help keep both buyers and sellers focused on the important issues so they don’t lose sight of the forest for the trees.

Hy Smith, MBA
Managing Member

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From Hy's Desk: Money, Money, Money
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It always amazes me how gullible people are when it comes to money making scams! By now we all have been exposed to the foreign get rich inheritance schemes. While watching a news program the other evening though, there was a report about a young Belgian man posing to be a wealthy heir to the Rothschild family. He circulated with the rich and famous using their money in a Ponzie scheme to stay in luxurious hotels, buy expensive cars and fly on private jets.

Yes, he got caught and did time for his crime, but there were a lot of innocent "wannabees“ that lost a lot of money before he ultimately was put out of business.

Scams come in many forms. Don’t let your practice transition become a victim.

Hy Smith, MBA
Managing Member

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From Hy's Desk
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For many years dentists have asked my opinion as to whether they should buy/build a building or condo for their office. It is a decision that has long been debated in the business community and that can only be answered after evaluating the reasons for considering the options of owning versus leasing.

If a dentist leases a premises, 100% of the lease payments are written off on taxes each year and if there have been leasehold improvements, the cost is amortized (written off) over 39 1/2 years. If buying an existing structure, the interest paid can be deducted, and again, the leasehold improvements are amortized over 39 1/2 years.

Ownership can provide predictability in the facility costs to the practice, where leasing exposes the dentist to escalating lease and maintenance payments. Ownership also provides, in most cases, some investment
advantage as the property appreciates in value.

I have always suggested that each option has its advantages and disadvantages, until now!

It has come to our attention that there is a trend in the leasing marketplace for landlords to try to take advantage of tenants by including language that allows the landlord to participate in the proceeds of the sale of the practice. That’s right - they get a piece of your goodwill!

I encourage you to read the following article about the increasing issues with landlords and leases.

Hy Smith, MBA
Managing Member

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