Office info:
- Upcoming bedroom community
-Office on 2nd floor(above ground) and corner unit in small plaza, with good signage on the road (We can put another sign in window or on the building as well). About 10k cars traffic per day. Clinic has been at this place for 32 years. No advertisement done. Clinic is behind grocery store. Other anchor stores in area are shopping mall, Staples, Toys R Us, Starbucks, McDonalds, Burger King etc.
- Practice gross $674k(2008), $652k(2007) and $634k(2006)
- Hygiene production $220k(2008), $203k(2007) and $193k(2006)
-Net Cash Flow $264k(2008), $253k(2007) and $233k(2006)
- Market value $556k - as appraised by the listing company
- $372k goodwill
- $40k equipment
-Supplies-$15k
-Leasehold improvement $112k
-Furniture - $15k
The price may be reasonable based on the numbers given. You should dump the allocation to LHI. You'd be better off lumping on top of GW or carve a piece out for consulting. Hygienists been very consistent, which may be why growth has been limited. Dentistry has also been consistently low at $450k, when it could be closer to $600k for an $800k practice.
Have you done a demographic analysis of the area?
- Dentist is working 4 days/ week
- Leasing the office, rent would be $21k/ yr
- Office has no pan
- Office has 5 ops and is outdated, including very outdated equipment
- one fulltime hygienist(4days/week), another part-time hygienist(2days/week), one front desk (with dentist for 35 years), two assistant(daughters), and his wife(office manager) works there.
Whole family of retiring dentist is working in clinic. Dentist and his wife (office manager) are willing to stay for transition (3 to 6months) and 2 Daughters (who work as dental assistants) are willing to stay longer. Daughters (DA's) are paid $32/hr which I think is high and I won’t need two dental assistants. But if I fire one dental assistant (daughter) then I think rest of family will also leave and this will poison the transition. Daughters are being paid probably to save money on tax and cutting their salary to normal level or firing them will have a big impact on cash flow as they are being paid $53K/year each, $106K. I don’t like the idea of firing anybody especially in or after transition, but I don’t think daughters will accept less compensation.
This part of the analysis needs CAREFUL attention. As you've already noted family MAY be paid too high and I wonder if wife and FD BOTH are needed. Find out what the going rates are for assistants, etc. and have a heart to heart with the seller to see if he thinks the daughters will concede some of their compensation if it's too high. As you've noted a VERY delicate situation that could absolutely affect value and overall GW transfer.
Patient info:
- 1900 patients seen within past 24 months
- about 8 new patients/ month
- no HMO
There’s likely about 1,000 INDIVIDUAL patients going through the hygienist’s department IF the majority are seen twice per year. You'd need to do more due diligence to verify. Do a zip code analysis to see where the active patients are coming from.
Myself:
5 years of experience, can do endo, oral surgeries etc., can handle what retiring dentist is doing. I can bring in orthodontist for a day each month or get ortho training myself, and also work 5 days/week to improve gross revenue.
Is the seller currently doing endo and oral surgeries? Are there any procedures you do that the seller does not and vice versa?
Are 8 new patients per month good enough?
I don't think so. You need that demographic analysis.
If not for the family employees I think this practice could have a lot of potential at the right price. The family\employees issue could kill any deal on this practice unless it can be resolved with them.
Thanks for the help. I think deal killers are whole family involved, low new patients, and old equipment. I may be able to advertise and bring new patients in. I could also stipulate in the contract that dentist family stays for 6 months.
Is this information regarding the practice you've detailed? It's not clear since you mentioned another clinic, but I’m assuming it is.
1. Talked to the owner dentist today and found that there is 2.5 years lease remaining, with two more 5 year options. BUT the second option has a 6 month demolition clause. Considering that it is an old building with new construction all around the area, there is good chance that building would be demolished. Then we'll have to find another place and start a clinic in 6 months.
Hmmm, that does seem to present another wrench. Certainly, it would be nice to work a deal where if the demolition clause is triggered after 2.5 years the seller would have to rebate say $150k to help fund the move or have the landlord kick in something. Though, I can't imagine why the landlord would do that.
2. Other factor is clinic is on 2nd floor, above ground floor and there is no elevator. How many old patients would I lose because of that?
What do you mean "lose"? If the clinic is already on the 2nd floor, hasn't the owner already "lost" those older patients he would have had? If those older patients are seeing the seller now without the elevator, why would they stop coming now?
3. There is no Pano
What do you think? The asking price is more than $550,000.
$556k to be exact, correct?
Even with the number’s potential, this just seems like too many potholes to maneuver around....
This first appeared on Dentaltown.
Tuesday, February 9, 2010
Tuesday, February 2, 2010
Abandoned Dental Practice Issue
I was approached by a distant relative to buy his practice. He owns two practices one that has been established for a long time and is doing great and the other not so much, and that is the one that I am getting.
So here is the story:
He bought the practice in 2004 with his associate 75/25, the partnership did not work out so they sold it in 2006. The new dentist took over and then he abandoned the practice in 2009. The landlord then approached my relative for 3 months of lease delinquency which he paid including penalties. He then changed the practice name and created a new business entity for the practice, remodeled the practice and wants to get rid of it.
It sounds like your relative is still on a lease and therefore, has fixed the place up in an effort to get off the lease by "selling" something. Not quite sure what it is he actually "owns" to sell as the previous dentist who walked away "owned" the F&E. I suspect the landlord now owns it, unless part of the deal your relative worked out was to acquire the F&E in exchange for stepping back in. I'm also assuming your relative has already "profited" from the 2006 sale, correct?
How many more years left on the lease and what's the monthly payment?
He is selling it to me as leasehold improvements but all the patients will stay, he is not taking any.
How many patients were there before the prior owner walked? How many are there now? You don't have to answer that, in my opinion it really doesn't matter. What you're buying is the opportunity to start from scratch without the 120 day wait to build-out and furnish. Any patients that comeback are simply icing on the cake. How are the demographics for the area? Maybe that's why this practice hasn't been successful, maybe bad location, bad (read no growth) area? This gets to Jason’s point about your due diligence effort being MUCH more intense than other deals.
He also cannot sell the patients because he cannot provide previous tax returns to show for practice profitability.
...and because he really doesn't "own" them, does he?
Here is my question:
What should I be worried about?
I’d be concerned about the demographics of the area. Why hasn't this location been successful? What if the owner that walked shows up again?
Is it possible to transfer ownership of practice with an absentee owner?
If the "owner" isn't around, how can they transfer it to you? You're (or any buyer is) simply picking up the pieces. That's why I'd be looking at this as a scratch start type issue and I'd be approaching it that way.
Can the old owner come back in 5 years or so and say this is my practice and I am screwed at that point?
I doubt it. Besides, I'd be less concerned about 5 yrs. What if the previous owner comes back to town in one year? They don’t have to "re-claim" this location. All they have to do is advertise that they're back in town, as any new dentist could. I'd be thinking about how that might impact my start-up. It gets back to the demographics of the area and the location of this particular practice.
Please help if anyone was in a similar situation?
Our friend Jason Patrick Wood:
The bad news is that to properly protect yourself, you are going to have to spend a lot more than normal on due diligence. The reason: you are going to need to review all of the past documents between your relative and the associate you need to inquire into liens since there is a very, very good chance that these liens will not be satisfied by the purchase price if they are there.
This needs to be treated as a dental practice purchase, regardless of what he is intending on selling to you.
Tim Lott asks:
Jason,
While I agree that the due diligence needs to be approached as though they're buying a practice, are all the other patient issues you mentioned really relevant if all they're doing is agreeing to occupy the space, signing a lease, and buying out the relative of their lease obligation?
Jason Patrick Wood responds:
Protecting yourself from the "old owner" is going to be the hardest and most time consuming part, and without knowing more of that previous relationship it may be easy or extremely difficult to get past. Let us know more if you can.
Tim Lott replies:
Yes. The previous owner is a complete unknown at the moment and can really mess everything up, especially if they re-enter the picture sooner rather than later.
This first appeared on Dentaltown.
So here is the story:
He bought the practice in 2004 with his associate 75/25, the partnership did not work out so they sold it in 2006. The new dentist took over and then he abandoned the practice in 2009. The landlord then approached my relative for 3 months of lease delinquency which he paid including penalties. He then changed the practice name and created a new business entity for the practice, remodeled the practice and wants to get rid of it.
It sounds like your relative is still on a lease and therefore, has fixed the place up in an effort to get off the lease by "selling" something. Not quite sure what it is he actually "owns" to sell as the previous dentist who walked away "owned" the F&E. I suspect the landlord now owns it, unless part of the deal your relative worked out was to acquire the F&E in exchange for stepping back in. I'm also assuming your relative has already "profited" from the 2006 sale, correct?
How many more years left on the lease and what's the monthly payment?
He is selling it to me as leasehold improvements but all the patients will stay, he is not taking any.
How many patients were there before the prior owner walked? How many are there now? You don't have to answer that, in my opinion it really doesn't matter. What you're buying is the opportunity to start from scratch without the 120 day wait to build-out and furnish. Any patients that comeback are simply icing on the cake. How are the demographics for the area? Maybe that's why this practice hasn't been successful, maybe bad location, bad (read no growth) area? This gets to Jason’s point about your due diligence effort being MUCH more intense than other deals.
He also cannot sell the patients because he cannot provide previous tax returns to show for practice profitability.
...and because he really doesn't "own" them, does he?
Here is my question:
What should I be worried about?
I’d be concerned about the demographics of the area. Why hasn't this location been successful? What if the owner that walked shows up again?
Is it possible to transfer ownership of practice with an absentee owner?
If the "owner" isn't around, how can they transfer it to you? You're (or any buyer is) simply picking up the pieces. That's why I'd be looking at this as a scratch start type issue and I'd be approaching it that way.
Can the old owner come back in 5 years or so and say this is my practice and I am screwed at that point?
I doubt it. Besides, I'd be less concerned about 5 yrs. What if the previous owner comes back to town in one year? They don’t have to "re-claim" this location. All they have to do is advertise that they're back in town, as any new dentist could. I'd be thinking about how that might impact my start-up. It gets back to the demographics of the area and the location of this particular practice.
Please help if anyone was in a similar situation?
Our friend Jason Patrick Wood:
The bad news is that to properly protect yourself, you are going to have to spend a lot more than normal on due diligence. The reason: you are going to need to review all of the past documents between your relative and the associate you need to inquire into liens since there is a very, very good chance that these liens will not be satisfied by the purchase price if they are there.
This needs to be treated as a dental practice purchase, regardless of what he is intending on selling to you.
Tim Lott asks:
Jason,
While I agree that the due diligence needs to be approached as though they're buying a practice, are all the other patient issues you mentioned really relevant if all they're doing is agreeing to occupy the space, signing a lease, and buying out the relative of their lease obligation?
Jason Patrick Wood responds:
Protecting yourself from the "old owner" is going to be the hardest and most time consuming part, and without knowing more of that previous relationship it may be easy or extremely difficult to get past. Let us know more if you can.
Tim Lott replies:
Yes. The previous owner is a complete unknown at the moment and can really mess everything up, especially if they re-enter the picture sooner rather than later.
This first appeared on Dentaltown.
Friday, January 29, 2010
Dental Independent Contractor or Employee? What is the Risk?
Rumor has it the IRS doesn't like independent contractor status.
That is completely untrue. What they don't like are employers trying to avoid employment taxes by classifying employees as IC's. IC's are a VERY valid form of association in MANY industries, even dentistry with the right set of circumstances.
But have they ever done anything about it?
Sure they have, and they continue to look for those abuses where employers try to evade employment taxes.
I work part time in multiple offices and enjoy being an independent contractor. Am I in the wrong?
The easy answer is it depends. You can arrange your set of circumstances. I mention above to create a defensible case IF challenged and generally speaking, you won't be challenged. Your general contractors (or employers if they lose) will be challenged as they're the ones NOT paying the employment taxes when maybe they should.
Can you name a case where the IRS did anything about it and what were the consequences?
I can't name names due to confidentiality issues; however, I recall back in the late 80's when I had a stock broker tax client where all the brokers of this small brokerage firm were being treated as IC's. The IRS audited the brokerage for several years for this very issue and the brokers had to submit returns to prove that they were reporting their income correctly and paying the SE tax while the brokerage got SLAMMED for hundreds of thousands of back payroll taxes, penalties, and interest. Ultimately, they went belly up.
We've had similar stories on a much smaller scale where IRS re-classed IC's as EE's and made the client pay back payroll taxes, interest, and penalties. I have yet to see a case where the IC themselves got "harmed".
The bottom line is in just about EVERY audit of a business. One issue the agent MUST take a look at is the EE vs. IC issue to ensure employers aren't trying to evade employment taxes.
This first appeared on Dentaltown.
That is completely untrue. What they don't like are employers trying to avoid employment taxes by classifying employees as IC's. IC's are a VERY valid form of association in MANY industries, even dentistry with the right set of circumstances.
But have they ever done anything about it?
Sure they have, and they continue to look for those abuses where employers try to evade employment taxes.
I work part time in multiple offices and enjoy being an independent contractor. Am I in the wrong?
The easy answer is it depends. You can arrange your set of circumstances. I mention above to create a defensible case IF challenged and generally speaking, you won't be challenged. Your general contractors (or employers if they lose) will be challenged as they're the ones NOT paying the employment taxes when maybe they should.
Can you name a case where the IRS did anything about it and what were the consequences?
I can't name names due to confidentiality issues; however, I recall back in the late 80's when I had a stock broker tax client where all the brokers of this small brokerage firm were being treated as IC's. The IRS audited the brokerage for several years for this very issue and the brokers had to submit returns to prove that they were reporting their income correctly and paying the SE tax while the brokerage got SLAMMED for hundreds of thousands of back payroll taxes, penalties, and interest. Ultimately, they went belly up.
We've had similar stories on a much smaller scale where IRS re-classed IC's as EE's and made the client pay back payroll taxes, interest, and penalties. I have yet to see a case where the IC themselves got "harmed".
The bottom line is in just about EVERY audit of a business. One issue the agent MUST take a look at is the EE vs. IC issue to ensure employers aren't trying to evade employment taxes.
This first appeared on Dentaltown.
Monday, January 25, 2010
Dental Practice Valuation Questions
When calculating the value of the practice is the value of the equipment on the balance sheet used or the tally of the itemization?
I'm in the middle of a practice acquisition after an agreed upon price.... getting to the final hours and finding out now the hand pieces , supplies, front office furniture are not staying.........seller says if you look on the list it's not on there......
My argument though is that it's part of the appraisal. It's the # on the balance sheet that is going to be used for the depreciation schedule… it's the number the appraisal uses in determining the value of the equipment........Not the itemization of the equip list; Seller feels like it's personal effects.....and why he never put it on the equip list....
So we go round and round.... he equates it to when you look at a house you don't expect to buy the pots/pans, dishes that you see when you buy a house.........
I equate it to... I'm buying a business and the ability to do business......
In hopes for further discussion as I feel it’s important since I will want to become a potential seller at some time:
What if the practice was appraised for X amount of dollars using a defined list of equipment used to derive an appraised value which would not be part of the sell which may include fun toys like Cerec, electric hand pieces, and specialized bone grafting tools. How about first class office furniture, let’s say: Snake skinned lounge furniture or a 2K dollar waiting room massage chair from Brookstone, something to that nature. Of course this would be disclosed up front to any buyers what’s not for sale and what isn't before any offer was made by the potential buyer. Do you think this is an appropriate way to approach this?
I'm curious as I plan to sell my at some point and uncertain to these measures as I personally stockpiled tons of equipment before I created my own practice and unsure if I would want it included in the appraisal value, especially new equipment that I do not intend to sell that hasn't been part of running a business yet.
Obviously I want be fair and honest about this in the future...
Your input is greatly appreciated
(Jason Patrick Wood responds):
Very simple. You don't get extra value on a dental practice because you have more bells and whistles than the guy down the block. Banks lend on your production figures, not on whether you use a CEREC machine in your office. Most "big ticket" items are actually harmful to a transition going forward specifically because the Seller believes they should get money out of the practice for these items. However, you buy big ticket items (or you should) to either lower your overhead, increase production, make your life easier or a combination of the three. As a result you are typically already having the value of the practice grant a "value" to that piece of equipment if you have utilized the equipment effectively. It is just a hidden value (i.e. CEREC machine reduced overhead by 5%, as a result my practice is more profitable, as a result I can command a higher value to my practice based upon comparable dental practices).
(Tim Lott responds):
If you have the appraiser’s name, ask the appraiser if their appraisal specifically excluded any assets or supplies. They're the ones that appraised it.
As Jason said, generally a practice appraisal assumes everything stays. Many times this issue gets addressed during the LOI stage. As one who represents buyers I want to make sure as soon as possible that the price includes ALL assets, supplies, intangibles, websites, web addresses, phone numbers, and even the use of sellers name as buyer sees fit for a period of time, according to state laws.
Most sellers will also state very soon in the process which "personal" items they wish to exclude. As one that values practices one of the questions we ask is if there are any assets excluded from the sale and we'll state that in our report or practice profile if we're selling the practice.
This seller is trying to pull a last minute fast one and unless there was ANY indication that these items were to be excluded when the price was agreed to I'd be looking to reduce the price already agreed to.
Good Luck!
Tim,
Thanks for your input and that makes complete sense. Its about clarity for the buyer so I would definitely aim to disclose what would be part of the sale and not for sale during and LOI. Unfortunately I think LOIs are non-binding in the State of Texas, from what I hear.
(Tim Lott responds):
I understand about non-binding. Still, it doesn't have to be binding to have an understanding. Even in a non-binding LOI, if the seller says the price is $xxx, xxx and it includes all assets, supplies, etc. In the event the seller tries to pull a stunt like this in the legal agreement phase, guess what: the price that was stated in the LOI no longer applies since the assets have changed. It can open up everything that was stated in the LOI for re-negotiation & that's never good.
This first appeared on Dentaltown.
I'm in the middle of a practice acquisition after an agreed upon price.... getting to the final hours and finding out now the hand pieces , supplies, front office furniture are not staying.........seller says if you look on the list it's not on there......
My argument though is that it's part of the appraisal. It's the # on the balance sheet that is going to be used for the depreciation schedule… it's the number the appraisal uses in determining the value of the equipment........Not the itemization of the equip list; Seller feels like it's personal effects.....and why he never put it on the equip list....
So we go round and round.... he equates it to when you look at a house you don't expect to buy the pots/pans, dishes that you see when you buy a house.........
I equate it to... I'm buying a business and the ability to do business......
In hopes for further discussion as I feel it’s important since I will want to become a potential seller at some time:
What if the practice was appraised for X amount of dollars using a defined list of equipment used to derive an appraised value which would not be part of the sell which may include fun toys like Cerec, electric hand pieces, and specialized bone grafting tools. How about first class office furniture, let’s say: Snake skinned lounge furniture or a 2K dollar waiting room massage chair from Brookstone, something to that nature. Of course this would be disclosed up front to any buyers what’s not for sale and what isn't before any offer was made by the potential buyer. Do you think this is an appropriate way to approach this?
I'm curious as I plan to sell my at some point and uncertain to these measures as I personally stockpiled tons of equipment before I created my own practice and unsure if I would want it included in the appraisal value, especially new equipment that I do not intend to sell that hasn't been part of running a business yet.
Obviously I want be fair and honest about this in the future...
Your input is greatly appreciated
(Jason Patrick Wood responds):
Very simple. You don't get extra value on a dental practice because you have more bells and whistles than the guy down the block. Banks lend on your production figures, not on whether you use a CEREC machine in your office. Most "big ticket" items are actually harmful to a transition going forward specifically because the Seller believes they should get money out of the practice for these items. However, you buy big ticket items (or you should) to either lower your overhead, increase production, make your life easier or a combination of the three. As a result you are typically already having the value of the practice grant a "value" to that piece of equipment if you have utilized the equipment effectively. It is just a hidden value (i.e. CEREC machine reduced overhead by 5%, as a result my practice is more profitable, as a result I can command a higher value to my practice based upon comparable dental practices).
(Tim Lott responds):
If you have the appraiser’s name, ask the appraiser if their appraisal specifically excluded any assets or supplies. They're the ones that appraised it.
As Jason said, generally a practice appraisal assumes everything stays. Many times this issue gets addressed during the LOI stage. As one who represents buyers I want to make sure as soon as possible that the price includes ALL assets, supplies, intangibles, websites, web addresses, phone numbers, and even the use of sellers name as buyer sees fit for a period of time, according to state laws.
Most sellers will also state very soon in the process which "personal" items they wish to exclude. As one that values practices one of the questions we ask is if there are any assets excluded from the sale and we'll state that in our report or practice profile if we're selling the practice.
This seller is trying to pull a last minute fast one and unless there was ANY indication that these items were to be excluded when the price was agreed to I'd be looking to reduce the price already agreed to.
Good Luck!
Tim,
Thanks for your input and that makes complete sense. Its about clarity for the buyer so I would definitely aim to disclose what would be part of the sale and not for sale during and LOI. Unfortunately I think LOIs are non-binding in the State of Texas, from what I hear.
(Tim Lott responds):
I understand about non-binding. Still, it doesn't have to be binding to have an understanding. Even in a non-binding LOI, if the seller says the price is $xxx, xxx and it includes all assets, supplies, etc. In the event the seller tries to pull a stunt like this in the legal agreement phase, guess what: the price that was stated in the LOI no longer applies since the assets have changed. It can open up everything that was stated in the LOI for re-negotiation & that's never good.
This first appeared on Dentaltown.
Friday, January 8, 2010
Promoting your Dental Practice when the Economy Slows
Here is a timely article from our friends at New Patients Incorporated.
Economic Reality
We do understand that certain areas of the country have been impacted more than others. Michigan, Ohio, the Buffalo/Rochester New York corridor, Las Vegas, parts of southern California, and other parts of the country have been hit harder than most. If you practice in one of these areas, just take what we are about to say and add even more importance to it.
The biggest overriding economic reality that is directly affecting your dental practices is the 2.3 trillion dollars of home equity that basically vanished. The entire US economy is balanced around 60 trillion dollars (to put it into perspective). So, 2.3 trillion dollars is quite a “chunk” to pull out of the economy in a very short amount of time. Do not underestimate the importance of how quickly that money vanished.
Who (which dental practice type) will get hit first and hardest?
The cosmetic/full mouth rehab focused practice, in even a moderately competitive market area, will be the first to get hit and the hardest hit. There is a necessity vs. elective mindset in the market. The farther away you go from family dentistry toward cosmetic/full mouth dentistry – the more “elective” the market perceives the dentistry. The real killer though is the 2.3 trillion in unavailable funding. Between 2001 and the latter part of 2005, those extreme makeovers you were doing were largely funded by home equity lines or loans. Well, that home equity has all but vanished for the vast majority of the population. If you combine an elective perception and lack of available funding, you get a slowdown. In some markets, like the markets mentioned above, a drastic slowdown.
What to do?
The first thing we recommend is to pay more attention to your existing patient base. There is likely a tremendous opportunity for practice growth within your own patient base. Between 2001 and 2005, you were all pretty “fat and happy”. Many times, promoting the practice within the existing patient base becomes complacent during “fat and happy” times. Now is definitely the time to pay more attention to your re-care system, communicate with your existing patients, and promote services to your existing patients.
The next thing we do with clients is allocate marketing dollars to what we KNOW works best in their particular market area. You should do the same. If you have been successful promoting your own practice in your market area before, over-allocate your marketing budget into the medium that has historically worked and stick with it until the economy picks up.
However you promote your practice (yellow pages, direct mail, print ads, radio, tv), start to change the design and message to be more “all inclusive”, or more family oriented. We will give you an example. We see this mistake all the time. Let’s say you are currently advertising your practice on the radio. And, it’s been successful in the past. The focus/message of your ad is sedation dentistry. Sedation dentistry is one very small aspect of what you do every day. Do you give every patient a pill before you recline them in your dental chairs? No, of course you don’t. So, your marketing dollars are paying for radio ads that only communicate one small aspect of what you offer the community. What if you had the same ad budget with the radio station but you had 4 different scripts that were rotated throughout the airtime? You certainly might have one script for sedation, but how about one for emergencies, one for family dentistry, and one for metal-free dentistry. The public at large will begin to know you as the “all inclusive” dentist, rather than the dentist that “just does” sedation. Your practice will be attractive to MORE PEOPLE for the same marketing expense! Take special note of that last sentence. We can’t tell you how many times a new client has told us that their previous marketing made people believe that they “only” provide sedation dentistry (or “just” cosmetic dentistry). Be honest with yourselves, have any of your patients ever asked you if you do “regular” dentistry? If so, there should be alarms going off in your head right now.
Be Patient
Of everything we just wrote, this one is likely going to be the toughest for you to apply. Effectively and professionally promoting a dental practice is NOT a short term endeavor. Proper promotion IS “a careful application of budget resources over the life cycle of a dental practice”. When the overall economy slows, that means we just came out of a period of time when things were easier. Patients were easier to attract to dental practices between 2001 and the latter part of 2005. If you weren’t impatient then, now is no time to start being impatient! Impatience will cause you to make terrible decisions on where to apply your marketing budget. You will bounce around with a “try this and try that” approach that is never the right thing to do.
We are both very excited to provide this content for the TPD readers. Our goal is to share what we’ve learned over all these years so you can perhaps take a 1,000 foot elevation view of how you promote your dental practice, and make it more effective and more rewarding.
by Howie Horrocks and Mark Dilatush
This article first appeaqred on New Patients Incorporated.
Economic Reality
We do understand that certain areas of the country have been impacted more than others. Michigan, Ohio, the Buffalo/Rochester New York corridor, Las Vegas, parts of southern California, and other parts of the country have been hit harder than most. If you practice in one of these areas, just take what we are about to say and add even more importance to it.
The biggest overriding economic reality that is directly affecting your dental practices is the 2.3 trillion dollars of home equity that basically vanished. The entire US economy is balanced around 60 trillion dollars (to put it into perspective). So, 2.3 trillion dollars is quite a “chunk” to pull out of the economy in a very short amount of time. Do not underestimate the importance of how quickly that money vanished.
Who (which dental practice type) will get hit first and hardest?
The cosmetic/full mouth rehab focused practice, in even a moderately competitive market area, will be the first to get hit and the hardest hit. There is a necessity vs. elective mindset in the market. The farther away you go from family dentistry toward cosmetic/full mouth dentistry – the more “elective” the market perceives the dentistry. The real killer though is the 2.3 trillion in unavailable funding. Between 2001 and the latter part of 2005, those extreme makeovers you were doing were largely funded by home equity lines or loans. Well, that home equity has all but vanished for the vast majority of the population. If you combine an elective perception and lack of available funding, you get a slowdown. In some markets, like the markets mentioned above, a drastic slowdown.
What to do?
The first thing we recommend is to pay more attention to your existing patient base. There is likely a tremendous opportunity for practice growth within your own patient base. Between 2001 and 2005, you were all pretty “fat and happy”. Many times, promoting the practice within the existing patient base becomes complacent during “fat and happy” times. Now is definitely the time to pay more attention to your re-care system, communicate with your existing patients, and promote services to your existing patients.
The next thing we do with clients is allocate marketing dollars to what we KNOW works best in their particular market area. You should do the same. If you have been successful promoting your own practice in your market area before, over-allocate your marketing budget into the medium that has historically worked and stick with it until the economy picks up.
However you promote your practice (yellow pages, direct mail, print ads, radio, tv), start to change the design and message to be more “all inclusive”, or more family oriented. We will give you an example. We see this mistake all the time. Let’s say you are currently advertising your practice on the radio. And, it’s been successful in the past. The focus/message of your ad is sedation dentistry. Sedation dentistry is one very small aspect of what you do every day. Do you give every patient a pill before you recline them in your dental chairs? No, of course you don’t. So, your marketing dollars are paying for radio ads that only communicate one small aspect of what you offer the community. What if you had the same ad budget with the radio station but you had 4 different scripts that were rotated throughout the airtime? You certainly might have one script for sedation, but how about one for emergencies, one for family dentistry, and one for metal-free dentistry. The public at large will begin to know you as the “all inclusive” dentist, rather than the dentist that “just does” sedation. Your practice will be attractive to MORE PEOPLE for the same marketing expense! Take special note of that last sentence. We can’t tell you how many times a new client has told us that their previous marketing made people believe that they “only” provide sedation dentistry (or “just” cosmetic dentistry). Be honest with yourselves, have any of your patients ever asked you if you do “regular” dentistry? If so, there should be alarms going off in your head right now.
Be Patient
Of everything we just wrote, this one is likely going to be the toughest for you to apply. Effectively and professionally promoting a dental practice is NOT a short term endeavor. Proper promotion IS “a careful application of budget resources over the life cycle of a dental practice”. When the overall economy slows, that means we just came out of a period of time when things were easier. Patients were easier to attract to dental practices between 2001 and the latter part of 2005. If you weren’t impatient then, now is no time to start being impatient! Impatience will cause you to make terrible decisions on where to apply your marketing budget. You will bounce around with a “try this and try that” approach that is never the right thing to do.
We are both very excited to provide this content for the TPD readers. Our goal is to share what we’ve learned over all these years so you can perhaps take a 1,000 foot elevation view of how you promote your dental practice, and make it more effective and more rewarding.
by Howie Horrocks and Mark Dilatush
This article first appeaqred on New Patients Incorporated.
Monday, January 4, 2010
Dental Marketing Tips
Below is an article from our friend Debra Seidel-Bittke, founder of Dental Practice Solutions.
I began thinking that in this new world we live in, we're all just a Google search away from one another. We live in a world now where we're all intrinsically connected. Suddenly, everything you say becomes part of your personal legacy and your personal brand. You are now guilty -- until proven innocent -- in the court of public opinion. Your brand isn't what you say it is; it's what Google says it is. We're all connected.
I like the concept of branding; it’s another layer of one’s reputation. Branding exercises us into thinking broadly about what we represent. As a dental professional we should be accessible, friendly and practical at the same time. Keeping it simple is important as well. How should the next generation approach building their brand and career, balancing personal interests and individuality with working well in teams and groups? We either brand ourselves or let others develop that brand for us. A brand doesn’t need to be dominant or exclusive but should have humility and be giving.
When speaking to many of my colleagues lately they call themselves “Servant Leaders.” I like those two words: Servant and Leader. Put them together and you have a very positive image of someone who has an IQ over 100 and approachable as well.
Developing a personal brand includes understanding how people individually communicate with you and understanding how you can take that and share it with the world. It forces a much better relationship for people to have between themselves and their community, whether personal or business driven.
Once you begin a written or verbal conversation about yourself and your dental practice, such as a service or the great treatment you provide, you need to come up with a marketing plan as if remaking your image or changing the tone of conversation about the new product that you are launching.
I just looked on a clients’ website today and he is promoting numerous oral hygiene products and photographs of flossing and toothbrushing techniques. He also had a lot of great information on the website for his patients to read about cosmetic or esthetic dentistry, he offers his patients. After looking at his website I walked away with a great feeling, knowing he was an outstanding dentist and most likely on the leading edge in the small community where he practices in Northern California.
Here are some of the tools you might use to flood the web with new information, keywords and search results for the “new you.”
1. Press releases. Flooding your market with press releases is best accomplished by using all the free and paid press release services available online. This not only gets people who read releases frequently on the networks to see the new you but also earns you publicity via potential interviews, guest blog posts and a myriad of other side benefits from creating a new and exciting story about yourself or your company.
2. Guest blog posting. Offer to guest post anywhere and everywhere you can get exposure. Bloggers love great, original and exclusive content targeted to their demographics. It is not hard at all to find guest posting gigs in any market to help change minds.
3. Podcast interviews. Use places like BlogTalkRadio.com to find podcasters who are directly in front of your target market and offer you as a guest on their shows. Invite your office team members, office team, or office administrator, etc., to send letters to each and every podcaster on such a network that would be beneficial to you and schedule as many interviews as you can. Ask them to link back to your “Fan Page” so that people can learn about you and you can take control of what is being said about you on the web. Be sure to prepare and execute this carefully, and by reaching out to your network, you are most likely to succeed.
4. Facebook and Twitter. Utilize at least these two so your patients can learn what is happening at your dental office. Facebook and Twitter are just two social networks receiving a lot of attention and much conversation these days. I suggest that you have a FAN PAGE and not a personal page for the dental practice to invite patients to participate in. The FAN PAGE tends to be only about the dental practice and can be kept business only. You are able to upload photographs of your office and possibly special photographs regarding something new in your office you want everyone to know about on the FAN PAGE. You can have a link (Looks like a filing tab) to share information, etc. Be sure to add the “Join our FAN PAGE” or “SHARE TWEETS WITH US”, in everything you send your patients and especially place the wiki on your webpage so patients are just a “click” away.
5. NewDocs.com. While we are on the topic of social networking I have found NewDocs.com to be an excellent area to share my knowledge and learn from other dental professionals. Regarding the topic of knowledge sharing, I want to be an advocate of this new social network for dental professionals. Pass along this information to all your colleagues. This is a great place to network with other dental professionals. If you are part of a study club, invite them to be a part of this growing community. Your study club can have their own "Group" within this social network.
Social media is not to be thought of as one more chore but I want to suggest that you invite the entire team to become a part of social media for the dental practice. Team members may feel empowered and definitely a part of a fun and innovative group when they are invited to participate in posting information about the dental practice daily or weekly on Facebook, Twitter, or a blog.
Debra Seidel-Bittke, RDH, BS
Founder: Dental Practice Solutions
http://www.dentalpracticesolutions.com/
Office: 503-970-1122
This first appeared on New Docs.
“Six Degrees of Separation”
I began thinking that in this new world we live in, we're all just a Google search away from one another. We live in a world now where we're all intrinsically connected. Suddenly, everything you say becomes part of your personal legacy and your personal brand. You are now guilty -- until proven innocent -- in the court of public opinion. Your brand isn't what you say it is; it's what Google says it is. We're all connected.
I like the concept of branding; it’s another layer of one’s reputation. Branding exercises us into thinking broadly about what we represent. As a dental professional we should be accessible, friendly and practical at the same time. Keeping it simple is important as well. How should the next generation approach building their brand and career, balancing personal interests and individuality with working well in teams and groups? We either brand ourselves or let others develop that brand for us. A brand doesn’t need to be dominant or exclusive but should have humility and be giving.
When speaking to many of my colleagues lately they call themselves “Servant Leaders.” I like those two words: Servant and Leader. Put them together and you have a very positive image of someone who has an IQ over 100 and approachable as well.
Developing a personal brand includes understanding how people individually communicate with you and understanding how you can take that and share it with the world. It forces a much better relationship for people to have between themselves and their community, whether personal or business driven.
Once you begin a written or verbal conversation about yourself and your dental practice, such as a service or the great treatment you provide, you need to come up with a marketing plan as if remaking your image or changing the tone of conversation about the new product that you are launching.
I just looked on a clients’ website today and he is promoting numerous oral hygiene products and photographs of flossing and toothbrushing techniques. He also had a lot of great information on the website for his patients to read about cosmetic or esthetic dentistry, he offers his patients. After looking at his website I walked away with a great feeling, knowing he was an outstanding dentist and most likely on the leading edge in the small community where he practices in Northern California.
Here are some of the tools you might use to flood the web with new information, keywords and search results for the “new you.”
1. Press releases. Flooding your market with press releases is best accomplished by using all the free and paid press release services available online. This not only gets people who read releases frequently on the networks to see the new you but also earns you publicity via potential interviews, guest blog posts and a myriad of other side benefits from creating a new and exciting story about yourself or your company.
2. Guest blog posting. Offer to guest post anywhere and everywhere you can get exposure. Bloggers love great, original and exclusive content targeted to their demographics. It is not hard at all to find guest posting gigs in any market to help change minds.
3. Podcast interviews. Use places like BlogTalkRadio.com to find podcasters who are directly in front of your target market and offer you as a guest on their shows. Invite your office team members, office team, or office administrator, etc., to send letters to each and every podcaster on such a network that would be beneficial to you and schedule as many interviews as you can. Ask them to link back to your “Fan Page” so that people can learn about you and you can take control of what is being said about you on the web. Be sure to prepare and execute this carefully, and by reaching out to your network, you are most likely to succeed.
4. Facebook and Twitter. Utilize at least these two so your patients can learn what is happening at your dental office. Facebook and Twitter are just two social networks receiving a lot of attention and much conversation these days. I suggest that you have a FAN PAGE and not a personal page for the dental practice to invite patients to participate in. The FAN PAGE tends to be only about the dental practice and can be kept business only. You are able to upload photographs of your office and possibly special photographs regarding something new in your office you want everyone to know about on the FAN PAGE. You can have a link (Looks like a filing tab) to share information, etc. Be sure to add the “Join our FAN PAGE” or “SHARE TWEETS WITH US”, in everything you send your patients and especially place the wiki on your webpage so patients are just a “click” away.
5. NewDocs.com. While we are on the topic of social networking I have found NewDocs.com to be an excellent area to share my knowledge and learn from other dental professionals. Regarding the topic of knowledge sharing, I want to be an advocate of this new social network for dental professionals. Pass along this information to all your colleagues. This is a great place to network with other dental professionals. If you are part of a study club, invite them to be a part of this growing community. Your study club can have their own "Group" within this social network.
Social media is not to be thought of as one more chore but I want to suggest that you invite the entire team to become a part of social media for the dental practice. Team members may feel empowered and definitely a part of a fun and innovative group when they are invited to participate in posting information about the dental practice daily or weekly on Facebook, Twitter, or a blog.
Debra Seidel-Bittke, RDH, BS
Founder: Dental Practice Solutions
http://www.dentalpracticesolutions.com/
Office: 503-970-1122
This first appeared on New Docs.
Madow versus Horrocks: Which new patient marketing works better - 'smart bomb' or 'carpet bomb'?
Below is an interesting commentary on two well respected dental marketing firms, New Patients Incorporated and the Madow Group.
I am embarking into the unknown seas of dental marketing. I am going to try a new move-in mailing with Promail from the Madow people. I am going to try it for 6 months. If the response is less than 1% I will go with Howie's people. I have bought and read his Unlimited New Patients books, which are great. Anyone try Promail and if so, any ideas for a mailing?
Augustdds@dentaltown.com
Hi August,
Let me see if I can be of some help here. First, we must agree that these are two conceptually different programs. True, both involve advertising, but that is where the similarity ends. The Madow approach is to send a mailing to EVERYONE who is "new to the area". I liken it to a carpet-bombing philosophy. You know, you drop enough bombs you're going to hit something. Now, don't think I'm putting it down. Actually, I am a Madow subscriber and use this method to attract new patients. I just want to differentiate it from a much more targeted approach that I think Howie Horrocks uses. From what I understand, Howie uses a more demographic approach, limiting the mailings to only those that meet certain criteria such as income level and such; more of a laser guided cruise missile type strike. You might want to spend more money per mailing here, as you are limiting your advertising to those you specifically know can afford your services and who hopefully want to have them done.
So why do I go with the Madow? Well, I have gone into this in more detail on another post but to simplify: I get about a 2-3 (or 4%) success rate with the mailings which cost approx $1 per address. For 200 mailings a month I get 4-6 or more families...at least a 10:1 ROI easy. So why not do it, right!
As I go on for more advanced cosmetic training I intend to contact Howie to try and attract those so inclined. Right now I'm busier than I've ever been and lovin' it. But, you can't ever take it for granted, always have to be looking ahead... not in the rear view. Madow has a bunch of info as far as new patient letters and such. I don't do any coupons or anything like that. Just a simple one page letter and business card. They also tell you to repeat mailings to the same individuals for 2 or three months. I've never done this. Just seems like too much work. It may be effective however, don't know.
If you would like a copy of my "Welcome to the Neighborhood" letter let me know I`ll fax it to you. Its nothing special but you're welcome to it if you like!
Flyer@dentaltown.com
Mike,
Yes, you're right. We try to smart bomb rather than carpet bomb. But don't get me wrong, I like the Madow's approach and in fact heartily recommend their Promail product in both my books. (And it has nothing to do with the fact that Rich and Dave are good friends of mine!) It all depends on your needs. If you are getting 10:1 ROI then break out the champagne! As my Dad used to say, "Where's the hard part?"
There are two basic approaches in new patient marketing. There's no one right way, just what works for you. One is to drag as many bodies as possible through your front door, develop a sixth sense about who are the "good" patients and who are the flakes, and spend your days sifting the chaff from the wheat. Perfectly valid approach.
The other method is to be more vigilant about pre-selecting your audience. Find out who can afford your service, where they live, what they would respond to, what they never would respond to, then craft a marketing message that you feel would get them to pick up the phone. Then go after them. You will have less quantity but more quality. With the other approach you have quantity but you have seek out the quality. I've had plenty of clients do both methods. You can do well either way but it usually boils down to the temperament of the doctor and how much he/she can "take."
Most of our clients (although not all) are NOT interested in attracting EVERY patient in town. They just want the right ones. ("Right" being defined however they define it - OK , let's be real - the ones that can afford you!)
To do this you need a selected approach. It's not rocket science. Hell it's not RCT either. Just send your message to people who first of all can afford you and then are likely to respond; don't waste your money sending it to people that could never afford you (mobile home parks, low rent apartments) or are likely to never respond to it. This comes down to using a good list broker (selecting the right mailing list is THE most important part of a direct mail campaign – even more important than having a good letter.) Then having a well crafted and written piece that is not boring but engages the reader (sorry, you have to be, or hire, a good copywriter for this part). And finally, repeating your message enough that people notice.
Good luck!
Howie Horrocks
This article is courtesy of New Patients Incorporated.
I am embarking into the unknown seas of dental marketing. I am going to try a new move-in mailing with Promail from the Madow people. I am going to try it for 6 months. If the response is less than 1% I will go with Howie's people. I have bought and read his Unlimited New Patients books, which are great. Anyone try Promail and if so, any ideas for a mailing?
Augustdds@dentaltown.com
Hi August,
Let me see if I can be of some help here. First, we must agree that these are two conceptually different programs. True, both involve advertising, but that is where the similarity ends. The Madow approach is to send a mailing to EVERYONE who is "new to the area". I liken it to a carpet-bombing philosophy. You know, you drop enough bombs you're going to hit something. Now, don't think I'm putting it down. Actually, I am a Madow subscriber and use this method to attract new patients. I just want to differentiate it from a much more targeted approach that I think Howie Horrocks uses. From what I understand, Howie uses a more demographic approach, limiting the mailings to only those that meet certain criteria such as income level and such; more of a laser guided cruise missile type strike. You might want to spend more money per mailing here, as you are limiting your advertising to those you specifically know can afford your services and who hopefully want to have them done.
So why do I go with the Madow? Well, I have gone into this in more detail on another post but to simplify: I get about a 2-3 (or 4%) success rate with the mailings which cost approx $1 per address. For 200 mailings a month I get 4-6 or more families...at least a 10:1 ROI easy. So why not do it, right!
As I go on for more advanced cosmetic training I intend to contact Howie to try and attract those so inclined. Right now I'm busier than I've ever been and lovin' it. But, you can't ever take it for granted, always have to be looking ahead... not in the rear view. Madow has a bunch of info as far as new patient letters and such. I don't do any coupons or anything like that. Just a simple one page letter and business card. They also tell you to repeat mailings to the same individuals for 2 or three months. I've never done this. Just seems like too much work. It may be effective however, don't know.
If you would like a copy of my "Welcome to the Neighborhood" letter let me know I`ll fax it to you. Its nothing special but you're welcome to it if you like!
Flyer@dentaltown.com
Mike,
Yes, you're right. We try to smart bomb rather than carpet bomb. But don't get me wrong, I like the Madow's approach and in fact heartily recommend their Promail product in both my books. (And it has nothing to do with the fact that Rich and Dave are good friends of mine!) It all depends on your needs. If you are getting 10:1 ROI then break out the champagne! As my Dad used to say, "Where's the hard part?"
There are two basic approaches in new patient marketing. There's no one right way, just what works for you. One is to drag as many bodies as possible through your front door, develop a sixth sense about who are the "good" patients and who are the flakes, and spend your days sifting the chaff from the wheat. Perfectly valid approach.
The other method is to be more vigilant about pre-selecting your audience. Find out who can afford your service, where they live, what they would respond to, what they never would respond to, then craft a marketing message that you feel would get them to pick up the phone. Then go after them. You will have less quantity but more quality. With the other approach you have quantity but you have seek out the quality. I've had plenty of clients do both methods. You can do well either way but it usually boils down to the temperament of the doctor and how much he/she can "take."
Most of our clients (although not all) are NOT interested in attracting EVERY patient in town. They just want the right ones. ("Right" being defined however they define it - OK , let's be real - the ones that can afford you!)
To do this you need a selected approach. It's not rocket science. Hell it's not RCT either. Just send your message to people who first of all can afford you and then are likely to respond; don't waste your money sending it to people that could never afford you (mobile home parks, low rent apartments) or are likely to never respond to it. This comes down to using a good list broker (selecting the right mailing list is THE most important part of a direct mail campaign – even more important than having a good letter.) Then having a well crafted and written piece that is not boring but engages the reader (sorry, you have to be, or hire, a good copywriter for this part). And finally, repeating your message enough that people notice.
Good luck!
Howie Horrocks
This article is courtesy of New Patients Incorporated.
Tuesday, December 29, 2009
Dental Practice Value for a Deceased Dentist's Family
I have a close friend that passed away last week unexpectedly. He had a heart attack at age 54 with no prior symptoms. It really was a bummer. His wife has a prospect to buy the practice. He’s a good guy and it could work out perfectly. The big question is the value of the practice.
I've heard one formula for determining "good will" is to take the annual gross average for the past three years and multiply times 40% for the value of the "good will" of the practice. Equipment, etc. is not included with this value.
Please let me know your thoughts and comments. We need to get this deal "up and running" for the sake of this family ASAP.
There are many formulas and rules of thumb. However, instead of relying on the rule of thumb methods and potentially leaving a lot of value on the table, the spouse should hire someone who can assess the reasonable "range of value" without needing or having to pay for a full blown valuation report. There are many transition professionals that can provide this service, even brokers. If you decide to try a broker, simply let them know that at this time all you need is to have them assess the range of value, assuming you're pretty sure you have a buyer. If for some reason this buyer falls through, at least you've already have a relationship with a broker who may be able to find you another buyer quickly. Good luck.
Tim,
Could you do the valuation from the P&L and balance sheet, without seeing the practice?
Yes, I can determine a "range of value" from good financial information. It’s what I do for our buyer representation clients. I’ve never stepped foot in the office of most of my buyer representative clients, what do I know about the working condition of the equipment? I’m not an equipment vendor or specialist.
This first appeared on Dentaltown.
I've heard one formula for determining "good will" is to take the annual gross average for the past three years and multiply times 40% for the value of the "good will" of the practice. Equipment, etc. is not included with this value.
Please let me know your thoughts and comments. We need to get this deal "up and running" for the sake of this family ASAP.
There are many formulas and rules of thumb. However, instead of relying on the rule of thumb methods and potentially leaving a lot of value on the table, the spouse should hire someone who can assess the reasonable "range of value" without needing or having to pay for a full blown valuation report. There are many transition professionals that can provide this service, even brokers. If you decide to try a broker, simply let them know that at this time all you need is to have them assess the range of value, assuming you're pretty sure you have a buyer. If for some reason this buyer falls through, at least you've already have a relationship with a broker who may be able to find you another buyer quickly. Good luck.
Tim,
Could you do the valuation from the P&L and balance sheet, without seeing the practice?
Yes, I can determine a "range of value" from good financial information. It’s what I do for our buyer representation clients. I’ve never stepped foot in the office of most of my buyer representative clients, what do I know about the working condition of the equipment? I’m not an equipment vendor or specialist.
This first appeared on Dentaltown.
Monday, December 21, 2009
Dental Practice Purchase Price Allocation: Is Goodwill the Devil?
Sometimes we come across uninformed buyers that want the majority of their purchase price allocated to equipment because they can get an immediate tax write-off under Internal Revenue Code Section 179 of up to $125k and $250k in very recent years. However, part of our job is to understand and educate ourselves about the state/locality that the transaction will occur in and educate our buyer/client on ALL the tax considerations of price allocation, not just income tax.
Many, many years ago goodwill was the devil in the eyes of every buyer. Why?
There was a time when goodwill was NOT deductible under the tax code, therefore from a buyer’s perspective, any allocation to goodwill was NOT providing them with any income tax savings. However, goodwill was always treated as a capital asset and subject to capital gains to sellers, therefore, sellers wanted most (and in some cases ALL) of the price allocated to goodwill. I remember when this one issue, the allocation between goodwill and tangible assets, was the most stressful part of most transitions. Not anymore though.
Now, buyers can write off goodwill over 15 years, so in my mind, that was a decent compromise from an income tax perspective between buyers/sellers when negotiating the allocation.
Enter the Sec. 179 write-off issue where the IRS increased the write-off election from $25,000 to over $100,000 and in recent years $250,000. All of a sudden, buyers were reverting back to the "old ways" of trying to minimize goodwill while trying to maximize equipment/furniture/computers and other areas that would generate a faster tax deduction, let alone ANY deduction. STILL, sellers wanted their capital gains so this issue of price allocation was once again a hurdle, though a low one that could usually be jumped fairly quickly.
Then the long term capital gains rates were lowered to 15%, down from 20% and at one time 28% so sellers once again began pushing firmly for more goodwill allocation while the buyers wanted more equipment due to the ability to write off $100,000 under Sec. 179 immediately. When the IRS recently increased the Sec. 179 write-off to $250,000, those that were purchasing large practices where the value of equipment could easily reach that level, began pushing for the higher equipment allocation and price allocation once again became a struggle.
These days, states & local governments are finding other ways to tax businesses aside from income tax, which usually means higher sales tax, personal property tax, transactional tax, etc. Therefore, buyers need to be educated on how the allocation of the purchase price can affect them from EVERY tax perspective, not just income tax.
Take Maryland for example. We have a 6% sales tax (was 5% a couple of years ago) on the allocation to equipment/furniture/computers and supplies, so on an allocation of $100,000 to those items you just cost yourself $6,000 DUE AT SETTLEMENT. Then our counties also assess a personal property tax on business assets, and on $100,000 over 10 years, that's easily another $10k-$15k. So the buyer’s allocation to tangible assets/supplies might cost them more than $20,000 in other taxes compared to $100,000 allocated to goodwill where there is no sales or personal property tax in most jurisdictions....YET.
Keep in mind the income tax savings on $100,000 will likely be nearly the same over 15 years whether it's goodwill OR equipment, with the only difference coming from the income tax brackets the deductions are taken in. The income tax benefit with equipment and supplies is the ability to get those tax savings sooner rather than later. However, if you run the numbers out over 15 years (the life of goodwill under the tax code), the allocation to equipment/supplies will almost always cost you more due to the other taxes you incur, at least here in Maryland and other jurisdictions we've seen.
This is just one reason why buyers should consider seeking advice from an advisor that has many years of experience with practice transactions & transitions, this one area can keep a buyer from making a mistake AND save them money.
This first appeared on NewDocs.
Many, many years ago goodwill was the devil in the eyes of every buyer. Why?
There was a time when goodwill was NOT deductible under the tax code, therefore from a buyer’s perspective, any allocation to goodwill was NOT providing them with any income tax savings. However, goodwill was always treated as a capital asset and subject to capital gains to sellers, therefore, sellers wanted most (and in some cases ALL) of the price allocated to goodwill. I remember when this one issue, the allocation between goodwill and tangible assets, was the most stressful part of most transitions. Not anymore though.
Now, buyers can write off goodwill over 15 years, so in my mind, that was a decent compromise from an income tax perspective between buyers/sellers when negotiating the allocation.
Enter the Sec. 179 write-off issue where the IRS increased the write-off election from $25,000 to over $100,000 and in recent years $250,000. All of a sudden, buyers were reverting back to the "old ways" of trying to minimize goodwill while trying to maximize equipment/furniture/computers and other areas that would generate a faster tax deduction, let alone ANY deduction. STILL, sellers wanted their capital gains so this issue of price allocation was once again a hurdle, though a low one that could usually be jumped fairly quickly.
Then the long term capital gains rates were lowered to 15%, down from 20% and at one time 28% so sellers once again began pushing firmly for more goodwill allocation while the buyers wanted more equipment due to the ability to write off $100,000 under Sec. 179 immediately. When the IRS recently increased the Sec. 179 write-off to $250,000, those that were purchasing large practices where the value of equipment could easily reach that level, began pushing for the higher equipment allocation and price allocation once again became a struggle.
These days, states & local governments are finding other ways to tax businesses aside from income tax, which usually means higher sales tax, personal property tax, transactional tax, etc. Therefore, buyers need to be educated on how the allocation of the purchase price can affect them from EVERY tax perspective, not just income tax.
Take Maryland for example. We have a 6% sales tax (was 5% a couple of years ago) on the allocation to equipment/furniture/computers and supplies, so on an allocation of $100,000 to those items you just cost yourself $6,000 DUE AT SETTLEMENT. Then our counties also assess a personal property tax on business assets, and on $100,000 over 10 years, that's easily another $10k-$15k. So the buyer’s allocation to tangible assets/supplies might cost them more than $20,000 in other taxes compared to $100,000 allocated to goodwill where there is no sales or personal property tax in most jurisdictions....YET.
Keep in mind the income tax savings on $100,000 will likely be nearly the same over 15 years whether it's goodwill OR equipment, with the only difference coming from the income tax brackets the deductions are taken in. The income tax benefit with equipment and supplies is the ability to get those tax savings sooner rather than later. However, if you run the numbers out over 15 years (the life of goodwill under the tax code), the allocation to equipment/supplies will almost always cost you more due to the other taxes you incur, at least here in Maryland and other jurisdictions we've seen.
This is just one reason why buyers should consider seeking advice from an advisor that has many years of experience with practice transactions & transitions, this one area can keep a buyer from making a mistake AND save them money.
This first appeared on NewDocs.
Thursday, December 17, 2009
Is an LLC or and S-Corp Best for Owning the Dental Building?
I have heard it said that the best way to go about owning a building and practice is to have the building set up as an LLC and the practice as an S-Corp, with the LLC renting out the building to your S-Corp practice. Assuming this model is followed, would the following be legal:
Let’s say you own a building with enough space to house multiple businesses. You start off with your practice set up in one area/wing/whatever of the building and rent out the rest of it. Perhaps you plan to use the extra space in the future for expansion, but that really is not important. Commercial real estate hits a rough patch and your LLC comes dangerously close to failure. Your dental practice is still rather successful. Would it be legal to "renegotiate" and jack up the rental rate on your dental practice so as to help your commercial property LLC get through the tough times?
The basic question here is whether or not it is legal to essentially use the rate charged to your practice to mediate the bumps felt by your commercial property. (I suppose the reverse of this situation is possible as well, with you lowering the rate charged to a struggling practice by your successful commercial real estate... but this situation seems unlikely at best).
Or you could simply use the S-Corp profits and lend them to the LLC to keep it afloat. Assuming you're the sole owner of each both flow through to your ind. tax return so the net tax benefit will be the same.
Remember, the S-Corp needs to act in a prudent business fashion. If it's already paying "fair market" rent and you didn't own the LLC and the landlord asked you to renegotiate the lease to pay more rent, would you still do it? The answer is no.
Don't make it more complicated that it needs to be.
Our friend Jason Wood would like to add:
The only thing I will add to this excellent answer is a real world experience as to why it should be done this way as opposed to renegotiating the rent and putting it in writing.
A client that contacted us after-the-fact had entered into an "above average rent" with his dental practice for the building that he owned. Because it was a part of the lease there was a paper trail. When he lost the building as a result of the economy we are in, the bank "relied" on the above market rental rate outlined in the lease to force the dentist to continue paying the above market rent.
In other words, don't renegotiate your rent, do what Tim suggests instead. Lend the LLC money personally so that if you lose the building it isn't attached to your separate entity.
Now that’s great information to know!
Thanks!
This first appeared on Dentaltown.
Let’s say you own a building with enough space to house multiple businesses. You start off with your practice set up in one area/wing/whatever of the building and rent out the rest of it. Perhaps you plan to use the extra space in the future for expansion, but that really is not important. Commercial real estate hits a rough patch and your LLC comes dangerously close to failure. Your dental practice is still rather successful. Would it be legal to "renegotiate" and jack up the rental rate on your dental practice so as to help your commercial property LLC get through the tough times?
The basic question here is whether or not it is legal to essentially use the rate charged to your practice to mediate the bumps felt by your commercial property. (I suppose the reverse of this situation is possible as well, with you lowering the rate charged to a struggling practice by your successful commercial real estate... but this situation seems unlikely at best).
Or you could simply use the S-Corp profits and lend them to the LLC to keep it afloat. Assuming you're the sole owner of each both flow through to your ind. tax return so the net tax benefit will be the same.
Remember, the S-Corp needs to act in a prudent business fashion. If it's already paying "fair market" rent and you didn't own the LLC and the landlord asked you to renegotiate the lease to pay more rent, would you still do it? The answer is no.
Don't make it more complicated that it needs to be.
Our friend Jason Wood would like to add:
The only thing I will add to this excellent answer is a real world experience as to why it should be done this way as opposed to renegotiating the rent and putting it in writing.
A client that contacted us after-the-fact had entered into an "above average rent" with his dental practice for the building that he owned. Because it was a part of the lease there was a paper trail. When he lost the building as a result of the economy we are in, the bank "relied" on the above market rental rate outlined in the lease to force the dentist to continue paying the above market rent.
In other words, don't renegotiate your rent, do what Tim suggests instead. Lend the LLC money personally so that if you lose the building it isn't attached to your separate entity.
Now that’s great information to know!
Thanks!
This first appeared on Dentaltown.
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